10-Q 1 c030210qdoc.txt FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2002 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 March 31, 2002 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 May 10, 2002, 13,091,744 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 March 31, 2002 (unaudited) and June 30, 2001 Consolidated Statements of Operations 4 for the Three and Nine Months Ended March 31, 2002 and 2001 (unaudited) Consolidated Statements of Cash Flows 5 for the Nine Months Ended March 31, 2002 and 2001 (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 15 Part II Other Information: Item 1. Legal Proceedings 15 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 16 SIGNATURES 17 COMTEX NEWS NETWORK, INC. CONSOLIDATED BALANCE SHEETS March 31, June 30, 2002 2001 -------------- -------------- (Unaudited) ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 1,052,268 $ 367,493 Accounts Receivable, Net of Allowance of approximately $296,000 and $554,000 at March 31, 2002 and June 30, 2001, respectively 1,085,338 1,897,983 Prepaid Expenses and Other Current Assets 259,204 367,112 -------------- -------------- TOTAL CURRENT ASSETS 2,396,810 2,632,588 PROPERTY AND EQUIPMENT, NET 3,345,924 3,730,653 DEPOSITS AND OTHER ASSETS 193,349 201,802 -------------- -------------- TOTAL ASSETS $ 5,936,083 $ 6,565,043 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Expenses $ 1,971,989 $ 2,501,834 -------------- -------------- TOTAL CURRENT LIABILITIES 1,971,989 2,501,834 LONG-TERM LIABILITIES: Long-Term Notes Payable - Affiliate 926,954 953,954 -------------- -------------- TOTAL LIABILITIES 2,898,943 3,455,788 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common Stock, $0.01 Par Value - Shares Authorized: 18,000,000; Shares issued and outstanding: 13,091,694 and 10,191,373, respectively 130,917 101,914 Additional Capital 12,180,932 11,867,469 Accumulated Deficit (9,271,434) (8,860,128) Foreign Currency Translation Adjustment (3,275) - -------------- -------------- TOTAL STOCKHOLDERS' EQUITY 3,037,140 3,109,255 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,936,083 $ 6,565,043 ============== ==============
The accompanying "Notes to Financial Statements" are an integral part of these financial statements. 3 COMTEX NEWS NETWORK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2002 AND 2001 (UNAUDITED) Three months ended Nine months ended March 31, March 31, ------------------------------ ---------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Revenues $ 2,901,678 $4,306,391 $9,563,537 $12,792,136 Cost of Revenues 1,001,164 1,171,588 3,078,153 3,487,740 ----------- ----------- ----------- ----------- Gross Profit 1,900,514 3,134,803 6,485,384 9,304,396 Operating Expenses Technical Operations & Support 548,007 862,970 1,671,420 2,545,469 Product Development 82,710 191,322 285,514 458,424 Sales and Marketing 351,370 687,373 1,042,344 2,081,465 General and Administrative 1,101,204 1,108,658 2,999,641 3,018,477 Stock-based Compensation - - 6,678 314,600 Depreciation and Amortization 280,083 201,889 828,535 516,207 ----------- ----------- ----------- ----------- Total Operating Expenses 2,363,374 3,052,212 6,834,132 8,934,642 Operating Income/(Loss) (462,860) 82,591 (348,748) 369,754 Other Income/(Expense) Interest Expense/Other (23,298) (24,149) (70,421) (74,885) Interest Income/Other 2,488 12,615 8,288 62,992 ----------- ----------- ----------- ----------- Other Income/(Expense), net (20,810) (11,534) (62,133) (11,893) ----------- ----------- ----------- ----------- Income Before Income Taxes (483,670) 71,057 (410,881) 357,861 Income Taxes - 878 425 2,103 ----------- ----------- ----------- ----------- Net Income/(Loss) (486,670) $ 70,179 (411,306) $355,758 =========== =========== =========== =========== Basic Earnings/(Loss) Per Common Share $ (.04) $ .01 $ (.04) $ .04 =========== =========== =========== =========== Weighted Average Number of Common Shares 11,659,409 10,062,307 10,767,801 10,004,446 =========== =========== =========== =========== Diluted Earnings/(Loss) Per Common Share $ (.04) $ .01 $ (.04) $ .03 =========== =========== =========== =========== Weighted Average Number of Shares Assuming Dilution 11,659,409 13,270,990 10,767,801 13,629,447 =========== =========== =========== ===========
The accompanying "Notes to Financial Statements" are an integral part of these financial statements 4 COMTEX NEWS NETWORK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended March 31, ------------------------------------------ 2002 2001 -------------- -------------- Cash Flows from Operating Activities: Net Income/(Loss) $ (410,381) $ 355,758 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and Amortization Expense 828,522 516,207 Bad Debt Expense 373,199 552,850 Stock-based Compensation 6,678 314,600 Changes in Assets and Liabilities: Accounts Receivable 439,446 (609,843) Prepaid Expenses and Other Current Assets 107,838 (249,177) Deposits and Other Long Term Assets 8,453 (150,712) Accounts Payable and Accrued Expenses (529,790) 24,280 -------------- -------------- Net Cash provided by Operating Activities 823,965 753,963 Cash Flows from Investing Activities: Purchases of Property and Equipment (444,399) (2,042,517) -------------- -------------- Net Cash used in Investing Activities (444,399) (2,042,517) Cash Flows from Financing Activities: Repayments on Notes Payable (27,000) (84,000) Issuance of Stock under Employee Stock Purchase Plan 17,965 43,478 Exercise of Stock Options 317,823 55,817 ------------- -------------- Net Cash provided by Financing Activities 308,788 15,295 Effect of exchange rate changes on cash (3,579) - -------------- -------------- Net Increase/(Decrease) in Cash and Cash Equivalents 684,775 (1,273,259) Cash and Cash Equivalents at Beginning of Period 367,493 1,655,222 -------------- -------------- Cash and Cash Equivalents at End of Period $ 1,052,268 $ 381,963 ============== ==============
The accompanying "Notes to Financial Statements" are an integral part of these financial statements 5 COMTEX NEWS NETWORK, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) March 31, 2002 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. The Company has designated the Euro as the functional currency of its wholly-owned subsidiary in Spain. Accordingly, assets and liabilities are translated from the Euro into U.S. dollars at the end of period exchange rate, and revenues and expenses are translated at average monthly exchange rates. Foreign currency translation gains and losses are recorded in stockholders' equity and reflected as a component of other comprehensive income or loss. Total comprehensive loss for the three and nine months ended March 31, 2002 was approximately $487,000 and $415,000, respectively. 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 nine months ended March 31, 2001. Certain amounts for the three and nine months ended March 31, 2001 have been reclassified to conform to the presentation of the three and nine months ended March 31, 2002. 2. Net Income per Share The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended Nine Months Ended March 31, March 31, 2002 2001 2002 2001 -------------- ------------ --------------- -------------- Numerator: Net Income/(Loss) $ (483,670) $ 70,179 $ (411,306) $ 355,758 ============== ============ ================ ============== Denominator: Denominator for basic earnings per share - weighted average shares 11,659,409 10,062,307 10,767,801 10,004,446 Effect of dilutive securities: Stock Options - 3,208,683 - 3,625,001 -------------- ------------ ---------------- --------------- Denominator for diluted earnings 11,659,409 13,270,990 10,767,801 13,629,447 per share ============== ============ ================ =============== Basic (Loss)/Earnings Per Share $ (.04) $ .01 $ (.04) $ .04 Diluted (Loss)/Earnings Per $ (.04) $ .01 $ (.04) $ .03 Share
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 suit was 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 sought damages for lost business, loss of reputation and good will. On March 11, 2002, the court issued a directed verdict in favor of InfoSpace on the breach of contract claim and Infospace withdrew the counterclaim. Infospace has filed a petition with the court for reimbursement of attorneys' fees and costs. That petition has been opposed by the Company and is under consideration by the court. 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; O 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. Critical Accounting Policies and Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting policies generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe the following critical accounting policies affect significant judgments, estimates and assumptions used in the preparation of the consolidated financial statements. Revenue Information services revenues are recognized as services are rendered based on contractual terms such as usage, fixed fee, percentage of distributor revenues or other pricing models. Start-up fee revenues are recognized over the initial term of the contract. Data communication revenues are recognized in accordance with contract terms as costs are incurred. Amounts received in advance are deferred and recognized over the service period. Contingencies From time to time, we are subject to proceedings, lawsuits and other claims related to labor and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these contingencies as well as potential ranges of probable losses and establish reserves accordingly. The amounts of reserves required, if any, may change in future periods due to new developments in each matter or changes in approach to a matter such as a change in settlement strategy. RESULTS OF OPERATIONS Comparison of the three months ended March 31, 2002 to the three months ended March 31, 2001 During the three months ended March 31, 2002, we incurred an operating loss of approximately $463,000, compared to operating income of approximately $83,000 during the three months ended March 31, 2001. We reported a net loss of approximately $484,000 during the three months ended March 31, 2002, compared to net income of approximately $70,000 for the three months ended March 31, 2001. As discussed below, the decline in operating income and net income is due primarily to a decrease in gross revenues and a decrease in gross profit margins. The decline in revenues was partially offset by a decrease in total operating expenses. In addition, we incurred costs of approximately $360,000 during the quarter related to a breach of contract action against Infospace, Inc., a former customer. Revenues consist primarily of royalty revenues and fees from the licensing of content products to information distributors. During the three months ended March 31, 2002, total revenues were approximately $2,902,000, or approximately $1,405,000 (33%) less than the total revenues for the three months ended March 31, 2001. The decline in revenues is the direct result of business shut downs and consolidation among clients, primarily in the Internet and personal investor markets. Further, 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 March 31, 2002 was approximately $1,001,000 or approximately $170,000 (15%) less than the cost of revenues for the three months ended March 31, 2001. The decrease in cost is primarily due to the decrease in content royalties as a result of decreased revenues for the period. The decrease is partially offset by required minimum fees paid to certain information providers that cause royalties, as a percentage of revenues, to be higher. The gross profit for the three months ended March 31, 2002 was approximately $1,901,000 or approximately $1,234,000 (39%) less than the gross profit for the same period in the prior year. The gross profit percentage declined for the three months ended March 31, 2002 to approximately 66% from approximately 73% for the three months ended March 31, 2001. The decline relates to the decrease in revenues which caused the required minimum fees paid to certain information providers to exceed the royalties earned by those information providers during the period, therefore increasing the cost as a percentage of revenues. Total operating expenses for the three months ended March 31, 2002 were approximately $2,363,000, representing an approximately $689,000 (23%) decrease in operating expenses from the three months ended March 31, 2001. The decrease in operating expenses reflects reductions in personnel across all departments and reduced sales and marketing expenses. These expense reductions were implemented in response to the decline in revenue over the past twelve months. The decrease in operating expenses was partially offset by increased legal and accounting fees, business consulting activities, the funding of nFactory COMTEX, S.L. operations and an increase in depreciation and amortization expense. Technical operations and support expenses during the three months ended March 31, 2002 decreased approximately $315,000 (36%) from these expenses in the three months ended March 31, 2001. The decrease in expense resulted from a decrease in personnel, computer parts and consulting expenses. Product development expenses decreased by approximately $109,000 (57%) for the three months ended March 31, 2002 compared to the three months ended March 31, 2001. This decrease is the result of personnel reductions 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 $336,000 (49%) for the three months ended March 31, 2002 compared to the three months ended March 31, 2001. 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. General and administrative expenses for the three months ended March 31, 2002 were approximately $7,000 (1%) less than these expenses during the three months ended March 31, 2001. This minimal decrease is due primarily to decreases in personnel and related costs including recruiting and office supplies. The decreases were partially offset by an increase in consulting activities aimed at exploring business development opportunities and legal and accounting fees related to the Infospace lawsuit. Depreciation and amortization expense for the three months ended March 31, 2002 was approximately $78,000 (39%) 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 March 31, 2002 decreased approximately $9,000, or 80%, compared to the three months ended March 31, 2001. The decrease was due to reduced interest earned on decreased cash balances. Comparison of the nine months ended March 31, 2002 to the nine months ended March 31, 2001 During the nine months ended March 31, 2002, we incurred an operating loss of approximately $349,000, compared to operating income of approximately $370,000 during the nine months ended March 31, 2001. We reported a net loss of approximately $411,000 during the nine months ended March 31, 2002, compared to net income of approximately $356,000 for the nine months ended March 31, 2001. 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. In addition, we incurred professional fees related to a breach of contract action against Infospace, Inc. during the nine months ended March 31, 2002. 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 nine months ended March 31, 2002, total revenues were approximately $9,564,000 or approximately $3,229,000 (25%) less than the total revenues for the nine months ended March 31, 2001. The decline in revenues is the direct result of business shut downs and consolidation among clients, primarily in the Internet and personal investor markets. In addition, revenues from new customers in the current nine-month period were less than the revenues generated from new customers in the prior nine-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 nine months ended March 31, 2002 was approximately $3,078,000 or approximately $410,000 (12%) less than the cost of revenues for the nine months ended March 31, 2001. The decrease in cost is primarily due to the decrease in content royalties as a result of decreased revenues for the period. The decrease is partially offset by required minimum fees paid to certain information providers that cause royalties, as a percentage of revenue, to be higher. The gross profit for the nine months ended March 31, 2002 was approximately $6,485,000 or approximately $2,819,000 (30%) less than the gross profit for the same period in the prior year. The gross profit percentage declined for the nine months ended March 31, 2002 to approximately 68% from approximately 73% for the nine months ended March 31, 2001. The decline relates to the decrease in revenues which caused the required minimum fees paid to certain information providers to exceed the royalties earned by those information providers during the period, therefore increasing the cost as a percentage of revenues. Total operating expenses for the nine months ended March 31, 2002 were approximately $6,834,000, representing an approximately $2,101,000 (24%) decrease in operating expenses over the nine months ended March 31, 2001. The decrease in operating expenses reflects reductions in personnel across all departments, reduced sales and marketing expenses and a decrease in stock-based compensation. These expense reductions were implemented in response to a decline in revenue over the previous twelve months. The decrease in operating expenses was partially offset by increased consulting activities aimed at exploring business development opportunities, increased legal and accounting fees and an increase in depreciation and amortization expense. Technical operations and support expenses during the nine months ended March 31, 2002 decreased approximately $874,000 (34%) from these expenses in the nine months ended March 31, 2001. This decrease resulted from a decrease in personnel, computer parts, software maintenance 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 $173,000 (38%) for the nine months ended March 31, 2002 compared to the nine months ended March 31, 2001. This decrease is the result of personnel reductions 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 $1,039,000 (50%) for the nine months ended March 31, 2002 compared to the nine months ended March 31, 2001. This decrease is the result of a reduction in personnel, decreases in advertising and promotional activities, public relations expenses and sales commissions. In addition, travel, entertainment and conference costs were significantly lower in the current period compared to the previous year. General and administrative expenses for the nine months ended March 31, 2002 were approximately $19,000 (1%) less than these expenses during the nine months ended March 31, 2000. This minimal decrease in expenses resulted from decreases in personnel and related costs including recruiting, employee relations and office supplies. The decrease was partially offset by increases in consulting activities to explore business development opportunities, legal and accounting fees for litigation issues and SEC filings, and Board of Directors fees related to additional meetings. 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 nine months ended March 31, 2002, compared to approximately $315,000 for the nine months ended March 31, 2001. The decrease in stock-based compensation is a result of the decrease in the fair market value of our common stock as of the dates of transfer. Depreciation and amortization expense for the nine months ended March 31, 2002 was approximately $312,000 (61%) 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 nine months ended March 31, 2002 decreased approximately $50,000 compared to the nine months ended March 31, 2001. This decrease was due to reduced interest earned on decreased cash balances. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES For the nine months ended March 31, 2002, our operations produced an operating loss of approximately $349,000 and a net loss of approximately $411,000. At March 31, 2002, we had working capital of approximately $425,000, 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, as well as an increase in the collection of accounts receivable. We had net stockholders' equity of approximately $3,037,000 at March 31, 2002, as compared to net stockholders' equity at June 30, 2001 of approximately $3,109,000. The decrease in stockholders' equity was due primarily to the net loss incurred during the nine months ended March 31, 2002, partially offset by the exercise of stock options, and the issuance of stock under the Employee Stock Purchase Plan. For the nine months ended March 31, 2002, operating activities generated approximately $824,000 in cash. We had cash of approximately $1,052,000 at March 31, 2002, 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 $444,000 in the nine months ended March 31, 2002, primarily for software licensing and the development of software for internal use, compared to $2,043,000 for the same period ended March 31, 2001. 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 sell existing Comtex products to clients in Western Europe and establish a customer foundation for selected new product initiatives. The effective date of the agency agreement between COMTEX and the subsidiary was amended to May 1, 2002. All payments made to or on behalf of the subsidiary prior to that date are recorded as capital contributions. As of the nine months ended March 31, 2002, we have made capital contributions of approximately $189,000. 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 59% to $486,000 for the nine months ended March 31, 2002 compared to $1,201,000 for the nine months ended March 31, 2001. The decrease is due to the decline in revenues and 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, we 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 suit was 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 we breached our agreement and sought damages for lost business, loss of reputation and good will. On March 11, 2002, the court issued a directed verdict in favor of InfoSpace on the breach of contract claim and Infospace withdrew the counterclaim. Infospace has filed a petition with the court for reimbursement of attorneys' fees and costs. We have opposed the petition, which is under consideration by the court. 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 On March 6, 2002 we filed a current report on Form 8-K reporting a change in control of the Company, by which current members of the Board of Directors and management increased their share ownership pursuant to the purchase of shares of common stock. 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: May 15, 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)