10-Q 1 c020210q.txt FORM 10-Q FOR THE PERIOD ENDED 12/31/01 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 2001 or ___ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period from __________ to ___________ Commission file number 0-10541 COMTEX NEWS NETWORK, INC. (Exact name of registrant as specified in its charter) New York 13-3055012 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4900 Seminary Road Suite 600 Alexandria, Virginia 22311 (Address of principal executive offices) (703) 820-2000 Registrant's Telephone number including area code Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No ___ As of February 12, 2002, 10,565,741 shares of the Common Stock of the registrant were outstanding. COMTEX NEWS NETWORK, INC. TABLE OF CONTENTS Part I Financial Information: Page No. Item 1. Financial Statements Consolidated Balance Sheets 3 as of December 31, 2001 (unaudited) and June 30, 2001 Consolidated Statements of Operations 4 for the Three and Six Months Ended December 31, 2001 and 2000 (unaudited) Consolidated Statements of Cash Flows 5 for the Six Months Ended December 31, 2001 and 2000 (unaudited) Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis 8 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure about Market Risk 14 Part II Other Information: Item 1. Legal Proceedings 14 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 COMTEX NEWS NETWORK, INC. CONSOLIDATED BALANCE SHEETS December 31, June 30, 2001 2001 ---------------- --------------- (Unaudited) ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 789,208 $ 367,493 Accounts Receivable, Net of Allowance of approximately $526,000 and $554,000 at December 31, 2001 and June 30, 2001, respectively 1,222,640 1,897,983 Prepaid Expenses and Other Current Assets 307,978 367,112 ---------------- --------------- TOTAL CURRENT ASSETS 2,319,826 2,632,588 PROPERTY AND EQUIPMENT, NET 3,547,654 3,730,653 DEPOSITS AND OTHER ASSETS 181,295 201,802 ---------------- --------------- TOTAL ASSETS $ 6,048,775 $ 6,565,043 ================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Expenses $ 1,836,296 $ 2,501,834 ---------------- --------------- TOTAL CURRENT LIABILITIES 1,836,296 2,501,834 LONG-TERM LIABILITIES: Long-Term Note Payable - Affiliate 941,954 953,954 ---------------- --------------- TOTAL LONG-TERM LIABILITIES 941,954 953,954 ---------------- --------------- TOTAL LIABILITIES 2,778,250 3,455,788 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common Stock, $0.01 Par Value - Shares Authorized: 18,000,000; Shares issued and outstanding: 10,565,691 and 10,191,373, respectively 105,657 101,914 Additional Capital 11,952,632 11,867,469 Accumulated Deficit (8,787,764) (8,860,128) ---------------- --------------- TOTAL STOCKHOLDERS' EQUITY 3,270,525 3,109,255 ---------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,048,775 $ 6,565,043 ================ ===============
The accompanying "Notes to Financial Statements" are an integral part of these financial statements. COMTEX NEWS NETWORK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended Six months ended December 31, December 31, -------------------------- --------------------------- 2001 2000 2001 2000 -------------------------- --------------------------- Revenues $ 3,197,808 $4,324,648 $6,661,859 $8,485,745 Cost of Revenues 998,790 1,155,932 2,076,989 2,316,152 ------------ ----------- ------------ ------------ Gross Profit 2,199,018 3,168,716 4,584,870 6,169,593 Operating Expenses Technical Operations & Support 572,856 922,554 1,123,413 1,682,499 Product Development 84,348 126,797 202,804 267,102 Sales and Marketing 301,576 765,515 690,974 1,394,092 General and Administrative 936,558 1,058,139 1,898,437 1,909,819 Stock-based Compensation 6,678 314,600 - - Depreciation and Amortization 279,476 180,886 548,452 314,318 ------------ ----------- ------------ ------------ Total Operating Expenses 2,174,814 3,053,891 4,470,758 5,882,430 Operating Income 24,204 114,825 114,112 287,163 Other(Expense)/Income Interest Expense (23,424) (24,374) (47,123) (50,736) Interest Income/Other 2,187 21,937 5,800 50,377 ------------ ----------- ------------ ------------ Other(Expense)/Income, net (21,237) (2,437) (41,323) (359) ------------ ----------- ------------ ------------ Income Before Income Taxes 2,967 112,388 72,789 286,804 Income Taxes 425 1,225 - - ------------ ----------- ------------ ------------ Net Income $ 2,967 $ 112,388 $ 72,364 $ 285,579 ============ =========== ============ ============ Basic Earnings Per Common Share $ 0.0003 $ 0.01 $ 0.01 $ 0.03 ============ =========== ============ ============ Weighted Average Number of Common Shares 10,445,112 9,982,881 10,321,979 9,975,516 ============ =========== ============ ============ Diluted Earnings Per Common Share $ 0.0002 $ 0.01 $ 0.01 $ 0.02 ============ =========== ============ ============ Weighted Average Number of Shares Assuming Dilution 12,924,521 13,814,914 12,988,321 13,800,207 ============ =========== ============ ============
The accompanying "Notes to Financial Statements" are an integral part of these financial statements. COMTEX NEWS NETWORK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended December 31, ----------------------------- 2001 2000 ------------ ------------ Cash Flows from Operating Activities: Net Income $ 72,364 $ 285,579 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and Amortization Expense 548,452 314,318 Bad Debt Expense 299,574 284,350 Stock Based Compensation 6,678 314,600 Changes in Assets and Liabilities: Accounts Receivable 375,769 (755,061) Prepaid Expenses and Other Current Assets 59,134 (165,754) Deposits and Other Long Term Assets 20,507 (153,748) Accounts Payable and Accrued Expenses (665,538) 532,450 ------------- ------------ Net Cash provided by Operating Activities 716,940 656,734 Cash Flows from Investing Activities: Purchases of Property and Equipment (365,453) (1,530,501) ------------ ------------ Net Cash used in Investing Activities (365,453) (1,530,501) Cash Flows from Financing Activities: Repayments on Notes Payable (12,000) (75,000) Issuance of Stock under Employee Stock Purchase Plan 17,964 43,478 Exercise of Stock Options 64,264 5,174 ------------ ------------ Net Cash provided by/(used in) Financing Activities 70,228 (26,348) ------------ ------------ Net Increase/(Decrease) in Cash and Cash Equivalents 421,715 (900,115) Cash and Cash Equivalents at Beginning of Period 367,493 1,655,222 ------------ ------------ Cash and Cash Equivalents at End of Period $ 789,208 $ 755,107 ============ =============
The accompanying "Notes to Financial Statements" are an integral part of these financial statements. COMTEX NEWS NETWORK, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) December 31, 2001 1. Basis of Presentation The accompanying interim consolidated financial statements of COMTEX News Network, Inc. (the "Company" or "COMTEX") and its wholly-owned subsidiary, nFactory COMTEX, S.L., are unaudited, but in the opinion of management reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The balance sheet at June 30, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2001 ("2001 Form 10-K"), filed with the Securities and Exchange Commission on September 28, 2001. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2003. Application of the non-amortization provisions of the Statement is not expected to result in a material change in net income. If necessary, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of July 1, 2002, and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. During the fiscal year ended June 30, 2001, the Company recorded an adjustment to the quarter ended September 30, 2000, of approximately $315,000 in stock-based compensation pursuant to the transfer of options by the Chairman of the Board of Directors to certain members of management. This adjustment resulted in a reduction in operating income, net income and retained earnings of the same amount. Basic earnings per share and diluted earnings per share were reduced by 3 cents and 2 cents, respectively, for the six months ended December 31, 2000. Certain amounts for the three and six months ended December 31, 2000 have been reclassified to conform to the presentation of the three and six months ended December 31, 2001. 2. Net Income per Share The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended Six Months Ended December 31, December 31, 2001 2000 2001 2000 ------------ ---------- ----------- ------------ Numerator: Net Income $ 2,967 $ 112,388 $ 72,364 $ 285,579 ============ ========== =========== ============ Denominator: Denominator for basic earnings per share - weighted average shares 10,445,112 9,982,881 10,321,979 9,975,516 Effect of dilutive securities: Stock Options 2,479,409 3,523,189 2,666,342 3,718,063 ------------ ---------- ----------- ------------ Denominator for diluted earnings per share 12,924,521 13,814,914 12,988,321 13,800,207 ============ ========== =========== ============ Basic Earnings Per Share $ .0003 $ .01 $ .01 $ .03 Diluted Earnings Per Share $ .0002 $ .01 $ .01 $ .02
3. Income Taxes The provision for income taxes is limited to the liability for alternative minimum tax, as the majority of income for Federal and state tax purposes has been offset by net operating loss and investment tax credit carryforwards. 4. Commitments and Contingencies On July 17, 2001, the Company filed a breach of contract action against Infospace, Inc., a former customer, in the United States District Court for the Eastern District of Virginia for payments owed under contracts with the defendant corporation. The Company is seeking damages in the range of $1,000,000 to $16,000,000. The suit is captioned Comtex News Network, Inc. v. Infospace, Inc. Case Number CV01-1108-A. On August 13, 2001, Infospace filed an Answer and Counterclaim alleging that Comtex breached its agreement and seeks damages of $1,000,000 for lost business, loss of reputation and good will. Comtex intends to vigorously defend itself against the allegations in the counterclaim. The Parties are preparing for a March 2002 trial date in the Eastern District of Virginia. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes included elsewhere in this Form 10-Q, and the financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended June 30, 2001 filed with the Securities and Exchange Commission on September 28, 2001. Historical results and percentage relationships among any amounts in the Financial Statements are not expected to be indicative of trends in operating results for any future period. Forward-looking Statements This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. In particular, the risks and uncertainties include those described in our annual report on Form 10-K for the year ended June 30, 2001 and in other periodic Securities and Exchange Commission filings. These risks and uncertainties include, among other things, the following: o the growth of the Internet news market; o the effects of competition; o our ability to maintain our name recognition; o the financial stability of our customers; o our ability to manage growth of our operations, both domestically and internationally; o our ability to maintain a secure and reliable news-delivery network; o our ability to maintain relationships with key content providers; o our ability to attract and retain key personnel; the volatility of our Common Stock price; o acquisitions involving us, which may disrupt the business and be dilutive to our existing stockholders; o our ability to successfully market our services to current and new customers; o our ability to reduce operating expenses; and o our ability to manage and grow our business in markets impacted by terrorist activities. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise the information contained in this Form 10-Q, whether as a result of new information, future events or circumstances or otherwise. RESULTS OF OPERATIONS Comparison of the three months ended December 31, 2001 to the three months ended December 31, 2000 During the three months ended December 31, 2001, we earned operating income of approximately $24,000, compared to operating income of approximately $115,000 during the three months ended December 31, 2000. We reported net income of approximately $3,000 during the three months ended December 31, 2001, compared to net income of approximately $112,000 for the three months ended December 31, 2000. As discussed below, the decline in operating income and net income is due primarily to a decrease in gross revenues and partially to a decrease in gross profit margins. The decline in revenues was partially offset by a decrease in total operating expenses. In addition, COMTEX' wholly-owned subsidiary, nFactory COMTEX, S.L., began operations in the second quarter, resulting in expenses to the Company to fund the subsidiary's operations. Revenues consist primarily of royalty revenues and fees from the licensing of content products to information distributors. During the three months ended December 31, 2001, total revenues were approximately $3,198,000, or approximately $1,126,000 (26%) less than the total revenues for the three months ended December 31, 2000. The decline in revenues was due to the loss of revenues from the Company's existing customer base: many of these customers, primarily in the Internet and personal investor markets, declared bankruptcy or were unable to obtain funding and remain in business. Further, our revenues from new customers were less than the revenues generated from new customers in the prior year's quarter. Our cost of revenues consists primarily of content license fees and royalties to information providers, as well as data communication costs for the delivery of our products to customers. The cost of revenues for the three months ended December 31, 2001 was approximately $999,000 or approximately $157,000 (14%) less than the cost of revenues for the three months ended December 31, 2000. The decrease in cost is primarily due to the decrease in content royalties based on decreased revenues for the period. The decrease is partially offset by required minimum fees paid by the Company to some information providers that cause royalties, as a percentage of revenues, to fail to reflect the changes in revenues. The gross profit for the three months ended December 31, 2001 was approximately $2,199,000 or approximately $970,000 (31%) less than the gross profit for the same period in the prior year. The gross profit percentage declined for the three months ended December 31, 2001 to approximately 69% from approximately 73% for the three months ended December 31, 2000. The decline is due to the fact that the required minimum royalties the Company paid to certain information providers exceeded the royalties earned by those information providers during the period. Total operating expenses for the three months ended December 31, 2001 were approximately $2,175,000, representing an approximately $879,000 (29%) decrease in operating expenses over the three months ended December 31, 2000. The decrease in operating expenses is due to reductions in personnel across all departments and reduced sales and marketing related expenses. These expense reductions were implemented in response to the loss of annuity revenue experienced over the last few quarters. The decrease in operating expenses was partially offset by increased legal fees, consulting activities to explore new business opportunities and an increase in depreciation and amortization expense. Technical operations and support expenses during the three months ended December 31, 2001 decreased approximately $350,000 (38%) from these expenses in the three months ended December 31, 2000. The decrease in expense resulted from a decrease in personnel, computer parts and consulting expenses. Product development expenses decreased by approximately $42,000 (33%) for the three months ended December 31, 2001 compared to the three months ended December 31, 2000. This decrease is the result of fewer personnel in this department. Product development activities include quality assurance, enhancements to our products and the development of proprietary news products. Sales and marketing expenses decreased by approximately $464,000 (61%) for the three months ended December 31, 2001 compared to the three months ended December 31, 2000. This decrease is the result of reductions in personnel, advertising and promotional activities and public relations expenses compared to the same quarter in the previous year, as well as decreased sales commissions. In addition, travel and entertainment costs were significantly lower in the current quarter than the previous year's quarter. General and administrative expenses for the three months ended December 31, 2001 were approximately $122,000 (11%) less than these expenses during the three months ended December 31, 2000. This decrease in expenses resulted from decreases in personnel and related costs including recruiting and office supplies. The decreases were partially offset by increases in consulting activities aimed at exploring new business opportunities and legal fees for litigation issues. Depreciation and amortization expense for the three months ended December 31, 2001 was approximately $99,000 (55%) higher than the expense during the same period in the prior year. The increase was due to the deployment of upgraded production software and hardware in the spring of 2001 and increased capital expenditures related to increasing the capacity and redundancy of the production systems over the past twelve months. Other income for the three months ended December 31, 2001 decreased approximately $19,000, or 771%, compared to the three months ended December 31, 2000. The decrease was due to reduced interest earned on decreased cash balances. Comparison of the six months ended December 31, 2001 to the six months ended December 31, 2000 During the six months ended December 31, 2001, we earned operating income of approximately $114,000, compared to operating income of approximately $287,000 during the six months ended December 31, 2000. We reported net income of approximately $72,000 during the six months ended December 31, 2001, compared to net income of approximately $286,000 for the six months ended December 31, 2000. As discussed below, the decline in operating income and net income is due primarily to a decrease in gross revenues and partially to a decrease in gross profit margins. The decline was partially offset by a decrease in total operating expenses. Revenues consist primarily of royalty revenues and fees from the licensing of content products to information distributors. During the six months ended December 31, 2001, total revenues were approximately $6,662,000 or approximately $1,824,000 (21%) less than the total revenues for the six months ended December 31, 2000. The decline in revenues was due to the loss of revenues from the Company's existing customer base: many of these customers, primarily in the Internet and personal investor markets, declared bankruptcy or were unable to obtain funding and remain in business. In addition, the revenues from new customers in the current six month period were less than the revenues generated from new customers in the prior six month period. Our cost of revenues consists primarily of content license fees and royalties to information providers, as well as data communication costs for the delivery of our products to customers. The cost of revenues for the six months ended December 31, 2001 was approximately $2,077,000 or approximately $239,000 (10%) less than the cost of revenues for the six months ended December 31, 2000. The decrease in cost is primarily due to the decrease in content royalties based on decreased revenues for the period. The decrease is partially offset by required minimum fees paid by the Company to information providers that cause royalties, as a percentage of revenue, to fail to reflect the changes in revenues. The gross profit for the six months ended December 31, 2001 was approximately $4,585,000 or approximately $1,585,000 (26%) less than the gross profit for the same period in the prior year. The gross profit percentage declined for the six months ended December 31, 2001 to approximately 69% from approximately 73% for the six months ended December 31, 2000. The decline is due to the fact that the required minimum royalties paid by the Company to certain information providers exceeded the royalties earned by those information providers during the period. Total operating expenses for the six months ended December 31, 2001 were approximately $4,471,000, representing an approximately $1,412,000 (24%) decrease in operating expenses over the six months ended December 31, 2000. The decrease in operating expenses is due to a decrease in stock-based compensation, as well as reductions in personnel across all departments and reduced sales and marketing related expenses. These expense reductions were implemented in response to the loss of annuity revenue experienced over the last few quarters. The decrease in operating expenses was partially offset by increased consulting activities aimed at exploring new business opportunities, increased legal fees and an increase in depreciation and amortization expense. Technical operations and support expenses during the six months ended December 31, 2001 decreased approximately $559,000 (33%) from these expenses in the six months ended December 31, 2000. This decrease resulted from a decrease in personnel, computer parts, travel and consulting expenses. The decrease in expense also includes an adjustment to software expense related to the return of certain software and renegotiated license fees. Product development expenses decreased by approximately $64,000 (24%) for the six months ended December 31, 2001 compared to the six months ended December 31, 2000. This decrease is the result of fewer personnel in this department. Product development activities include quality assurance, enhancements to our products and the development of proprietary news products. Sales and marketing expenses decreased by approximately $703,000 (50%) for the six months ended December 31, 2001 compared to the six months ended December 31, 2000. This decrease is the result of a reduction in personnel, decreased advertising, promotional activities, public relations expenses and decreased sales commissions. In addition, travel, entertainment and conference costs were significantly lower in the current period than the previous year's period. General and administrative expenses for the six months ended December 31, 2001 were approximately $11,000 (1%) less than these expenses during the six months ended December 31, 2000. This decrease in expenses resulted from decreases in personnel and related costs including recruiting, employee relations and office supplies. The decreases were partially offset by increases in consulting activities to explore new business opportunities, in legal fees for litigation issues and SEC filings, and in Board of Directors fees related to additional meetings. Also, we recorded additional reserves for doubtful accounts related to the significant number of customer cancellations due to their lack of funding or failed businesses. In connection with the transfer of stock options from the Chairman of the Board of Directors to certain employees, we recorded stock-based compensation of approximately $7,000 for the six months ended December 31, 2001, compared to approximately $315,000 for the six months ended December 31, 2000. The decrease in stock-based compensation is a result of the decrease in the fair market value of our common stock at the dates of transfer. Depreciation and amortization expense for the six months ended December 31, 2001 was approximately $234,000 (74%) higher than the expense during the same period in the prior year. The increase was due to the deployment of upgraded production software and hardware in the spring of 2001 and increased capital expenditures related to increasing the capacity and redundancy of the production systems over the past twelve months. Other income for the six months ended December 31, 2001 decreased approximately $41,000 compared to the six months ended December 31, 2000. This decrease was due to reduced interest earned on decreased cash balances. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES For the six months ended December 31, 2001, our operations produced operating income of approximately $114,000 and net income of approximately $72,000. At December 31, 2001, we had working capital of approximately $484,000, as compared with working capital of approximately $131,000 at June 30, 2001. The increase in working capital was due primarily to the use of cash provided by operating activities to reduce accounts payable and accrued expenses. We had net stockholders' equity of approximately $3,271,000 at December 31, 2001, as compared to net stockholders' equity at June 30, 2001 of approximately $3,109,000. The increase in stockholders' equity was due to the exercise of stock options, the issuance of stock under the Employee Stock Purchase Plan and the retention of net income earned during the six months ended December 31, 2001. For the six months ended December 31, 2001, operating activities generated approximately $717,000 in cash. We had cash of approximately $789,000 at December 31, 2001, compared to approximately $367,000 at June 30, 2001. To date, our operations have generated cash flow sufficient to cover our expenses. We made capital expenditures of approximately $365,000 in the six months ended December 31, 2001, primarily for software licensing and the development of software for internal use. These investments improve our product capabilities and reliability, and our ability to meet future content and client processing requirements. In June 2001, we obtained a $500,000 line of credit to assist us with short-term fluctuations in cash flow, if necessary. The line of credit bears interest at the Prime Rate, as published in the Wall Street Journal, and expires June 29, 2002. To date we have not used this facility but may do so in the future. In August 2001, we signed an amendment to the 10% Senior Subordinated and Secured Note payable to AMASYS Corporation ("AMASYS") extending the term of the note from July 1, 2002 to July 1, 2008. Included in the amendment is a provision for AMASYS to convert all or a portion of the outstanding principal amount, plus accrued interest, into common stock of COMTEX. The note is convertible at a price of $1.00 per share, which price increases by $0.10 upon each anniversary of the amendment. During the second quarter of FY 2002, our wholly owned subsidiary, nFactory COMTEX, S.L., located in Madrid, Spain, began operations. The subsidiary was formed to expand our operations throughout Europe. The management agreement between COMTEX and the subsidiary provides that COMTEX will pay to the subsidiary a monthly payment based on revenues, but in no event less than $15,000, for sales and customer support activities. During the period ended December 31, 2001, COMTEX paid $105,000 for those services. The financial statements included with this Form 10-Q present the consolidated financial results of COMTEX and its subsidiary. Currently, our operations generate cash flow sufficient to cover our expenses and we believe that cash from operations will provide us with adequate cash resources to meet our obligations on a short-term basis. Our ability to meet our liquidity needs on a long-term basis depends upon our ability to generate sufficient revenues and cash to cover our current obligations and to pay down our long-term debt obligations. Any further corporate consolidation or market deterioration affecting our customers could limit our ability to generate such revenues. No assurance may be given that we will be able to maintain the revenue base or the size of profitable operations that may be necessary to achieve our liquidity needs. EBITDA, as defined below, decreased approximately 27% to $669,000 for the six months ended December 31, 2001 compared to $916,000 for the six months ended December 31, 2000. The decrease is due to the decrease in revenues and the decrease in gross profit margin, offset partially by decreased operating expenses, excluding stock-based compensation, depreciation and amortization. EBITDA consists of earnings before interest expense, interest and other income, income taxes, stock-based compensation, depreciation and amortization. EBITDA does not represent funds available for management's discretionary use and is not intended to represent cash flow from operations. EBITDA should also not be construed as a substitute for operating income or a better measure of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles. EBITDA excludes components that are significant in understanding and assessing our results of operations and cash flows. In addition, EBITDA is not a term defined by generally accepted accounting principles, and as a result, our measure of EBITDA might not be comparable to similarly titled measures used by other companies. However, we believe that EBITDA is relevant and useful information, which is often reported and widely used by analysts, investors and other interested parties in our industry. Accordingly, we are disclosing this information to permit a more comprehensive analysis of our operating performance, as an additional meaningful measure of performance and liquidity, and to provide additional information with respect to our ability to meet future debt service, capital expenditure and working capital requirements. See the audited financial statements and notes thereto contained elsewhere in this report for more detailed information. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. None. Part II. Other Information Item 1. Legal Proceedings - On July 17, 2001, the Company filed a breach of contract action against Infospace, Inc., a former customer, in the United States District Court for the Eastern District of Virginia for payments owed under contracts with the defendant corporation. The Company is seeking damages in the range of $1,000,000 to $16,000,000. The suit is captioned Comtex News Network, Inc. v. Infospace, Inc. Case Number CV01-1108-A. On August 13, 2001, Infospace filed an Answer and Counterclaim alleging that Comtex breached its agreement and seeks damages of $1,000,000 for lost business, loss of reputation and good will. Comtex intends to vigorously defend itself against the allegations in the counterclaim. The Parties are preparing for a March 2002 trial date in the Eastern District of Virginia. We are also involved in routine legal proceedings occurring in the ordinary course of business, which in the aggregate are believed by management to be immaterial to our financial condition. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 21 Subsidiaries of the Registrant (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMTEX NEWS NETWORK, INC. (Registrant) Dated: February 14, 2002 By: /S/CHARLES W.TERRY Charles W. Terry President and Chief Executive Officer (Principal Executive Officer) By: /S/ ROBIN Y. DEAL Robin Y. Deal Vice President, Finance & Accounting (Principal Financial and Accounting Officer)