-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OXjfBhUSsSgNu21ZXA8HRmNvx4s3Tygxi7sJXS2LFbAIctg/sOR+lyXZ9v/3ZRh9 qLF5UYCe6dm2BicSIu5Qnw== 0000352988-96-000026.txt : 19961118 0000352988-96-000026.hdr.sgml : 19961118 ACCESSION NUMBER: 0000352988-96-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMTEX SCIENTIFIC CORP CENTRAL INDEX KEY: 0000352988 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 133055012 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-72408-NY FILM NUMBER: 96664380 BUSINESS ADDRESS: STREET 1: 4900 SEMINARY RD STE 800 CITY: ALEXANDRIA STATE: VA ZIP: 22311 BUSINESS PHONE: 7038242000 MAIL ADDRESS: STREET 1: 4900 SEMINARY RD STREET 2: SUITE 800 CITY: ALEXANDRIA STATE: VA ZIP: 22311 10-Q 1 FIRST QUARTER 1997 FORM 10-Q 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. 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 COMTEX SCIENTIFIC CORPORATION BALANCE SHEETS AT SEPTEMBER 30, 1996 AND JUNE 30, 1996
September 30, June 30, 1996 1996 (Unaudited) 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
1 COMTEX SCIENTIFIC CORPORATION STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
Three months ended September 30, 1996 1995 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
2 COMTEX SCIENTIFIC CORPORATION STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Three Months Ended September 30, 1996 1995 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.
The accompany "Notes to Financial Statements" are an integral part of these financial statements. 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 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 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 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 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 by an increase in interest expense related to notes payable in the quarter ended September 30, 1996. Page 11 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 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 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 Part II. Other Information Item 1. Legal Proceedings None. Item 6. Exhibits and Reports. None. Page 15 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 3-MOS JUN-30-1997 SEP-30-1996 127,544 0 1,027,399 (96,000) 0 1,107,694 777,385 (538,993) 1,411,213 1,401,695 0 78,577 0 0 (991,224) 1,411,213 1,040,288 1,040,288 561,165 978,157 0 0 32,852 29,279 346 28,933 0 0 0 28,933 0.00 0
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