UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Form 10-Q
---------------------
/X/ Quarter report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996 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 11, 1996, 7,857,667 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 at 1
September 30, 1996 and June 30, 1996
Statements of Operations 2
for the Three Months Ended
September 30, 1996 and 1995
Statements of Cash Flows 3
for the Three Months Ended
September 30, 1996 and 1995
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis 7
of Financial Condition and Results
of Operations
Part II Other Information:
Item 1. Legal Proceedings 11
Item 6. Exhibits 11
SIGNATURES 12
<PAGE>
COMTEX SCIENTIFIC CORPORATION
BALANCE SHEETS AT SEPTEMBER 30, 1996 AND JUNE 30, 1996
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 127,544 $ 57,644
Accounts Receivable, Net of Allowance of $96,000 and $108,000
at September 30, 1996 and June 30, 1996, respectively 601,866 582,318
Advances to TII, a related party 329,533 360,573
Prepaid Expenses and Other Current Assets 48,751 49,133
TOTAL CURRENT ASSETS 1,107,694 1,049,668
PROPERTY AND EQUIPMENT, NET 238,392 267,028
DEPOSITS AND OTHER ASSETS 65,127 65,315
TOTAL ASSETS $ 1,411,213 $1,382,011
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts Payable $ 521,112 $ 502,962
Accrued Expenses 271,097 238,451
Amounts due to Related Parties 247,689 231,714
Notes Payable 361,797 418,178
TOTAL CURRENT LIABILITIES 1,401,695 1,391,305
LONG-TERM LIABILITIES:
Long-Term Notes Payable - Affiliate 857,785 1,008,831
Other Long-Term Notes Payable 64,380 74,050
TOTAL LONG-TERM LIABILITIES 922,165 1,082,881
TOTAL LIABILITIES 2,323,860 2,474,186
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common Stock, $0.01 Par Value - Shares Authorized: 18,000,000;
Shares issued and outstanding: 7,857,667 78,577 78,547
Additional Capital 9,980,575 9,830,010
Accumulated Deficit (10,971,799) (11,000,732)
TOTAL STOCKHOLDERS' DEFICIT (912,647) (1,092,175)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,411,213 $1,382,011
</TABLE>
<PAGE>1
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
1996 1995
<S> <C> <C>
REVENUES
Information Services Revenues $ 910,006 $ 755,187
Data Communications Revenues 130,282 58,954
Total Revenues 1,040,288 814,141
COSTS AND EXPENSES
Costs of Information Services 391,654 383,554
Costs of Data Communications 169,511 168,841
Product Development 54,409 66,448
Sales and Marketing 110,089 92,214
General and Administrative 215,502 212,626
Depreciation and Amortization 36,992 37,552
Total Costs and Expenses 978,157 961,235
INCOME (LOSS) FROM OPERATIONS 62,131 (147,094)
OTHER INCOME (EXPENSE)
Interest Expense (32,863) (26,000)
Interest Income/Other 11 (1,315)
Other Expense, Net (32,852) (27,315)
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES 29,279 (174,409)
INCOME TAXES 346 489
NET INCOME (LOSS) $ 28,933 $ (174,898)
NET INCOME (LOSS) PER COMMON SHARE $ 0.00 $ (0.02)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 7,858,667 7,854,667
</TABLE>
<PAGE> 2
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1996 1995
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $ 28,933 $ (174,896)
Adjustments to reconcile net income (loss) to net cash
provided by (used in ) operating activities:
Depreciation and Amortization Expense 36,992 37,552
Bad Debt Expense 9,000 8,000
Loss on Disposal of Fixed Assets 68 1,346
Changes in Assets and Liabilities:
Accounts Receivable (28,548) (134,240)
Prepaid Expenses and Other Current Assets 382 (5,261)
Deposits and Other Assets - -
Accounts Payable 18,150 172,695
Accrued Expenses 32,646 79,083
Amounts due to Related Parties 15,975 32,609
Other Liabilities - (925)
Net Cash provided by Operating Activities 113,628 15,961
Cash Flows from Investing Activities:
Purchases of Property and Equipment (10,607) (55,800)
Proceeds from Sale of Fixed Assets 2,401 8,185
Advances to TII - (481,354)
Repayments of Advances 31,040 929,298
Net Cash provided by Investing Activities 22,804 400,329
Cash Flows from Financing Activities:
Notes Payable, Net (47,178) (4,550)
Notes Payable to Related Parties, Net (481) -
Proceeds from PrinCap Financing Agreement - 440,749
Repayments against PrinCap Financing Agreement (18,873) (852,971)
Net Cash used in Financing Activities (66,532) (416,772)
Net Increase (Decrease) in Cash and Cash Equivalents 69,900 (482)
Cash and Cash Equivalents Balance at Beginning of Period 57,644 15,163
Cash and Cash Equivalents Balance at End of Period $ 127,544 $14,681
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,064 $ -
Cash paid for income taxes $ 346 $ 489
Supplemental disclosure of noncash financing activities:
During the three months ended September 30, 1996,
the Amended Infotech Note was reduced by
$150,565 in connection with the MRI Acquisition.
See Note 2 to the Financial Statements.
</TABLE>
The accompany "Notes to Financial Statements" are an integral part of these
financial statements.
<PAGE>3
COMTEX SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
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.
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, 1996 ("1996 Form 10-K"), filed with the
Securities and Exchange Commission.
Gain or loss per common share is based upon the
weighted average number of shares outstanding during each
quarter and common stock equivalents, if dilutive. The
effect of outstanding common stock equivalents on net
loss per common share is not included because it would be
antidilutive.
2. Related Party Transactions
Acquisition and Divestiture of Micro Research
Industries : During fiscal 1995, the Company acquired
certain assets and assumed certain liabilities of
Telecommunications Industries, Inc. ("TII") representing
substantially all the assets of TII's sole operating
division, Micro Research Industries ("MRI") (the
"Acquisition"). MRI provided sales, leasing and maintenance
support of computer hardware and software primarily to the
U.S. House of Representatives. At the time of the
Acquisition, Infotechnology, Inc. ("Infotech") owned 60% and
82% of the Company and TII, respectively, and Dr. Gilluly,
Chairman of the Board and Chief Executive Officer of the
Company and of Infotech also served as Chairman of the Board
and Chief Executive Officer of TII. In return for closing
the Acquisition prior to satisfaction of all conditions to
closing, the Asset Purchase Agreement and related Put
Agreement permitted the Company, upon the failure of certain
conditions, to require TII to repurchase all or any portion
of the assets acquired by the Company and to assume the
liabilities related to MRI (the "Put").
The Acquisition resulted in the restructuring of the
Company's previously matured promissory notes to Infotech.
Page 6<PAGE>
As of October 11, 1996, Infotech ratified the reduction of
$150,565 of the principal of the Company's restructured
$1,040,000 promissory notes due Infotech and rolled the
remaining $889,435 principal into a 10% Senior Subordinated
and Secured Note due July 1, 2002 (the "Amended Infotech
Note"). Principal amounts due under the Amended Infotech
Note are subject to reduction or increase under certain
circumstances. The Amended Infotech Note is collateralized
by a continuing interest in all receivables, products and
proceeds thereof, all purchase orders and all patents and
technology then or in the future received or held by the
Company. The Amended Infotech Note is subordinated in right
of payment to all Senior indebtedness of the Company,
including indebtedness arising from the Princeton Capital
Financing Agreement (see below).
In connection with the Acquisition, the Company entered
into a $1 million secured credit facility with Princeton
Capital Finance Company, L.L.P. ("PrinCap") (the "PrinCap
Financing Agreement") in February 1995. After the Company
exercised the Put, TII sold such assets to a third party,
which PrinCap claimed represented an event of default under
the credit facility. On July 24, 1996, the Company and
PrinCap agreed to consolidate all indebtedness of the
Company under the PrinCap Financing Agreement ($244,449 at
July 24, 1996) into a single Note collateralized by MRI
receivables from the U.S. House of Representatives retained
by TII. The Note was due October 22, 1996, demand has been
made, and the Note is in default. The Company is currently
in discussions regarding payment of the Note. Management of
the Company believes the Company's indemnification under the
terms of the Amended Infotech Note will apply to any amounts
due PrinCap (or separately to the Company from TII) not
ultimately recovered through the MRI receivables held by
TII, and that any such amounts will reduce the principal of
the Amended Infotech Note.
Infotech has agreed with the Company that in the event
the Company incurs any cost or liability arising out of or
relating to the MRI business, which the Company "put" back
to TII (then 82% owned by Infotech) as of March 25, 1996,
the Company may either seek indemnification for such
liability from TII or reduce the principal amount of its
indebtedness under the Amended Infotech Note by the amount
of such liability. In April, 1996, the Company reduced the
Amended Infotech Note by approximately $31,000, the costs
incurred by the Company for rent due to the landlord from
TII.
Page 7<PAGE>
Services Provided by/to Hadron, Inc.: The Company
contracts with Hadron, Inc. (13.5% owned by Infotech) for
corporate and shareholder services. Charges for such
services are based on time and material expended by Hadron
personnel in providing such services. The Company accrued
approximately $4,000 for services provided during the three
months ended September 30, 1996, which had not been billed.
Hadron, Inc. subleases office space from the Company at the
rental rate paid by the Company to its landlord and also
shares certain office related expenses. Total charges to
Hadron, Inc. during the three months ended September 30,
1996, amounted to approximately $4,800.
3. Notes Payable
On July 1, 1996, the Company agreed with Wavephore
Networks, Inc. to convert a net amount of accounts payable
to the vendor and royalties receivable by the Company from
the vendor to a note payable in the amount of $173,712. At
September 30, 1996, $40,875 was classified as long-term.
The note bears interest at 10%, with principal and interest
payments in the aggregate amount of $10,433 due monthly
through December, 1997.
4. Income Taxes
The Company has recorded net income for the three
months ended September 30, 1996; 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 8<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
Comtex Scientific Corporation (the "Company" or
"Comtex") is a value-added real-time distributor of
customized newswire information products aggregated on a
real-time basis from thousands of news stories drawn from
hundreds of broad and specialized news sources. The
Company's products are marketed to information distributors
ranging from online services and World Wide Web sites to
proprietary networks utilized by financial traders and
corporate electronic news clipping services. Consistent
with standard practice in the information aggregation
industry, the Company generally has renewable long-term
contractual relationships with those information providers
and information distributors with whom it does business.
These contracts typically provide for both minimum fees and
for royalties based upon expected and achieved volumes of
usage. Fees and royalties from information distributors
comprise the majority of the Company's revenues. Fees and
royalties due to information providers, along with
telecommunications costs and employee payroll costs,
comprise the majority of the Company's costs and expenses.
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 1996, to
the three months ended September 30, 1995
During the three months ended September 30, 1996, the
Company s total revenues were approximately $1,040,000, or
approximately $226,000 (28%) greater than the total revenues
for the three months ended September 30, 1995. The increase
of approximately $155,000 in information services revenues
reflects revenues from new customers, certain price
increases and royalties derived from the sale of Comtex'
news to information distributors who pay the Company a
royalty based upon usage. These revenue increases were
partially offset by customer losses and revenue decreases
due to pricing and usage factors. The increase of
approximately $71,000 in data communications revenues
reflects the Company's billing of communications charges to
its' customers. As more customers are added utilizing
satellite and Internet delivery methods, the data
communications revenue will increase with a minimal increase
in data communications costs.
Page 9<PAGE>
Total costs and expenses for the three months ended
September 30, 1996, were approximately $978,000,
representing an approximately $17,000 (2%) increase in
operating expenses from the three months ended September 30,
1995. This increase in operating expenses is principally
due to an increase in information services costs and sales
and marketing expenses offset by a decrease in product
development expenses.
Information services costs during the quarter ended
September 30, 1996, increased approximately $8,000 over
these costs in the quarter ended September 30, 1995,
primarily due to additional personnel in Client Services in
order to manage the increasing customer base as well as
increased expenses for computer equipment maintenance.
These increases were reduced by a decrease in expenses
related to the absence of a Director of Content Development
during the three months ended September 30, 1996. This
position was filled at the end of September, 1996.
Data communications costs remained constant since two
of the Company's primary delivery methods, satellite and
Internet, do not incur variable costs with the addition of
new customers. Therefore, as Comtex adds new customers
utilizing these delivery methods, data communications
revenue will increase without a corresponding increase in
communications expenses.
Sales and marketing expenses increased by approximately
$18,000 in the three months ended September 30, 1996, over
the three months ended September 30, 1995, due to increased
compensation arising from the addition of sales support
staff and more experienced sales personnel to the Company's
workforce and additional commissions related to the increase
in information services revenue during these three months.
Product development expenses for the three months ended
September 30, 1996, were $12,000 lower than for the same
period ended September 30, 1995. This decrease was
principally due to the timing of personnel turnover in this
department.
The Company reported operating income of approximately
$62,000 during the quarter ended September 30, 1996, as
compared with an operating loss of $147,000 for the quarter
ended September 30, 1995. The Company recorded net income
of approximately $29,000 for the three months ended
September 30, 1996, as compared with a net loss for the
three months ended September 30, 1995, of approximately
$174,000. The increase in operating income reflects
increased revenues with a minimal increase in total
expenses. The increase in net income was partially offset
Page 10<PAGE>
by an increase in interest expense related to notes payable
in the quarter ended September 30, 1996.
Page 11<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 1996, the
Company's operations produced operating income of
approximately $62,000 and net income of approximately
$29,000. At September 30, 1996, the Company had negative
working capital of approximately $294,000 as compared with
negative working capital of approximately $342,000 at June
30, 1996. This increase in working capital is a result of
operational income and the conversion of approximately
$174,000 net accounts payable to the Company's primary
telecommunications vendor into a note payable. The Company
also had a net stockholders' deficit of approximately
$913,000 at September 30, 1996, as compared to a net
stockholders' deficit at June 30,1996, of approximately
$1,092,000.
As of October 11, 1996, Infotechnology, Inc.
("Infotech"), the Company's majority stockholder
(approximately 60%) ratified the reduction of $150,565 of
the principal of the Company's restructured $1,040,000
promissory notes due Infotech and rolled the remaining
$889,435 principal into a 10% Senior Subordinated and
Secured Note due July 1, 2002 (the "Amended Infotech Note").
For the three months ended September 30, 1996, the
Company's operating activities generated approximately
$114,000 in cash. The Company had cash and cash equivalents
of approximately $128,000 at September 30, 1996, as compared
to approximately $58,000 at June 30, 1996. Currently, the
Company's operations generate cash flow sufficient to cover
its monthly expenses and management believes that cash from
operations will provide the Company with adequate cash
resources to meet its obligations on a short-term basis.
The Company's ability to meet its liquidity needs on a
long-term basis is dependent on its ability to generate
sufficient revenues and cash to cover its current
obligations and to pay down its current and long-term debt
obligations. No assurance may be given that the Company
will be able to maintain the revenue base or the size of
profitable operations that would be necessary to achieve its
liquidity needs. If the Company is not successful in its
efforts, it may undertake other actions as may be
appropriate to preserve asset values.
As disclosed previously, during fiscal year 1995, the
Company negotiated and consummated the acquisition (the "MRI
Acquisition") of certain assets of Telecommunications
Industries, Inc. ("TII") which included substantially all of
the assets of TII's sole operating division, Micro Research
Industries ("MRI"). MRI's business consisted of providing
Page 12<PAGE>
sales, leasing and maintenance support of integrated
information systems, computer hardware and software
primarily to the U.S. House of Representatives. On March
25, 1996, the Company exercised its right to require TII to
take back the TII assets acquired by the Company and the TII
liabilities assumed by the Company, and TII agreed to retain
all liabilities and obligations of every kind and nature,
contingent, matured or otherwise, of the MRI business. TII
and Infotech (also the majority stockholder of TII,
approximately 82%) have agreed with the Company that, in the
event the Company incurs any damage, loss, judgment, fine,
penalty, assessment, settlement, cost or expense resulting
in a liability to the Company, in whole or in any part
arising out of or relating to the MRI business, the Company
may either seek indemnification for such liability from TII
or may reduce the principal amount of its $889,435
indebtedness to Infotech (the "Amended Infotech Note") by
the amount of such liability.
In connection with the MRI Acquisition, the Company
entered into a Contracts Financing Agreement with Princeton
Capital Finance Company, L.L.C. ("PrinCap") (the "PrinCap
Financing Agreement"). The PrinCap Financing Agreement
provided a $1 million credit facility secured by approved
inventory, unbilled accounts receivable and billed accounts
receivable to support both the MRI business and the
Company's other business. All borrowings under the PrinCap
Financing Agreement were made for the benefit of the MRI
business. On March 30, 1996, TII sold the assets related to
the MRI business to an unrelated third party, net of
accounts receivable and sales orders and related liabilities
through that date which were retained by TII.
PrinCap, on April 30, 1996, claimed that TII's sale of
the assets of MRI subsequent to exercise of the Put Right
constituted an event of default under the terms of the
PrinCap Financing Agreement. On July 24, 1996, the Company
and PrinCap agreed to consolidate all indebtedness of the
Company under the PrinCap Financing Agreement ($244,449 at
July 24, 1996) into a single Note collateralized by MRI
receivables from the U.S. House of Representatives retained
by TII. The Note was due October 22, 1996, demand has been
made, and the Note is in default. The Company is currently
in discussions regarding payment of the Note. Management of
the Company believes the Company's indemnification under the
terms of the Amended Infotech Note will apply to any amounts
due PrinCap (or separately to the Company) not ultimately
recovered through the MRI receivables held by TII, and that
any such amounts will reduce the principal of the Amended
Infotech Note.
Page 13<PAGE>
The Company's management continues to monitor the
ongoing reorganization of Infotech under Chapter 11 of the
U.S. Bankruptcy Code, since events in that regard may
adversely affect the Company's financial position and
ability to conduct operations. In addition, the ability of
TII to collect outstanding MRI receivables from the U.S.
House of Representatives and repay the Company's outstanding
note under the PrinCap Financing Agreement may also have a
significant effect on the Company's overall liquidity and
ability to conduct operations.
Page 14<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 6. Exhibits and Reports.
None.
Page 15<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 thereunto duly
authorized.
COMTEX SCIENTIFIC CORPORATION
(Registrant)
Dated: November 14, 1996 By: /s/ C.W. Gilluly
C.W. Gilluly
Chairman of the Board and
Chief Executive Officer
By: /s/ C.W. Gilluly
C.W. Gilluly
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 16<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 127,544
<SECURITIES> 0
<RECEIVABLES> 1,027,399
<ALLOWANCES> (96,000)
<INVENTORY> 0
<CURRENT-ASSETS> 1,107,694
<PP&E> 777,385
<DEPRECIATION> (538,993)
<TOTAL-ASSETS> 1,411,213
<CURRENT-LIABILITIES> 1,401,695
<BONDS> 0
<COMMON> 78,577
0
0
<OTHER-SE> (991,224)
<TOTAL-LIABILITY-AND-EQUITY> 1,411,213
<SALES> 1,040,288
<TOTAL-REVENUES> 1,040,288
<CGS> 561,165
<TOTAL-COSTS> 978,157
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,852
<INCOME-PRETAX> 29,279
<INCOME-TAX> 346
<INCOME-CONTINUING> 28,933
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,933
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0
</TABLE>
