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 September 30, 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 November 8, 1999, 8,127,040 shares of the Common Stock of
the registrant were outstanding.
<PAGE>
COMTEX SCIENTIFIC CORPORATION
TABLE OF CONTENTS
Part I Financial Information: Page No.
Item 1. Financial Statements
Balance Sheets 3
at September 30, 1999 (unaudited)
and June 30, 1999
Statements of Operations 4
for the Three Months Ended
September 30, 1999 and 1998 (unaudited)
Statements of Cash Flows 5
for the Three Months Ended
September 30, 1999 and 1998 (unaudited)
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis 8
of Financial Condition and Results
of Operations
Part II Other Information:
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
<PAGE>
<TABLE>
COMTEX SCIENTIFIC CORPORATION
BALANCE SHEETS AT SEPTEMBER 30, 1999 AND JUNE 30, 1999
<CAPTION>
September 30, June 30,
1999 1999
(Unaudited)
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 274,756 $ 95,283
Accounts Receivable, Net of Allowance
of approximately $382,418 and $350,868
at September 30, 1999 and June 30, 1999, respectively 1,287,785 1,340,338
Prepaid Expenses and Other Current Assets 117,533 72,662
-------------- --------------
TOTAL CURRENT ASSETS $ 1,680,074 1,508,283
PROPERTY AND EQUIPMENT, NET 1,061,318 836,988
DEPOSITS AND OTHER ASSETS 62,254 62,254
-------------- --------------
TOTAL ASSETS $ 2,803,646 $ 2,407,525
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts Payable $ 856,083 $ 755,223
Accrued Expenses 874,963 815,884
Amounts due to Related Parties 2,504 3,497
Notes Payable 60,000 40,000
-------------- --------------
TOTAL CURRENT LIABILITIES 1,793,550 1,614,604
LONG-TERM LIABILITIES:
Long-Term Notes Payable - Affiliate 986,954 986,954
Other Long-Term Notes Payable - 60,000
-------------- --------------
TOTAL LONG-TERM LIABILITIES 986,954 1,046,954
-------------- --------------
TOTAL LIABILITIES 2,780,504 2,661,558
COMMITMENTS AND CONTINGENCIES
<PAGE>
STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock, $0.01 Par Value -
Shares Authorized: 18,000,000;
Shares issued and outstanding:
8,126,380 and 8,124,430, respectively 81,264 81,244
Additional Capital 10,032,092 10,031,802
Accumulated Deficit (10,090,214) (10,367,079)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 23,142 (254,033)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,803,646 $ 2,407,525
============== ==============
</TABLE>
The accompanying "Notes to Financial Statements are an integral
part of these financial statements.
3
<PAGE>
<TABLE>
Comtex Scientific Corporation
Statements of Operations for the Three Months Ended September 30, 1999 and 1998
(unaudited)
<CAPTION>
Three months ended
September 30, September 30,
1999 1998
------------- ---------------
<S> <C> <C>
Revenues 2,408,894 1,654,703
Cost of Revenues 799,422 666,843
------------- ---------------
Gross Profit 1,609,472 987,860
Operating Expenses
Technical Operations & Support 427,619 208,057
Product Development 118,989 54,708
Sales and Marketing 289,844 238,476
General and Administrative 438,842 339,660
Depreciation and Amortization 29,697 29,863
------------- ---------------
Total Operating Expenses 1,304,991 870,765
Operating Income 304,481 117,095
Other income/(expense)
Interest Expense (27,781) (23,203)
Interest Income/Other 609 138
------------- ---------------
Other Expense, net (27,172) (23,065)
------------- ---------------
Income Before Income Taxes 277,309 94,030
Income Taxes 444 414
------------- ---------------
Net Income 276,865 93,616
============= ===============
Basic Earnings Per Common Share $ .03 $ .01
============= ===============
Weigted Average Number of Common Shares 8,125,102 7,901,454
============= ===============
Diluted Earnings Per Common Share $ .02 $ .01
============= ===============
Weighted Average Number of Shares Assuming Dilution 12,100,225 10,662,232
============= ===============
</TABLE>
The accompanying "Notes to Financial Statements" are an integral part
these financial statements
4
<PAGE>
<TABLE>
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<CAPTION>
Three Months Ended
September 30,
----------------------------
1999 1998
------------- ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 276,865 $ 93,616
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization Expense 29,697 29,863
Bad Debt Expense 32,000 67,500
Changes in Assets and Liabilities:
Accounts Receivable 20,552 (182,859)
Prepaid Expenses and Other Current Assets (44,869) (4,848)
Deposits and Other Assets - 250
Accounts Payable 101,853 70,017
Accrued Expenses 58,086 5,811
Amounts due to Related Parties (993) 15,179
------------- ------------
Net Cash provided by Operating Activities 473,191 94,529
Cash Flows from Investing Activities:
Purchases of Property and Equipment (254,027) (101,987)
------------- ------------
Net Cash (used in) Investing Activities (254,027) (101,987)
Cash Flows from Financing Activities:
Repayments on Notes Payable (40,000) (41,755)
Exercise of Stock Options 309 1,017
------------- ------------
Net Cash used in Financing Activities (39,691) (40,738)
------------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents 179,473 (48,196)
Cash and Cash Equivalents at Beginning of Period 95,283 170,416
------------- ------------
Cash and Cash Equivalentsat End of Period $ 274,756 $ 122,220
============= ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 27,781 $ 4,757
Cash paid for income taxes $ 444 $ 414
</TABLE>
The accompanying "Notes to Financial Statements" are an integral part
these financial statements
5
<PAGE>
COMTEX SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 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, 1999 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, 1999
("1999 Form 10-K"), filed with the Securities and Exchange
Commission.
Certain amounts for the three months ended September 30,
1998, have been reclassified to conform to the presentation of the
three months ended September 30, 1999.
2. Related Party Transactions
AMASYS Corporation ("AMASYS"), the successor corporation to
Infotechnology, Inc. ("Infotech"), is the Company's majority
stockholder (approximately 58%). Of the Company's common stock owned
by AMASYS, 2,540,503 shares are subject to option by C.W. Gilluly,
Ed.D., the Chairman of the Board of Directors of both the Company
and AMASYS. C.W. Gilluly, Ed.D., is also Chairman and Chief
Executive Officer of Hadron, Inc. ("Hadron"), of which AMASYS owns
approximately 12% of the outstanding shares. The Chairman and
Corporate Secretary of the Company have similar duties with Hadron.
More than 50% of their time is spent on other than Company business.
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 due September 1998, September 1999 and September 2000,
respectively. Both facilities are guaranteed by C.W. Gilluly, Ed.D.
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
bearing interest at a rate of prime plus one percent annually and
expires November 30, 1999. The Company is currently renegotiating
the renewal of the line of credit. The term note bears interest at
a rate of prime plus two percent annually.
<PAGE>
<TABLE>
4. Net Income per Share
The following table sets forth the computation of basic and
diluted earnings per share:
<CAPTION>
Three Months Ended
September 30,
1999 1998
---------- -----------
<S> <C> <C>
Numerator:
Net Income $ 276,865 $ 93,616
========== ===========
Denominator:
Denominator for basic
earnings per share -
weighted average shares 8,125,102 7,901,454
Effect of dilutive
securities:
Stock Options 3,975,123 2,760,778
---------- -----------
Denominator for diluted
earnings per share 12,100,225 10.662,232
========== ===========
Basic Earnings Per Share
$ .03 $ .01
Diluted Earnings Per Share $ .02 $ .01
</TABLE>
5. Income Taxes
The Company has recorded net income for the three months ended
September 30, 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.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 1999, to the
three months ended September 30, 1998
The Company earned operating income of approximately $304,000
during the three months ended September 30, 1999, compared to operating
income of $117,000 during the three months ended September 30, 1998. The
Company earned net income of approximately $277,000 during the
three months ended September 30, 1999, compared to net income of
approximately $94,000 for the three months ended September 30, 1998. As
discussed below, the improvement in operating income and net income
is due primarily to a 46% growth in revenues with only a 37%
corresponding increase in cost of revenues and operating expenses.
The Company's revenues consist primarily of royalty revenues
and fees from the delivery of content to information distributors as
well as revenues from charges for data communications. During the
three months ended September 30, 1999, the Company's total revenues
were approximately $2,409,000, or approximately $754,000 (46%)
greater than the total revenues for the three months ended September
30, 1998. Of the approximately $754,000 increase revenues,
approximately 96% reflects revenues from new customers obtained
during the twelve months ended September 30, 1999.
The Company's cost of revenue consists primarily of content
acquisition costs as well as communication costs for the deliver of
the Company's products to customers. The cost of revenue for the
three months ended September 30, 1999 was approximately 799,000, or
$ 132,000 (20%) greater than the cost of revenue for the three
months ended September 30, 1998. The increase in cost is primarily
due to an increase in royalties and fees for the acquisition of
content related to the increase in revenues for the period. The
increase is offset partially by decreases in communications costs
resulting from the implementation of a more cost effective delivery
vehicle for the delivery of the Company's products to customers.
The gross profit for the three months ended September 30, 1999
was approximately $1,609,000, or $622,000 (63%) better than the
gross profit for the same period in the prior year. The gross
margin percentage improved for the three months ended September 30,
1999 to approximately 67% from approximately 60% in the prior year
due primarily to the implementation of a more cost effective
delivery vehicle for the delivery of the Company's products to
customers.
<PAGE>
Total operating expenses for the three months ended September
30, 1999 were approximately $1,305,000, representing an approximate
$434,000 (50%) increase in operating expenses from the three months
ended September 30, 1998. This increase in operating expenses is
due primarily to increases in expenses associated with increased
headcount and outside consultants as the company makes investments
in company infrastructure. The increase in these costs is partially
offset by a decrease in bad debt expense as a result of an improved
credit and collection process.
Technical operations and support expenses during the three
months ended September 30, 1999 increased approximately $220,000
(106%) over these expenses in the three months ended September 30,
1998. This increase was due primarily to increased headcount and
consulting costs associated with technology projects and client
support.
Product development expenses increased by approximately $64,000
(118%) for the three months ended September 30, 1999 compared to the
three months ended September 30, 1998. This increase is the result
of additional personnel in this department.
Sales and marketing expenses increased by approximately $51,000
or approximately 21% for the three months ended September 30, 1999
compared to the three months ended September 30, 1998. This
increase was due to increased compensation arising from the addition
of sales and marketing personnel as well as additional commissions
based on the increase in information services revenues during the
period.
General and administrative expenses for the three months ended
September 30, 1999 were approximately $99,000 (29%) greater than
these expenses during the three months ended September 30, 1998.
This increase was due to increased expenses related to additional
headcount, expanded office space, recruitment and consulting offset
by a decrease in bad debt expense due to improved credit and
collection policies and procedures.
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 1999, the Company's
operations produced operating income of approximately $304,000 and
net income of approximately $277,000. At September 30, 1999, the
Company had negative working capital of approximately $113,000 as
compared with negative working capital of approximately $106,000 at
June 30, 1999. The Company also had net stockholders' equity of
approximately $23,000 at September 30, 1999, as compared to a net
stockholders' deficit at June 30, 1999, of approximately $254,000.
The increase in stockholders' equity was due primarily to the
increase in, and retention of, net income.
For the three months ended September 30, 1999, the Company's
operating activities generated approximately $473,000 in cash. The
Company had cash of approximately $275,000 at September 30, 1999,
compared to approximately $95,000 at June 30, 1999. To date, the
Company's operations have generated cash flow sufficient to cover
its monthly expenses. The Company contemplates spending, over the
next nine months, additional amounts to make necessary investments
in technology, human resources, marketing, development of new
products and office infrastructure.
The Company has invested significantly in upgrading the
experience level of its management, sales, marketing and technical
support staff; in expanding its contractual base with information
providers so as to improve the quality and flexibility of its
information products; and in expanding its contracts with
information distributor customers. All of these factors contribute
to improving the Company's ability to sell and deliver quality
products and services.
In addition, the Company has made capital expenditures of
approximately $254,000 in the three months ended September 30, 1999,
primarily to upgrade its software and hardware platforms thus
expanding both its product capabilities and its ability meet future
client processing requirements. The Company anticipates continued
investment at similar levels in fiscal year 2000 to continue to
upgrade its technology platforms and infrastructure.
The Company has a $250,000 line of credit in place and
available to assist with short-term fluctuations in cash flow, if
necessary. To date, the Company has not needed to use this
facility, but may need to do so in the future to assist with
investments in the Company.
<PAGE>
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. Therefore, these computer programs do not properly recognize
a year that begins with "20" instead of the familiar "19, "
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, including those with embedded controls. It has
undertaken, or is currently undertaking, corrective actions where
issues were discovered. Specific contingency plans are currently
being developed where significant risks may exist despite corrective
actions taken or planned. All corrective actions and contingency
plans are scheduled to be completed and/or put into place by
December 31, 1999.
The first of a two-phase project to evaluate the Company's
primary systems for processing feeds from information providers and
distributing them to its customers has been completed with generally
positive results. Not all systems were found to be Year 2000
compliant. The second phase will correct known problems, further
identify areas for correction and develop contingency plans where no
remediation is possible. Management believes these systems will
operate satisfactorily in a Year 2000 environment with little or no
impact.
The Company estimates that its total Year 2000 compliance costs
will approximate less than $50,000, of which less than $20,000 has
been expended to date. This amount includes the cost of duplicative
equipment for testing, the replacement of non-compliant systems and
personnel and consulting expenses to affect the review and
remediation.
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. 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 a significant number of replies with generally complete
answers and positive assurances regarding Year 2000 readiness. The
Company is in the process of completing this portion of the
evaluation as well as following up on non-replies, incomplete
replies and issues arising out of replies received.
<PAGE>
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.
Based upon the activities described above, the Company does not
believe that the Year 2000 problem is likely to have a material
adverse effect on the Company's business or results of operations.
However, the above discussion regarding the Year 2000 issue contains
forward-looking statements that reflect the Company's current
expectations or beliefs concerning future results and events. These
statements are made pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Readers are
cautioned that forward-looking statements contained in the Year 2000
discussion should be read in conjunction with the following
disclosures of the Company.
The dates on which the Company believes its Year 2000
compliance efforts will be completed are based on management's best
estimates, which were derived utilizing numerous assumptions of
future events, including the continued availability of certain
resources, third-party modification plans and other factors.
Unanticipated failures by critical vendors, as well as a failure by
the Company to execute successfully its own remediation efforts,
however, could have a material adverse effect on the costs
associated with year 2000 compliance and on the completion of
efforts to effect such compliance. Some important factors that
might cause differences between the estimates and actual results
include, but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and correct
all relevant computer code, the timely and accurate responses to and
correction by third-parties and suppliers, the ability to implement
interfaces between new systems and the systems not being replaced
and similar uncertainties. Due to the general uncertainty inherent
in the Year 2000 problem, the Company cannot ensure its ability to
timely and cost-effectively resolve problems associated with the
Year 2000 issue that may affect its operations and business or
expose it to third-party liability.
Cautionary Statements Concerning Forward-Looking Statements
Except for the historical information contained herein, the
matters discussed in this 10-Q include forward-looking statements.
Forward-looking statements, which the Company believes to be
reasonable and are made in good faith, are subject to certain risks
and uncertainties that could cause actual results to differ
materially from those expressed in any forward-looking statement
made by, or on behalf of, the Company.
<PAGE>
Among such important external factors and risks are business
conditions and growth in the demand for real-time, aggregated custom
online 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. Among such important internal factors and risks are
continued success in the acquisition and growth of new information
re-distributor and corporate end-user client accounts; the ability
to continue the Company's program of technical system upgrades; 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; and the
other risks detailed from time to time in the Company's SEC reports,
including quarterly reports on Form 10-Q, that could cause results
to differ materially from those anticipated by the statements
contained herein.
<PAGE>
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.
<PAGE>
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: November 15, 1999 By: /S/ CHARLES W. TERRY
Charles W. Terry
President and Chief Executive Officer
(Principal Executive Officer)
By: /S/ AARON N. DANIELS
Aaron N. Daniels
Chief Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCEHDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FORM THE FIRST QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 274,756
<SECURITIES> 0
<RECEIVABLES> 1,673,203
<ALLOWANCES> (382,418)
<INVENTORY> 0
<CURRENT-ASSETS> 1,680,074
<PP&E> 1,905,763
<DEPRECIATION> (844,445)
<TOTAL-ASSETS> 2,803,646
<CURRENT-LIABILITIES> 1,793,550
<BONDS> 0
0
0
<COMMON> 81,264
<OTHER-SE> (58,122)
<TOTAL-LIABILITY-AND-EQUITY> 2,803,646
<SALES> 2,408,894
<TOTAL-REVENUES> 2,408,894
<CGS> 799,422
<TOTAL-COSTS> 2,104,413
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,172
<INCOME-PRETAX> 277,309
<INCOME-TAX> 444
<INCOME-CONTINUING> 276,865
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 276,865
<EPS-BASIC> .03
<EPS-DILUTED> .02
</TABLE>
