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, 1997 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 12, 1997, 7,854,667 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 (Unaudited)
Balance Sheets 3
at September 30, 1997 and June 30, 1997
Statements of Operations 4
for the Three Months Ended
September 30, 1997 and 1996
Statements of Cash Flows 5
for the Three Months Ended
September 30, 1997 and 1996
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis 10
of Financial Condition and Results
of Operations
Part II Other Information:
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
<PAGE>
<TABLE>
COMTEX SCIENTIFIC CORPORATION
BALANCE SHEETS AT SEPTEMBER 30, 1997 AND JUNE 30, 1997
<CAPTION>
September 30, June 30,
1997 1997
(Unaudited)
ASSETS ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 162,162 $ 17,927
Accounts Receivable, Net of Allowance of $58,000 and $77,000
at September 30, 1997 and June 30, 1997, respectively 699,684 935,619
Advances to TII, a related party - 266,000
Prepaid Expenses and Other Current Assets 23,612 47,094
------------ ------------
TOTAL CURRENT ASSETS 885,458 1,266,640
PROPERTY AND EQUIPMENT, NET 209,819 199,982
DEPOSITS AND OTHER ASSETS 64,373 64,561
------------ ------------
TOTAL ASSETS $1,159,650 $ 1,531,183
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts Payable $ 513,926 $ 529,612
Accrued Expenses 359,729 459,034
Amounts due to Related Parties 168,964 294,113
Notes Payable 14,033 288,792
------------ ------------
TOTAL CURRENT LIABILITIES 1,056,652 1,571,551
LONG-TERM LIABILITIES:
Long-Term Notes Payable - Affiliate 732,872 732,872
Other Long-Term Notes Payable 194,800 55,100
------------ ------------
TOTAL LONG-TERM LIABILITIES 927,672 787,972
------------ ------------
TOTAL LIABILITIES 1,984,324 2,359,523
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common Stock, $0.01 Par Value - Shares Authorized: 18,000,000;
Shares issued and outstanding: 7,854,667 78,547 78,547
Additional Capital 9,980,575 9,980,575
Accumulated Deficit (10,883,796) (10,887,462)
------------ ------------
(824,674) (828,340)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,159,650 $ 1,531,183
============ ============
</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, 1997 AND 1996
(UNAUDITED)
<CAPTION>
Three months ended
September 30,
------------------------------
1997 1996
------------- ------------
<S> <C> <C>
REVENUES
Information Services Revenues $ 1,079,976 $ 910,006
Data Communications Revenues 139,373 130,282
------------- ------------
Total Revenues 1,219,349 1,040,288
COSTS AND EXPENSES
Costs of Information Services 514,450 391,654
Costs of Data Communications 174,551 169,511
Product Development 33,623 54,409
Sales and Marketing 193,030 110,089
General and Administrative 253,813 215,502
Depreciation and Amortization 23,641 36,992
------------- ------------
Total Costs and Expenses 1,193,108 978,157
------------- ------------
INCOME FROM OPERATIONS 26,241 62,131
OTHER INCOME (EXPENSE)
Interest Expense (23,511) (32,863)
Interest Income/Other 1,269 11
------------- ------------
Other Expense, Net (22,242) (32,852)
------------- ------------
INCOME FROM OPERATIONS BEFORE INCOME TAXES 3,999 29,279
INCOME TAXES 332 346
------------- ------------
NET INCOME $ 3,667 $ 28,933
============= ============
NET INCOME PER COMMON SHARE $ .00 $ .00
============= ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS OUTSTANDING 9,993,970 7,854,667
============= ============
The accompanying "Notes to Financial Statements" are an integral part
of these financial statements
-4-
<PAGE>
</TABLE>
<TABLE>
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<CAPTION>
Three Months Ended
September 30,
------------------------------
1997 1996
Cash Flows from Operating Activities: ------------ -------------
<S> <C> <C>
Net Income $ 3,667 $ 28,933
Adjustments to reconcile net income to net cash
provided by (used in ) operating activities:
Depreciation and Amortization Expense 23,641 36,992
Bad Debt Expense 9,000 9,000
Loss on Disposal of Fixed Assets - 68
Changes in Assets and Liabilities:
Accounts Receivable 226,935 (28,548)
Prepaid Expenses and Other Current Assets 23,482 382
Deposits and Other Assets - -
Accounts Payable (15,686) 18,150
Accrued Expenses (99,305) 32,646
Amounts due to Related Parties 22,273 15,975
Other Liabilities - -
------------- ------------
Net Cash provided by Operating Activities 194,007 113,598
Cash Flows from Investing Activities:
Purchases of Property and Equipment (33,291) (10,607)
Proceeds from Sale of Fixed Assets - 2,401
Advances to TII - -
Repayments of Advances 266,000 31,040
------------- ------------
Net Cash provided by Investing Activities 232,709 22,834
Cash Flows from Financing Activities:
Notes Payable, Net 130,941 (47,178)
Notes Payable to Related Parties, Net (147,422) (481)
Proceeds from PrinCap Financing Agreement - -
Repayments against PrinCap Financing Agreement (266,000) (18,873)
------------- ------------
Net Cash used in Financing Activities (282,481) (66,532)
------------- ------------
Net Increase in Cash and Cash Equivalents 144,235 69,900
Cash and Cash Equivalents Balance at Beginning of Period 17,927 57,644
------------- ------------
Cash and Cash Equivalents Balance at End of Period $ 162,162 $ 127,544
============= ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 5,590 $ 10,064
Cash paid for income taxes $ 332 $ 346
</TABLE>
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.
The accompanying "Notes to Financial Statements" are an integral part
of these financial statements
-5-
<PAGE>
COMTEX SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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, 1997
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, 1997 ("1997 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.
In February, 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings per Share, which is required
to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact of
Statement 128 on the calculation of primary earnings per share
and fully diluted earnings per share for the periods presented
has not yet been determined.
Certain amounts for the three months ended September 30,
1996, have been reclassified to conform to the presentation of
the three months ended September 30, 1997.
2. Related Party Transactions
AMASYS Corporation ("AMASYS")(the Successor corporation to
Infotechnology, Inc., "Infotech") in addition to being the
Company's majority stockholder (approximately 60%), is also the
majority stockholder (approximately 82%) of Telecommunications
Industries, Inc. ("TII"), which has ceased to conduct business
operations. C.W. Gilluly, Ed.D. is Chairman and Chief Executive
Officer of TII. Dr. Gilluly is also Chairman and Chief Executive
Officer of Hadron, Inc. of which AMASYS owns approximately 12% of
the outstanding shares. During the three months ended September
30, 1997, the following transactions occurred.
<PAGE>
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. The Company expensed approximately
$4,000 for these services during the three months ended September
30, 1997. Hadron 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 service charges to Hadron
during the three months ended September 30, 1997, amounted to
approximately $8,000.
Administrative Services Provided to AMASYS Corporation
AMASYS shares certain general and administrative expenses
with the Company for which the Company billed AMASYS
approximately $2,000 during the three months ended September 30,
1997.
Acquisition and Divestiture of Micro Research Industries
During fiscal year 1995 the Company acquired certain assets
and assumed certain liabilities of 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, Infotech was a
majority stockholder of both the Company and of TII, and C.W.
Gilluly served as the Chairman and Chief Executive Officer of the
Company, Infotech and TII. The terms of the Acquisition, through
a related Put Agreement (the "Put"), provided that the Company
could, upon the failure of certain conditions, require TII to
repurchase all or any portion of the assets acquired and to
assume the liabilities related to MRI. On March 25, 1996, the
Company exercised the Put and transferred to TII all the assets
and liabilities associated with MRI.
In connection with the Acquisition, the Company entered into
a $1 million secured credit facility with Princeton Capital
Finance Company, L.L.P. ("PrinCap"). As partial consideration
for the agreement by Dr. and Mrs. Gilluly to personally guarantee
the PrinCap financing and to make certain loans to TII prior to
the PrinCap financing, Infotech and Pacific Telecommunications
Systems, Inc. ("PTSI"), its wholly-owned subsidiary, granted an
option to the Gillulys, expiring on February 20, 2002, to
purchase 2,540,503 shares of common stock of the Company owned by
Infotech and PTSI at an exercise price of $.10 per share ("the
Infotech Option").
<PAGE>
The Acquisition required the Company to grant to the
Gillulys an option ("the Gilluly Option") to acquire 2,540,503
shares of the Company's common stock at an exercise price of $.10
per share. The Gilluly Option expires on February 20, 2002.
Shortly after the Company exercised the Put, TII sold to a
third-party the MRI assets that the Company had transferred to
TII, which sale PrinCap claimed represented an event of default
under the PrinCap Financing Agreement. In July, 1996, the
Company and PrinCap consolidated the $244,449 outstanding under
the PrinCap Financing Agreement into a single note collateralized
by MRI receivables from the House of Representatives which had
been pledged to PrinCap. In October, 1996, TII commenced
litigation to collect the MRI receivables collateralizing the
PrinCap Note.
In December 1996, PrinCap commenced legal action against
TII, Infotech, AMASYS and the Company to collect such outstanding
amounts. In February 1997, TII, Infotech, AMASYS and the Company
agreed to a judgment of $271,000 to settle all claims made by
PrinCap. In August 1997, TII settled the MRI amounts due from
the House of Representatives and paid the final amounts due to
PrinCap, which released the Company from all obligations under
the PrinCap Financing Agreement and TII from its related
indemnification of the Company.
The Acquisition also provided for the restructuring of the
Company's previously matured $1,040,000 promissory notes to
Infotech (the "Infotech Notes"), and allowed the Company to
either seek indemnification from TII or reduce the amount of the
Company's indebtedness under the Infotech Notes for costs or
liabilities incurred by the Company in connection with the MRI
business.
As provided in the Acquisition, AMASYS ratified the
restructuring of the Infotech Notes, which reduced the principal
thereof by $150,565. The resulting $889,435 principal was rolled
into a 10% Senior Subordinated and Secured Note, due July 1, 2002
(the "AMASYS Note"), subject to future reduction or increase
under certain circumstances. In fiscal year 1996, the Company
reduced by $31,082 the amount it owed under the AMASYS Note for
rent paid to TII's landlord. During fiscal year 1997, the AMASYS
Note was further reduced by $125,481 in final resolution of the
amounts due from TII not recovered through collection of the MRI
receivables. The AMASYS Note is secured by a continuing interest
in all receivables, products and proceeds thereof, all purchase
orders and all patents then or in the future held by the Company,
and is subordinated to all Senior indebtedness. During the three
months ended September 30, 1997, the Company accrued
approximately $18,000 in interest on the AMASYS Note.
<PAGE>
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 principal repayments of $40,000, $40,000 and $60,000
due September, 1998, September, 1999 and September, 2000,
respectively. The facilities, guaranteed by C.W. Gilluly, bear
interest at a rate of Prime plus two percent annually.
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 thereon. The note bears interest at a
rate of nine percent (9%) per annum.
In July, 1996, the Company agreed with a data communications
vendor 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. Due to substandard service
provided by this vendor during the period July through November,
1996, the Company negotiated a one-time credit of approximately
$57,000. This credit was applied to the principal balance of the
note. The note was further reduced by $15,000 at June 30, 1997,
pursuant to a Customer Conversion Agreement with the vendor. At
September 30, 1997, the balance of the note was $8,333. The note
bears interest at 10%, with principal and interest payments due
monthly through December, 1997.
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. At September 30, 1997, $9,375 was outstanding on
these obligations, with $5,700 due within one year.
4. Income Taxes
The Company has recorded net income for the three months
ended September 30, 1997; 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 1997, to the
three months ended September 30, 1996
During the three months ended September 30, 1997, the
Company's total revenues were approximately $1,219,000, or
approximately $179,000 (17%) greater than the total revenues for
the three months ended September 30, 1996. The increase of
approximately $170,000 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. The
increase of approximately $9,000 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
September 30, 1997, were approximately $1,193,000, representing
an approximately $215,000 (22%) increase in operating expenses
from the three months ended September 30, 1996. This increase in
operating expenses is principally due to increases in information
services costs, sales and marketing and general and
administrative expenses, offset by a decrease in product
development expenses.
Information services costs during the quarter ended
September 30, 1997, increased approximately $123,000 (31%) over
these costs in the quarter ended September 30, 1996. This
increase was due to increased personnel and an increase in the
fees and royalties to information providers, as new sources were
added and revenues increased.
Product development expenses decreased by approximately
$21,000 (38%) for the three months ended September 30, 1997,
compared to the three months ended September 30, 1996. This
decrease is the result of a shift of personnel to focus on
marketing strategies for the Company.
Sales and marketing expenses increased by approximately
$83,000 or approximately 75% for the three months ended September
30, 1997, compared to the three months ended September 30, 1996.
This increase was due to increased compensation arising from the
addition of marketing personnel and more experienced sales
personnel to the Company's workforce, increased travel expenses
related to new business development, and additional commissions
related to the increase in information services revenues during
the period.
<PAGE>
General and administrative expenses for the three months
ended September 30, 1997 totaled approximately $254,000 or
approximately $38,000 (18%) greater than these expenses during
the three months ended September 30, 1996. This increase was
principally due to increased expenses related to an office space
expansion.
The Company earned operating income of approximately $26,000
during the quarter ended September 30, 1997, compared to
operating income of $62,000 for the quarter ended September 30,
1996. The Company earned net income of almost $4,000 for the
three months ended September 30, 1997, compared to net income for
the three months ended September 30, 1996, of approximately
$29,000. The decrease in operating and net income reflects the
investment in personnel and information provider content
discussed above.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 1997, the Company's
operations produced operating income of approximately $26,000 and
net income of approximately $4,000. At September 30, 1997, the
Company had negative working capital of approximately $171,000 as
compared with negative working capital of approximately $305,000
at June 30, 1997. This increase in working capital is a result
of utilizing long-term bank financing to repay a short term note
due to C.W. Gilluly. The Company also had a net stockholders'
deficit of approximately $824,000 at September 30, 1997, as
compared to a net stockholders' deficit at June 30, 1997, of
approximately $828,000. The decrease in stockholders' deficit
was due to the retention of net income.
For the three months ended September 30, 1997, the Company's
operating activities generated approximately $194,000 in cash.
The Company had cash and cash equivalents of approximately
$162,000 at September 30, 1997, compared to approximately $18,000
at June 30, 1997. 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 achieve 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.
<PAGE>
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 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; the
evolution of the Internet; 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;
and the other risks detailed from time to time in the Company's
SEC reports, that could cause results to differ materially from
those anticipated by the statements contained herein.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The information provided in Note 2 of the Notes to
the Financial Statements is incorporated herein by
reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11 Earnings Per Share Computation
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 14, 1997 By: /S/ C.W. GILLULY
C.W. Gilluly
Chairman of the Board
By: /S/ DONALD E. ZIEGLER
Donald E. Ziegler
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE>
Exhibit 11
<TABLE>
Comtex Scientific Corporation
Earnings Per Share Computation
<CAPTION>
Three Months Ended
September 30,
1997 1996
--------- ---------
<S> <C> <C>
Net Income $ 3,667 $ 28,933
Add:
Interest expense savings
assuming repayment of
debt from excess proceeds
of exercise of stock
options under treasury
stock method assuming 20%
of outstanding shares
limitation 2,074 -
--------- ---------
$ 5,741 $ 28,933
========= =========
Weighted average shares:
Shares outstanding 7,854,667 7,854,667
Common stock equivalents 2,139,303 -
--------- ---------
9,993,970 7,854,667
========= =========
Earnings per share $ 5,741 = $.00 $ 28,933 = $.00
--------- ---------
9,993,970 7,854,667
</TABLE>
<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>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 162,162
<SECURITIES> 0
<RECEIVABLES> 757,265
<ALLOWANCES> (57,581)
<INVENTORY> 0
<CURRENT-ASSETS> 885,458
<PP&E> 839,188
<DEPRECIATION> (629,369)
<TOTAL-ASSETS> 1,159,650
<CURRENT-LIABILITIES> 1,056,652
<BONDS> 0
<COMMON> 78,547
0
0
<OTHER-SE> (903,221)
<TOTAL-LIABILITY-AND-EQUITY> 1,159,650
<SALES> 1,219,349
<TOTAL-REVENUES> 1,219,349
<CGS> 0
<TOTAL-COSTS> 1,193,108
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,242
<INCOME-PRETAX> 3,999
<INCOME-TAX> 332
<INCOME-CONTINUING> 3,667
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,667
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
