UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
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/X/ Quarterly report pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended
December 31, 1998 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 SCIENTIFIC CORPORATION
(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 800
Alexandria, Virginia 22311
(Address of principal executive offices)
Registrant's Telephone number including area code
(703) 820-2000
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 10, 1999, 8,073,358 shares of
the Common Stock of the registrant were
outstanding.
COMTEX SCIENTIFIC CORPORATION
TABLE OF CONTENTS
Part I Financial Information: Page No.
Item 1. Financial Statements
Balance Sheets 3
at December 31, 1998
(unaudited)
and June 30, 1998
Statements of Operations 4
for the Three and Six Months
Ended December 31, 1998 and 1997 (unaudited)
Statements of Cash Flows 5
for the Six Months Ended
December 31, 1998 and 1997 (unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis 9
of Financial Condition and Results
of Operations
Part II Other Information:
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
COMTEX SCIENTIFIC CORPORATION
BALANCE SHEETS AT DECEMBER 31, 1998 AND JUNE 30, 1998
December 31, June 30,
1998 1998
------------ -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 31,470 $ 170,416
Accounts Receivable, Net of Allowance of
approximately $177,000 and $67,000
at December 31, 1998 and June 30, 1998, respectively 1,166,306 882,001
Prepaid Expenses and Other Current Assets 25,092 19,512
---------- -----------
TOTAL CURRENT ASSETS 1,222,868 1,071,929
PROPERTY AND EQUIPMENT, NET 459,006 299,097
DEPOSITS AND OTHER ASSETS 62,318 62,944
TOTAL ASSETS $1,744,192 $1,433,970
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts Payable $ 702,366 $ 600,345
Accrued Expenses 481,230 446,317
Amounts due to Related Parties, net 257,071 216,815
Notes Payable 41,150 94,660
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TOTAL CURRENT LIABILITIES 1,481,817 1,358,137
LONG-TERM LIABILITIES:
Long-Term Notes Payable - Affiliate 732,872 732,872
Other Long-Term Notes Payable 60,000 100,000
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TOTAL LONG-TERM LIABILITIES 792,872 832,872
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TOTAL LIABILITIES 2,274,689 2,191,009
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common Stock, $0.01 Par Value - Shares Authorized: 18,000,000;
Shares issued and outstanding: 7,948,705 and 7,896,231,
respectively 79,487 78,962
Additional Capital 10,001,627 9,987,098
Accumulated Deficit (10,611,611) (10,823,099)
---------- -----------
(530,497) (757,039)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,744,192 $1,433,970
========== ==========
The accompanying "Notes to Financial Statements"
are an integral part of these financial statements.
- 3 -
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
Three months ended Six months ended
December 31, December 31,
------------------ -------------------
1998 1997 1998 1997
--------- ---------- ---------- -----------
REVENUES
Information Services Revenues $1,657,823 $1,164,445 $3,147,914 $ 2,244,422
Data Communications Revenues 152,842 141,284 317,455 280,658
---------- ---------- ---------- -----------
Total Revenues 1,810,665 1,305,729 3,465,369 2,525,080
COSTS AND EXPENSES
Costs of Information Services 726,466 548,496 1,395,958 1,062,946
Costs of Data Communications 182,828 191,207 388,235 365,759
Product Development 60,037 40,181 114,746 73,804
Sales and Marketing 308,893 184,368 547,369 377,397
General and Administrative 360,925 278,813 700,586 532,626
Depreciation and Amortization 32,093 25,036 61,956 48,677
---------- ---------- ---------- -----------
Total Costs and Expenses 1,671,242 1,268,101 3,208,850 2,461,209
---------- ---------- ---------- -----------
INCOME FROM OPERATIONS 139,423 37,628 256,519 63,871
OTHER INCOME (EXPENSE)
Interest Expense (21,872) (23,178) (45,075) (46,689)
Interest Income/Other 322 239 459 1,507
---------- ---------- ---------- -----------
Other Expense, Net (21,550) (22,939) (44,616) (45,182)
---------- ---------- ---------- -----------
INCOME FROM OPERATIONS BEFORE INCOME TAXES 117,873 14,689 211,903 18,689
INCOME TAXES - - 414 332
---------- ---------- ---------- -----------
NET INCOME $ 117,873 $ 14,689 $ 211,489 $ 18,357
========== ========== ========== ===========
BASIC EARNINGS PER COMMON SHARE $ .01 $ .00 $ .02 $ .00
========== ========== ========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 7,924,501 7,858,428 7,912,978 7,858,422
========== ========== ========== ===========
DILUTED EARNINGS PER COMMON SHARE $ .01 $ .00 $ .02 $ .00
========== ========== ========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
ASSUMING DILUTION 10,554,738 10,062,820 10,608,485 9,932,525
========== ========== ========== ===========
The accompanying "Notes to Financial Statements"
are an integral part of these financial statements.
- 4 -
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
Six Months Ended
December 31,
-------------------------------
1998 1997
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Cash Flows from Operating Activities:
Net Income $ 211,489 $ 18,357
Adjustments to reconcile net income to net cash
provided by (used in ) operating activities:
Depreciation and Amortization Expense 61,956 48,677
Bad Debt Expense 133,000 16,225
Changes in Assets and Liabilities:
Accounts Receivable (417,305) 77,587
Prepaid Expenses and Other Current Assets (5,582) 29,849
Deposits and Other Assets 250 -
Accounts Payable 102,021 22,781
Accrued Expenses 34,913 (143,288)
Amounts due to Related Parties 40,256 40,121
--------- ----------
Net Cash provided by Operating Activities 160,998 110,309
Cash Flows from Investing Activities:
Purchases of Property and Equipment (221,488) (62,511)
Repayments of Advances to TII - 266,000
--------- ----------
Net Cash provided by (used in) Investing Activities (221,488) 203,489
Cash Flows from Financing Activities:
Proceeds from Notes Payable - 140,000
Repayments on Notes Payable (93,510) (19,942)
Repayments on Notes Payable to Related Parties - (147,422)
Issuance of Stock under Employee Stock Purchase Plan 12,537 -
Exercise of Stock Options 2,517 140
Repayments against PrinCap Financing Agreement - (266,000)
--------- ----------
Net Cash used in Financing Activities (78,456) (293,224)
--------- ----------
Net Increase (Decrease) in Cash (138,946) 20,574
Cash Balance at Beginning of Period 170,416 17,927
--------- ----------
Cash Balance at End of Period $ 31,470 $ 38,501
========= ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 16,987 $ 9,323
Cash paid for income taxes $ 414 $ 332
The accompanying "Notes to Financial Statements"
are an integral part of these financial statements.
- 5 -
COMTEX SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 31, 1998 and 1997
1. Basis of Presentation
The accompanying interim financial
statements of Comtex Scientific Corporation
(the "Company" or "Comtex") 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, 1998 has been derived from
the audited financial statements at that date
but does not include all of the information
and footnotes required by generally accepted
accounting principles 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, 1998 ("1998 Form
10-K"), filed with the Securities and
Exchange Commission.
For the fiscal year ending June 30,
1999, the Company will adopt Statement No.
131, Disclosures about Segments of an
Enterprise and Related Information. The
Company will make the necessary changes to
comply with the provisions of the Statement.
The Company does not expect the adoption of
the Statement to have a material impact on
the Company's financial condition or results
of operations.
Certain amounts for the three and six
months ended December 31, 1997, have been
reclassified to conform to the presentation
of the three and six months ended December
31, 1998.
2. Related Party Transactions
AMASYS Corporation, the successor corporation
to Infotechnology, Inc., owns approximately 59%
of the Company's common stock as well as
approximately 12% of the outstanding common
stock of Hadron, Inc. C.W. Gilluly, Ed.D.,
Chairman of the Company, is also
Chairman and Chief Executive Officer
of Hadron and of AMASYS. The Chief Financial Officer
and Corporate Secretary of the Company have
similar duties with Hadron, Inc. More than
50% of their time is spent on other than
Company matters. During the six months ended
December 31, 1998, the following transactions
occurred.
Corporate Services Provided by/to Hadron,
Inc.
The Company contracts with Hadron, Inc.
for corporate and shareholder relations
services. Charges for such services are
based on time and material expended by Hadron
personnel in providing such services at a
rate equal to Hadron's costs. The Company
expensed approximately $14,000 for these
services during the six months ended December
31, 1998. Hadron subleases office space from
the Company at the same rental rate paid by
the Company to its landlord and also shares
certain office-related expenses at cost based
upon usage. Total service charges to Hadron
during the six months ended December 31,
1998, amounted to approximately $16,000. At
January 31, 1999, Hadron terminated its
sublease with the Company and relocated to
other facilities. Management believes the
methods used for allocating these charges are
reasonable.
Administrative Services Provided to AMASYS
Corporation
AMASYS shares certain general and
administrative expenses with the Company
based on usage for which the Company billed
AMASYS approximately $1,400, the Company's
cost, during the six months ended December
31, 1998. Management believes the methods
used for allocating these charges are
reasonable.
3. Notes Payable
In September 1997, the Company obtained
a $50,000 line of credit and a $140,000 three
year term loan from Century National Bank
with annual principal repayments of $40,000,
$40,000 and $60,000. In September 1998, the
first $40,000 principal payment was made.
The facilities, guaranteed by C.W. Gilluly,
bear interest at a rate of prime plus two
percent annually. The line of credit
facility was renewed for one year in December
1998. Approximately $6,000 in interest was
expensed and paid during the six months ended
December 31, 1998.
In June 1997, the Company signed a note
with a law firm converting accounts payable
to the firm to a note payable in the amount
of $50,000 due no later than December 17,
1998, together with all accrued interest, at
nine percent (9%) per annum, thereon. In
December 1998, the principal and accrued
interest, totaling $56,750, was paid.
In December 1993, the Company assumed
certain unsecured, non-interest bearing debt
obligations related to the acquisition of
assets and certain liabilities of
International Intelligence Report, Inc. As
of December 31, 1998, approximately $1,150
was outstanding on these obligations and due
within one year.
4. 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,
1998 1997 1998 1997
---------- --------- ---------- ----------
Numerator:
Net Income $117,873 $14,689 $211,489 $18,357
========== ========= ========== ==========
Denominator:
Denominator for basic
earnings per share -
weighted average
shares 7,924,501 7,858,428 7,912,978 7,858,422
Effect of dilutive
securities:
Stock Options 2,630,237 2,204,392 2,695,507 2,074,103
---------- --------- ---------- ----------
Denominator for diluted
earnings per share 10,554,738 10,062,820 10,608,485 9,932,525
========== ========= ========== ==========
Basic Earnings Per Share $.01 $.00 $.02 $.00
Diluted Earnings Per
Share $.01 $.00 $.02 $.00
5. Income Taxes
The Company has recorded net income for
the six months ended December 31, 1998;
however, no tax provision has been recorded
as the Company's net operating loss (NOL) and
investment tax credit (ITC) carryforwards are
sufficient to offset this income for federal
and state tax purposes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of the three months ended December
31, 1998, to the three months ended December
31, 1997
During the three months ended December
31, 1998, the Company's total revenues were
approximately $1,811,000, or approximately
$505,000 (39%) greater than the total
revenues for the three months ended December
31, 1997. Revenues are derived from two
sources. Information services is the primary
business of the Company and involves the
aggregation, formatting and value-add of
real-time news sources. Data communications
revenues represent the recovery of costs
incurred in the delivery of the information
services to customers. Of the approximately
$493,000 increase in information services
revenues, approximately 94% reflects revenues
from new customers obtained during the past
twelve months and approximately 6% represents
growth from existing customers. Revenue
growth from existing customers consisted of
usage-based royalties and certain contractual
increases. The increase of approximately
$12,000 in data communications revenues
reflects billings for delivery of the
Company's products to new customers.
Total costs and expenses for the three
months ended December 31, 1998 were
approximately $1,671,000, representing an
approximate $403,000 (32%) increase in
operating expenses from the three months
ended December 31, 1997. This increase in
operating expenses is due to increases in
information services costs, product
development costs, sales and marketing,
general and administrative and depreciation
expenses, partially offset by a slight
decrease in data communications costs.
Information services costs during the
quarter ended December 31, 1998 increased
approximately $178,000 (32%) over these costs
in the quarter ended December 31, 1997. This
increase was due primarily to increased fees
and royalties to information providers as new
sources were added and revenues increased, as
well as additional staffing costs.
Data communications costs decreased
approximately $8,000 (4%) during the three
months ended December 31, 1998 compared with
the three months ended December 31, 1997.
This decrease is primarily a result of the
termination of an outdated method of
delivery.
Product development expenses increased
by approximately $20,000 (49%) for the three
months ended December 31, 1998 compared to
the three months ended December 31, 1997.
This increase is the result of additional
personnel in this department.
Sales and marketing expenses increased
by approximately $125,000 or approximately
68% for the quarter ended December 31, 1998
compared to the quarter ended December 31,
1997. This increase was due to increased
compensation arising from the addition of
sales and marketing personnel, increased
expenses for advertising, promotional
material and sales collateral, increased
travel expenses related to business
development and additional commissions based
on the increase in information services
revenues during the period.
General and administrative expenses for
the three months ended December 31, 1998 were
approximately $82,000 (29%) greater than
these expenses during the three months ended
December 31, 1997. This increase was
primarily due to expenses related to an
increase of approximately $58,000 in the
allowance for doubtful accounts. The
increase in the allowance reflects the
changing dynamics of the industry with little
or no barrier to entry for our distributors,
an increased number of failed start-up
companies and the quantity of new signed
contracts.
Depreciation and amortization expense
increased by approximately $7,000 for the
quarter ended December 31, 1998 compared to
the quarter ended December 31, 1997 due to
additional equipment purchases.
The Company earned operating income of
approximately $139,000 during the quarter
ended December 31, 1998, compared to
operating income of $38,000 during the
quarter ended December 31, 1997. The Company
earned net income of approximately $118,000
during the quarter ended December 31, 1998,
compared to net income of approximately
$15,000 for the quarter ended December 31,
1997. The increase in operating and net
income reflects the increase in revenues with
a marginal increase in total expenses.
Comparison of the six months ended December
31, 1998, to the six months ended December
31, 1997
During the six months ended December 31,
1998, the Company's total revenues were
approximately $3,465,000, or approximately
$940,000 (37%) greater than the total
revenues for the six months ended December
31, 1997. Of the approximately $903,000
increase in information services revenues,
approximately 94% reflects revenues from new
customers obtained during the past twelve
months and approximately 6% represents growth
from existing customers. Revenue growth from
existing customers consisted of usage-based
royalties and certain contractual increases.
The increase of approximately $37,000 in data
communications revenues reflects billings for
delivery of the Company's products to new
customers.
Total costs and expenses for the six
months ended December 31, 1998 were
approximately $3,209,000, representing an
approximate $728,000 (29%) increase in
operating expenses from the six months ended
December 31, 1997. This increase in
operating expenses is due to increases in
information services costs, data
communications costs, product development
costs, sales and marketing, general and
administrative and depreciation expenses.
Information services costs during the
six months ended December 31, 1998 increased
approximately $333,000 (31%) over these costs
in the six months ended December 31, 1997.
This increase was due primarily to increased
fees and royalties to information providers
as new sources were added and revenues
increased, additional staffing costs, and an
increase in computer supplies and software
expenses, partially offset by decreased
maintenance costs.
Data communications costs increased
approximately $22,000 (6%) during the six
months ended December 31, 1998 compared with
the six months ended December 31, 1997. This
increase is due to the increase in the number
of customers to whom the Company delivers its
products, partially offset by the termination
of an outdated method of delivery.
Product development expenses increased
by approximately $41,000 (55%) for the six
months ended December 31, 1998 compared to
the six months ended December 31, 1997. This
increase is the result of additional
personnel in this department.
Sales and marketing expenses increased
by approximately $170,000 or approximately
45% for the six months ended December 31,
1998 compared to the six months ended
December 31, 1997. This increase was due to
increased compensation arising from the
addition of sales and marketing personnel,
increased expenses for advertising,
promotional material and sales collateral,
increased travel expenses related to business
development and additional commissions based
on the increase in information services
revenues during the period.
General and administrative expenses for
the six months ended December 31, 1998 were
approximately $168,000 (32%) greater than
these expenses during the six months ended
December 31, 1997. This increase was
primarily due to the write-off of a $28,500
account receivable from a customer who went
out of business and an increase of more than
$80,000 in the allowance for doubtful
accounts. With the changing dynamics of the
industry, little or no barrier to entry for
our distributors, the quantity of new signed
contracts, and an increase in the number of
failed start-up companies, the Company
increased the allowance for doubtful
accounts.
Depreciation and amortization expense
increased by approximately $13,000 over the
six months ended December 31, 1998 compared
to the six months ended December 31, 1997 due
to additional equipment purchases.
The Company earned operating income of
approximately $257,000 during the six months
ended December 31, 1998, compared to
operating income of $64,000 during the six
months ended December 31, 1997. The Company
earned net income of approximately $211,000
for the six months ended December 31, 1998,
compared to net income of approximately
$18,000 for the quarter ended December 31,
1997. The increase in operating and net
income reflects the increase in revenues with
a marginal increase in total expenses.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL
RESOURCES
For the six months ended December 31,
1998, the Company's operations produced
operating income of approximately $257,000
and net income of approximately $211,000. At
December 31, 1998, the Company had negative
working capital of approximately $259,000 as
compared with negative working capital of
approximately $286,000 at June 30, 1998. The
increase in working capital is a result of
earnings offset by the substantial use of
earnings in funding capital expenditures.
The Company also had a net stockholders'
deficit of approximately $530,000 at December
31, 1998, as compared to a net stockholders'
deficit at June 30, 1998, of approximately
$757,000. The decrease in stockholders'
deficit was due to the retention of net
income and the addition of capital through an
Employee Stock Purchase Plan.
For the six months ended December 31,
1998, the Company's operating activities
generated approximately $161,000 in cash.
The Company had cash and cash equivalents of
approximately $32,000 at December 31, 1998,
compared to approximately $170,000 at June
30, 1998. The decrease arose from continuing
investment in the upgrade of the Company's
software and hardware systems. To date, the
Company's operations have generated cash flow
sufficient to cover its monthly expenses.
However, no assurance may be given that the
Company will be able to expand its revenue
base or maintain ongoing profitable operations
that would be necessary to meet its liquidity
needs in the future. If the Company is not
successful in its efforts, it may undertake
other actions as may be appropriate to
preserve asset values, including bank
financing and debt negotiations with AMASYS.
YEAR 2000 ISSUE
The Year 2000 issue is the result of
computer programs being written using two
digits rather than four to define the
applicable year, resulting in possible system
failure or miscalculations causing
disruptions of operations.
The Company has completed an internal
review and assessment of the impact of the
Year 2000 issue upon its operating, financial
and accounting systems. At this time the
Company believes that, with respect to its
internal systems, the Year 2000 issue will
not pose any significant operational problems
or costs.
The Company has commenced a program to
assess the impact of the Year 2000 issue with
respect to the Company's major vendors and
distributor customers, none of whom share
information systems with the Company
(external agents). Letters have been sent
requesting detailed, written information
concerning existing or anticipated Year 2000
compliance by their systems, insofar as the
operating systems relate to the Company's
business activities with such parties. The
Company expects to receive replies by
February 28, 1999, and will update its
assessment of any impact at that time. The
Company has no means of ensuring that its
external agents will be Year 2000 ready. The
inability of external agents to complete
their Year 2000 resolution process in a
timely fashion could materially impact the
Company. The effect of non-compliance by
external agents is not determinable.
Management of the Company believes it
has an effective program in place to assess
the Year 2000 issue. As noted above, the
Company has not yet completed all necessary
phases of the Year 2000 program. Failure on
the part of the external agents to comply and
disruptions in the economy generally
resulting from Year 2000 issues could
materially adversely affect the Company. The
amount of potential liability and lost
revenues cannot be reasonably estimated at
this time.
The Company currently has no contingency
plans in place in the event its external
agents do not complete all phases of the Year
2000 resolution process. The Company plans
to evaluate the status of completion during
the March 1999 quarter and determine whether
such a plan is necessary.
Except for the historical information
contained herein, the matters discussed in
this 10-Q include forward-looking statements
that involve a number of risks and
uncertainties. There are certain important
external factors and risks, including
business conditions and growth in the demand
for real-time, aggregated custom on-line news
delivery services, and growth in the economy
in general; the impact of competitive
products and pricing; the proliferation of
large, global information networks; and the
evolution of the Internet. Certain internal
factors and risks exist as well, such as
continued success in the acquisition and
growth of new information re-distributor and
corporate end-user client accounts; the
ability to fund upgrades to the Company's
technical systems; the timely creation and
market acceptance of new products; the
Company's ability to continue to increase the
variety and quantity of sources of
information available to create its products;
the Company's ability to continue to recruit
and retain highly skilled technical,
editorial, managerial and sales/marketing
personnel; the Company's ability to generate
cash flow sufficient to cover its current
obligations while meeting its long-term debt
obligations. These and other risks detailed
from time to time in the Company's SEC
reports, could cause results to differ
materially from those anticipated by the
statements contained herein.
Part II. Other Information
Items 1 - 5. None.
Item 6. Exhibits and Reports on
Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(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 there
unto duly authorized.
COMTEX SCIENTIFIC CORPORATION
(Registrant)
Dated: February 12, 1999 By: /S/ CHARLES W. TERRY
Charles W. Terry
President and Chief Executive Officer
(Principal Executive Officer)
By: /S/ DONALD E. ZIEGLER
Donald E. Ziegler
Chief Financial Officer
(Principal Financial and
Accounting Officer)