UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Form 10-Q
---------------------
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999 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 May 11, 1999, 8,083,694 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 March 31, 1999 (unaudited)
and June 30, 1998
Statements of Operations 4
for the Three and Nine Months Ended
March 31, 1999 and 1998 (unaudited)
Statements of Cash Flows 5
for the Nine Months Ended
March 31, 1999 and 1998 (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 14
SIGNATURES 15
COMTEX SCIENTIFIC CORPORATION
BALANCE SHEETS
March 31, June 30,
1999 1998
---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 176,657 $ 170,416
Accounts Receivable, Net of Allowance of
approximately $205,000 and $67,000
at March 31, 1999 and June 30, 1998, respectively 1,222,626 882,001
Prepaid Expenses and Other Current Assets 60,562 19,512
---------- ----------
TOTAL CURRENT ASSETS 1,459,845 1,071,929
PROPERTY AND EQUIPMENT, NET 629,990 299,097
DEPOSITS AND OTHER ASSETS 62,255 62,944
---------- ----------
TOTAL ASSETS $ 2,152,090 $1,433,970
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts Payable $ 836,599 $ 600,345
Accrued Expenses 582,902 446,317
Amounts due to Related Parties, net 257,224 216,815
Notes Payable 40,000 94,660
---------- ----------
TOTAL CURRENT LIABILITIES 1,716,725 1,358,137
LONG-TERM LIABILITIES:
Notes Payable - Affiliate 732,872 732,872
Other Notes Payable 60,000 100,000
---------- ----------
TOTAL LONG-TERM LIABILITIES 792,872 832,872
---------- ----------
TOTAL LIABILITIES 2,509,597 2,191,009
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common Stock, $0.01 Par Value - Shares Authorized:
18,000,000; Shares issued and outstanding:
8,078,360 and 7,896,231, respectively 80,784 78,962
Additional Capital 10,015,520 9,987,098
Accumulated Deficit (10,453,811) (10,823,099)
---------- ----------
TOTAL STOCKHOLDERS' DEFICIT (357,507) (757,039)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,152,090 $ 1,433,970
========== ==========
The accompanying "Notes to Financial Statements" are an integral part of these
financial statements
- 3 -
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
March 31, March 31,
--------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
REVENUES
Information Services Revenues $1,644,439 $1,232,981 $4,792,353 $3,477,403
Data Communications Revenues 166,688 132,358 484,143 413,016
---------- ---------- ---------- ----------
Total Revenues 1,811,127 1,365,339 5,276,496 3,890,419
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Costs of Information Services 718,043 580,622 2,114,001 1,643,565
Costs of Data Communications 186,848 179,177 575,084 544,937
Product Development 67,624 41,540 182,370 115,344
Sales and Marketing 292,757 218,398 840,126 595,796
General and Administrative 345,397 287,614 1,045,982 820,240
Depreciation and Amortization 22,145 27,744 84,100 76,422
--------- ---------- ---------- ----------
Total Costs and Expenses 1,632,814 1,335,095 4,841,663 3,796,304
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 178,313 30,244 434,833 94,115
OTHER INCOME (EXPENSE)
Interest Expense (20,813) (23,121) (65,888) (69,810)
Interest Income/Other 327 266 785 1,774
---------- ---------- ---------- ---------
Other Expense, Net (20,486) (22,855) (65,103) (68,036)
---------- ---------- ---------- ---------
INCOME BEFORE INCOME TAXES 157,827 7,389 369,730 26,079
INCOME TAXES 27 28 441 360
---------- ---------- ---------- ----------
NET INCOME $ 157,800 $ 7,361 $ 369,289 $ 25,719
========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE $ .02 $ .00 $ .04 $ .00
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 8,010,914 7,859,417 7,945,623 7,858,749
========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE $ .01 $ .00 $ .03 $ .00
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
ASSUMING DILUTION 12,055,635 10,122,563 11,090,868 9,995,871
========== ========== ========== ==========
The accompanying "Notes to Financial Statements" are an integral part of these
financial statements
- 4 -
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31,
--------------------------
1999 1998
---------- ----------
Cash Flows from Operating Activities:
Net Income $ 369,289 $ 25,719
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization Expense 84,100 76,422
Bad Debt Expense 160,000 19,590
Changes in Assets and Liabilities:
Accounts Receivable (500,623) 115,404
Prepaid Expenses and Other Current Assets (41,050) 15,359
Deposits and Other Assets 250 864
Accounts Payable 236,254 (3,980)
Accrued Expenses 136,585 (9,880)
Amounts due to Related Parties 40,409 57,937
---------- ----------
Net Cash provided by Operating Activities 485,214 297,435
Cash Flows from Investing Activities:
Purchases of Property and Equipment (414,555) (128,810)
Repayments of Advances to TII - 266,000
---------- ----------
Net Cash provided by (used in) Investing Activities (414,555) 137,190
Cash Flows from Financing Activities:
Proceeds from Notes Payable - 140,000
Repayments on Notes Payable (94,660) (21,477)
Repayments on Notes Payable to Related Parties - (147,422)
Issuance of Stock under Employee Stock Purchase Plan 12,537 -
Exercise of Stock Options 17,706 140
Repayments against PrinCap Financing Agreement - (266,000)
---------- ----------
Net Cash used in Financing Activities (64,418) (294,759)
---------- ----------
Net Increase in Cash 6,241 139,866
Cash Balance at Beginning of Period 170,416 17,927
---------- ----------
Cash Balance at End of Period $ 176,657 $ 157,793
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 14,782 $ 12,998
Cash paid for income taxes $ 441 $ 360
The accompanying "Notes to Financial Statements" are integral part of these
financial statements
- 5 -
COMTEX SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999
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.
Statement No. 131, Disclosures about Segments of an Enterprise
and Related Information is required for the fiscal year ending June
30, 1999. The Company will make the necessary changes to comply
with the provisions of the Statement as applicable. 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 nine months ended March 31,
1998, have been reclassified to conform to the presentation of the
three and nine months ended March 31, 1999.
2. Related Party Transactions
AMASYS Corporation ("AMASYS"), the successor corporation to
Infotechnology, Inc. ("Infotech"), is the Company's majority
stockholder (holding approximately 59% of the Company's Common Stock
oustanding). C.W. Gilluly, Ed.D., Chairman of the Company,
is also Chairman of AMASYS and Chairman and Chief Executive Officer of
Hadron, Inc. of which AMASYS owns approximately 12% of the outstanding
shares. The Chairman, 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 nine months ended March 31, 1999, 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 $19,000 for these services during the nine months
ended March 31, 1999. Hadron subleased office space from the
Company at the same rental rate paid by the Company to its landlord
and also shared certain office-related expenses at cost based upon
usage. Total service charges to Hadron during the nine months ended
March 31, 1999, amounted to approximately $18,000. At January 31,
1999, Hadron terminated their 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 $2,000, the Company's cost, during the nine months
ended March 31, 1999. 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. Approximately $9,000 in
interest was expensed and paid during the nine months ended March
31, 1999. The line of credit facility was renewed for one year in
December 1998. In May 1999, the line of credit was increased to
$250,000.
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.
4. 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,
1999 1998 1999 1998
-------- -------- -------- --------
Numerator:
Net Income $157,800 $7,361 $369,289 $25,719
======== ======== ======== ========
Denominator:
Denominator for basic earnings per share -
weighted average shares 8,010,914 7,859,417 7,945,623 7,858,422
Effect of dilutive securities:
Stock Options 4,044,721 2,263,146 3,145,245 2,074,103
---------- ---------- ---------- ----------
Denominator for diluted earnings per share 12,055,635 10,122,563 11,090,868 9,932,525
========== ========== ========== =========
Basic Earnings Per Share $.02 $.00 $.04 $.00
Diluted Earnings Per Share $.01 $.00 $.03 $.00
5. Income Taxes
The Company has recorded net income for the nine months ended
March 31, 1999; 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 March 31, 1999, to the three
months ended March 31, 1998
During the three months ended March 31, 1999, the Company's
total revenues were approximately $1,811,000, or approximately
$446,000 (33%) greater than the total revenues for the three months
ended March 31, 1998. 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 $411,000 increase in information
services revenues, approximately 118% reflects revenues from new
customers obtained during the past twelve months and approximately
- -18% represents decreases in existing customer revenues from usage-
based royalties and losses from failed customer models. The
increase of approximately $34,000 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 March 31,
1999 were approximately $1,633,000, representing an approximate
$298,000 (22%) increase in operating expenses from the three months
ended March 31, 1998. This increase in operating expenses is due to
increases in information services costs, data communications costs,
product development costs, sales and marketing, and general and
administrative expenses.
Information services costs during the quarter ended March 31,
1999 increased approximately $137,000 (24%) over these costs in the
quarter ended March 31, 1998. 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 increased approximately $7,000 (4%)
during the three months ended March 31, 1999 compared to the three
months ended March 31, 1998 as a result of the growth in the number
customers to which the Company delivers its products.
Product development expenses increased by approximately $26,000
(63%) for the three months ended March 31, 1999 compared to the
three months ended March 31, 1998. This increase is the result of
additional personnel in this department.
Sales and marketing expenses increased by approximately $74,000
or approximately 34% for the quarter ended March 31, 1999 compared
to the quarter ended March 31, 1998. 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, and additional commissions based on
the increase in information services revenues during the period.
General and administrative expenses for the three months ended
March 31, 1999 were approximately $58,000 (20%) greater than these
expenses during the three months ended March 31, 1998. This
increase was due to expenses related to expanded office space and an
increase in the allowance for doubtful accounts of approximately
$27,000. 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.
The Company earned operating income of approximately $178,000
during the quarter ended March 31, 1999, compared to operating
income of $30,000 during the quarter ended March 31, 1998. The
Company earned net income of approximately $158,000 during the
quarter ended March 31, 1999, compared to net income of
approximately $7,000 for the quarter ended March 31, 1998. The
increase in operating and net income reflects the increase in
revenues with a marginal increase in total expenses.
Comparison of the nine months ended March 31, 1999, to the nine
months ended March 31, 1998
During the nine months ended March 31, 1999, the Company's
total revenues were approximately $5,276,000, or approximately
$1,386,000 (36%) greater than the total revenues for the nine months
ended March 31, 1998. Of the approximately $1,315,000 increase in
information services revenues, approximately 88% reflects revenues
from new customers obtained during the past twelve months and
approximately 12% represents growth from existing customers.
Revenue growth from existing customers consisted of usage-based
royalties and certain contractual increases. The increase of
approximately $71,000 in data communications revenues reflects
billings for delivery of the Company's products to new customers.
Total costs and expenses for the nine months ended March 31,
1999 were approximately $4,842,000, representing an approximate
$1,045,000 (28%) increase in operating expenses from the nine months
ended March 31, 1998. 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 nine months ended March
31, 1999 increased approximately $475,000 (29%) over these costs in
the nine months ended March 31, 1998. 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 $26,000 (5%)
during the nine months ended March 31, 1999 compared with the nine
months ended March 31, 1998. This increase is due to the increase in
the number of customers to which the Company delivers its products,
partially offset by the termination of an outdated method of
delivery.
Product development expenses increased by approximately $67,000
(58%) for the nine months ended March 31, 1999 compared to the nine
months ended March 31, 1998. This increase is the result of
additional personnel in this department.
Sales and marketing expenses increased by approximately
$244,000 or approximately 41% for the nine months ended March 31,
1999 compared to the nine months ended March 31, 1998. 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 nine months ended
March 31, 1999 were approximately $226,000 (28%) greater than these
expenses during the nine months ended March 31, 1998. 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
approximately $113,000 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 $8,000 over the nine months ended March 31, 1999
compared to the nine months ended March 31, 1998 due to additional
equipment purchases.
The Company earned operating income of approximately $435,000
during the nine months ended March 31, 1999, compared to operating
income of $94,000 during the nine months ended March 31, 1998. The
Company earned net income of approximately $369,000 for the nine
months ended March 31, 1999, compared to net income of approximately
$26,000 for the nine months ended March 31, 1998. 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 nine months ended March 31, 1999, the Company's
operations produced operating income of approximately $435,000 and
net income of approximately $369,000. At March 31, 1999, the
Company had negative working capital of approximately $257,000 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 $358,000 at March 31, 1999, 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 and the exercise of Company incentive
stock options.
For the nine months ended March 31, 1999, the Company's
operating activities generated approximately $485,000 in cash. The
Company had cash of approximately $177,000 at March 31, 1999,
compared to approximately $170,000 at June 30, 1998. To date, the
Company's operations have generated cash flow sufficient to cover
its monthly expenses. The Company contemplates spending, over the
next six months, an additional approximately $600,000 to complete
the new hardware and software system platform. Current operations
cash flow and the Company's $250,000 line of credit are expected to
fund the expenditures. The Company continues to explore other
financing options as well.
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 has received replies from a number of its
vendors and distributor customers with encouraging results and will
be sending second requests to those who have not responded. 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 continues to monitor and
assess 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: May 14, 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)