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 March 31, 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 May 10, 1996, 7,854,667 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 March 31, 1996
and June 30, 1995 1
Statements of Operations for the Three
and Nine Months ended March 31, 1996
and 1995 2
Statements of Cash Flows for the Nine
Months ended March 31, 1996 and 1995 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II Other Information
Item 5. Recent Developments 15
Item 6. Exhibits and Reports 17
SIGNATURES 18
COMTEX SCIENTIFIC CORPORATION
BALANCE SHEETS AT MARCH 31, 1996 AND JUNE 30, 1995
--------------------------------------
MARCH 31, JUNE 30,
ASSETS 1996 1995
______ -------------- --------------
(Unaudited)
Current assets:
Cash and cash equivalents $44,939 $15,163
Account Receivable, Net of Allowance of $82,284
and $58,622 at March 31, 1996 and June 30, 1995,
respectively 615,458 432,045
Advances to MRI 859,346 1,071,392
Prepaid Expenses and Other Current Assets 24,528 12,821
-------------- --------------
Total Current Assets 1,544,271 1,531,421
-------------- --------------
Property and Equipment, Net 270,074 301,406
-------------- --------------
Other Assets:
Unamortized License Fee, Net of Accumulated Amortization
of $82,631 and $78,016 at March 31, 1996 and June 30,
1995 respectively 2,135 6,750
Deposits 1,448 12,137
-------------- --------------
Total Other Assets 3,583 18,887
-------------- --------------
TOTAL ASSETS $1,817,928 $1,851,714
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts Payable $972,813 $491,419
Accrued Expenses 193,455 89,984
Current Portion of Long-term Notes Payable 724,211 815,652
-------------- --------------
Total Current Liabilities 1,890,479 1,397,055
Long-Term Notes Payable, less Current Portion 1,026,272 1,074,930
-------------- --------------
TOTAL LIABILITIES 2,916,751 2,471,985
-------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common Stock, $0.01 Par Value -
Share Authorizes: 18,000,000;
Shares issued and outstanding: 7,854,667 78,547 78,547
Additional Paid-In Capital 9,830,010 9,830,010
Accumulated Deficit (11,007,380) (10,528,828)
-------------- --------------
Total Stockholders Deficit (1,098,823) (620,271)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,817,928 $1,851,714
============== ==============
The accompanying "Notes to Financial Statements" are an integral part
of these financial statements
-Page 1
/TABLE
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
------------- -------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
NET REVENUES
Business Information Services $794,877 $639,416 $2,311,183 $2,090,162
------------ ------------ ------------ ------------
Total Net Revenues $794,877 $639,416 $2,311,183 $2,090,162
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Operations 511,558 352,073 1,533,064 1,004,709
Product Development 48,407 44,238 182,089 112,205
Sales and Marketing 69,360 96,932 249,602 255,222
General and Administrative 201,929 149,066 638,703 520,335
Depreciation and Amortization 34,763 51,619 106,486 135,715
------------ ------------ ------------ ------------
Total Costs and Expenses 866,017 693,928 2,709,944 2,028,186
------------ ------------ ------------ ------------
INCOME (L0SS) FROM OPERATIONS (71,140) (54,512) (398,761) 61,976
OTHER INCOME (EXPENSE)
Interest Expense (26,000) (26,000) (78,000) (78,000)
Interest Income/Other 0 1,689 (1,302) 7,733
------------ ------------ ------------ ------------
Other Expense, Net (26,000) (24,311) (79,302) (70,267)
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES (97,140) (78,823) (478,063) (8,291)
(BENEFIT) PROVISION FOR INCOME TAXES 0 (17) 489 294
------------ ------------ ------------ ------------
NET LOSS ($97,140) ($78,806) ($478,552) ($8,585)
============ ============ ============ ============
NET LOSS PER COMMON SHARE ($0.01) ($0.01) ($0.06) ($0.00)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 7,854,667 7,854,667 7,854,667 7,854,667
============ ============ ============ ============
The accompanying "Notes to Financial Statements" are an integral part
of these financial statements
-2-
/TABLE
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
------------------------------------------------------
Nine Months Ended
March 31,
--------------------
1996 1995
----------- -----------
Cash flows from operating activities:
Net income (Loss) ($478,552) ($8,585)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization Expense 106,486 135,715
Bad Debt Expense 35,000 25,996
Loss on Disposition of Fixed Assets 1,346 -
Non-cash reduction in MRI advances 81,650 (25,000)
Changes in Assets and Liabilities:
Accounts Receivalbe (218,413) (1,536)
Prepaid Expenses and Other Current Assets (11,707) (115,446)
Deposits 10,689 (10,823)
Accounts Payable 481,394 (42,167)
Accrued Expenses 72,388 79,322
Other Liabilities (17,575) (51,325)
----------- -----------
Net Cash provided by Operatiing Activities 62,706 (13,849)
Cash Flows from Investing Activities:
Purchases of Property and Equipment (80,070) (93,805)
Proceeds from Disposition of Fixed Assets 8,185 -
Advances to MRI (1,632,309) (739,544)
Repayments from MRI 1,762,705 123,377
----------- -----------
Net cash provided by (used in) investing activities 58,511 (709,972)
----------- -----------
Cash Flows from Financing Activities:
Notes Payable (390) (2,020)
Proceeds from Line of Credit 1,606,410 739,544
Repayment against Line of Credit (1,697,461) (123,377)
----------- -----------
Net Cash provided by (used in) Financing Activities (91,441) 614,147
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 29,776 (109,674)
Cash and Cash Equivalents, Balance at Beginning of Period 15,163 356,099
----------- -----------
Cash and Cash Equivalents, Balance at End of Period $44,939 $246,425
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $0 $78,000
Cash paid for income taxes $489 $1,111
Supplemental disclosure of noncash flow financing activities:
During the nine months ended March 31, 1996, the Infotech Note was reduced by $31,082 in accordance
with the indemnification agreement between Infotech and the Company. See Notes 4 and 5 to the
Financial Statements.
The accompanying "Notes to Financial Statements" are an integral part
of these financial statements
-3-
/TABLE
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, 1995 ("1995 Form 10-K"), filed with the Securities and Exchange
Commission.
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. Reclassifications
Certain amounts presented for the three and nine months ended
March 31, 1995, have been reclassified to conform to the
presentation for the three and nine months ended March 31, 1996.
3. Going Concern
The accompanying financial statements have been prepared
assuming that Comtex will continue as a going concern. The Company
has suffered recurring losses from operations and has a negative
stockholders' equity that raises substantial doubt about its ability
to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result should
the Company be unable to continue as a going concern.
4. Telecommunications Industries, Inc./Micro Research Industries
During fiscal 1995, the Company entered into an Asset Purchase
Agreement (the "MRI Acquisition") to acquire certain assets of
Telecommunications Industries, Inc. ("TII"). The assets to be
acquired included substantially all of the assets of TII's sole
operating division, Micro Research Industries ("MRI"). MRI's
business consisted of providing sales, leasing and maintenance
support of computer hardware and software primarily to the U.S.
House of Representatives. Infotechnology, Inc. ("Infotech"), which
owns approximately 60% of the outstanding common stock of the
4
Company, also owns approximately 82% of the outstanding common stock
of TII. C.W. Gilluly, Ed.D, Chairman of the Board of Directors and
Chief Executive Officer of the Company, also is the Chairman of the
Board of Directors and Chief Executive Officer of TII and Chairman
of the Board of Directors and President of Infotech.
The terms of the MRI Acquisition were embodied in a number of
documents, including an Asset Purchase Agreement and a Put Agreement
each dated May 16, 1995, entered into by the Company and TII
(collectively the "MRI Agreements"). These agreements granted to
the Company the right, under certain terms and conditions, to
require TII to retain the assets of the MRI business and the
liabilities associated therewith (the "Put Right"). On March 25,
1996, the Company exercised its Put Right.
Pursuant to the MRI Agreements and a subsequent letter
agreement dated March 25, 1996, the Company exercised the Put Right
related to all of the assets, rights and properties constituting or
used exclusively in the MRI business, and TII agreed to retain all
liabilities and obligations, contingent, matured or otherwise, of
the MRI business. TII and Infotech have agreed with the Company
that, in the event the Company incurs any damage, loss, judgement,
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 reduce the principal
amount of its indebtedness to Infotech (the "Infotech Note"), by the
amount of such liability (see Note 5. to Notes to Financial
Statements).
At March 31, 1996, the Company's balance Sheet reflected
$859,346 owed to the Company by MRI (the "MRI Advances"). Of this
amount, approximately $701,000 consisted of borrowings from
Princeton Capital Finance Company, L.L.C. ("PrinCap") advanced by
the Company to the MRI business and approximately $159,000 of
uncollateralized cash advances. Management believes that most of
the portion of the MRI Advances attributable to PrinCap borrowings
will be paid off as accounts receivable of the MRI business, pledged
as collateral for the PrinCap loan, are collected. A portion of the
uncollateralized accounts receivable will be repaid through the
transfer of assets, at book value, pursuant to the Company entering
into a new facility lease and accepting certain operational assets
from TII. Beyond the amount of the transfer of assets from TII,
management believes that it is unlikely that TII will be able to
repay to the Company the balance of the MRI Advances attributable to
uncollateralized cash advances, or that TII will be able to
indemnify the Company against any other liabilities of the MRI
business. Management therefore anticipates that any such amounts
which are not repaid to the Company by TII, or losses incurred by
the Company for which TII does not provide indemnification, will be
used to reduce the principal of the Infotech Note. Any such
nonpayment or loss could have a material adverse effect on the
5
Company's financial condition and liquidity position.
Since the MRI Acquisition was contingent upon certain
conditions pursuant to the Put Agreement, the Company did not
include MRI's balance sheet or results of operations in its
financial statements as of or for any period presented.
5. Notes Payable
On February 17, 1995, the Company entered into a $1 million
Contracts Financing Agreement with PrinCap. The PrinCap Contracts
Financing Agreement provides for the financing of approved
inventory, unbilled accounts receivable and accounts receivable to
support both the MRI business (see below) and Comtex' operations.
Under the financing agreement, PrinCap will finance approved
inventory and unbilled accounts receivable at an annualized interest
rate of Prime plus 4% and accounts receivable at an annualized
interest rate of Prime plus 3% based upon the Prime rate as defined
by The Wall Street Journal on the date of borrowing. At March 31,
1996, the Company owed PrinCap approximately $701,000 plus accrued
interest.
Through March 31, 1996, all PrinCap proceeds had been utilized
for the financing of purchase orders and accounts receivable to
support the MRI business. Accordingly, all such borrowings from
PrinCap by the Company have been for the benefit of TII (see Note 4.
of Notes to Financial Statements).
The Company made no borrowings under the PrinCap Contracts
Financing Agreement in April or early May 1996. Through May 2,
1996, the Company received approximately $437,000 from TII and
repaid such amount to PrinCap, reducing the PrinCap balance to
approximately $264,000.
To obtain the PrinCap financing, Dr. Gilluly and his wife,
Marny Gilluly (the "Gillulys") signed a limited personal guarantee
of up to $1 million. To induce the Gillulys to personally guarantee
the financing, the Board approved the issuance directly to the
Gillulys of certain options to purchase common stock of the Company
pursuant to Stock option Agreements between the Company dated May
16, 1995. Additionally, as partial consideration for the Gillulys'
personal guarantee of the PrinCap financing and to make certain
loans to TII prior to the PrinCap financing, Infotech and one of its
wholly-owned subsidiaries, granted to the Gillulys options to
purchase common stock of the Company owned by Infotech and that
subsidiary pursuant to a Stock Option Agreement dated May 16, 1995
(collectively the "Stock Option Agreements").
6
The number of shares of the Company's common stock subject to
the Stock Option Agreements ("Option Shares") was determined as of
August 21, 1995, pursuant to the formulae set forth in the Stock
Option Agreements. The Gillulys received options to purchase
2,540,503 of the Company's shares held by Infotech. In addition,
pursuant to the Stock Option Agreements, the Company issued
2,540,503 options to the Gillulys. For a more detailed description
of the Amended Infotech Note, the PrinCap Contracts Financing
Agreement and the Stock Option Agreements, see the 1995 Form 10-K.
On May 16, 1995, the Company and Infotech, signed the Amended
Infotech Note ("Infotech Note") which carries an interest rate of
10% on the unpaid principal balance and is due on July 1, 2002.
Interest only is payable quarterly, commencing June 30, 1995. The
Company has not made any interest payments during the fiscal year
beginning July 1, 1995. The Infotech Note is collateralized by a
continuing collateral interest in all receivables, all products of
such receivables and the proceeds thereof, all purchase orders, and
all patents and technology now or hereafter held or received by the
Company. The Infotech Note is subordinated to all Senior
Indebtedness of the Company. The term "Senior Indebtedness"
includes the principal and interest charges, existing or hereafter
incurred on the Company's obligations, including borrowings from
PrinCap.
Immediately following the exercise by the Company of the Put
Right, the Infotech Note had a principal balance of $1,040,000,
subject to reduction by the Company in the event the Company incurs
any damage, loss, judgement, 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. In
March 1996, the Company incurred an approximately $31,000 liability
related to the MRI business to allow the Company to remain in its
facility. Thus, in accordance with the MRI Agreements which include
provisions to adjust the Infotech Note, the Infotech Note was
reduced by a corresponding $31,000 to a principal balance of
$1,009,000 at March 31, 1996. Since Infotech agreed to reduce the
principal balance of the Infotech Note for all MRI business
liabilities borne by the Company, the $31,000 reduction did not
effect the Company's results of operations during the three and nine
months ended March 31, 1996.
6. Related Parties
On May 31, 1993, the Company relocated to Alexandria, Virginia,
sharing facilities, accounting, human resources, and technical
employees, equipment, and office supplies with TII pursuant to a
contract signed September 1, 1993. In April 1996, the Company
terminated its sublease with TII and signed a lease directly with
the owner of the building for essentially the identical space it had
been subleasing from TII (see Note 7. of Notes to Financial
7
Statements). This lease begins May 1, 1996, and the sharing of
accounting, human resources, and technical employees, equipment, and
office supplies with TII cease at that time or shortly thereafter.
Pursuant to the contract with TII, the Company incurred
expenses of approximately $127,000 and $176,000 for facility rental,
staff and office expenses during the nine months ended March 31,
1996 and 1995, respectively.
At March 31, 1996, the Company owed approximately $701,000 to
PrinCap and reflected a corresponding accounts receivable from MRI
in this amount. Advances from the Company to MRI have the same
interest rate as the Company incurs to PrinCap. At March 31, 1996,
the Company owed PrinCap approximately $14,000 in accrued interest
and had a corresponding $14,000 interest receivable from MRI.
Additionally, at March 31, 1996, the Company had a net accounts
receivable from MRI totalling approximately $159,000 which includes
cash advances, payments of MRI accounts payable and operating
transactions. At June 30, 1995, the Company had an accounts
receivable from MRI related to PrinCap financings of approximately
$792,000 and a net accounts receivable related to cash advances,
payments of MRI accounts payable and operating transactions of
approximately $309,000.
7. Subsequent Event
As discussed above, in April 1996, the Company terminated its
sublease with TII and signed a lease directly with the owner of the
building for essentially the identical space it had been renting
from TII. To consummate this lease and to satisfy other building
related MRI liabilities (for which the Company is indemnified), and
to meet the requirement for the Company to deliver a six-month
facility deposit and a build-out deposit, the Company executed a
demand note in the amount of $127,422 from Dr. Gilluly (the "Gilluly
Note"). The Gilluly Note is due on demand but in no event later
than April 11, 1997. The Gilluly Note shall bear interest on the
principal amount outstanding at a rate of twelve percent (12%) per
annum and interest is payable monthly. The Gilluly Note is
collateralized by the Company's accounts receivable, now existing
and in the future arising, and all proceeds of those accounts.
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
The Company is in the business of integrating hundreds of real-
time news and information sources from around the world and
specializes in providing automated editorial processing and
repackaging of real-time news sources for information product
distributors and corporate end-users. Comtex provides its customers
with information which consists of the development and delivery of
customized real-time and delayed-basis news wires. Product content
includes late-breaking U.S. and international news and events,
world-wide economic news and indices, news and information on over
15,000 public and private companies, Securities and Exchange
Commission ("SEC") filings within 24 hours of release and up-to-the-
minute sports and entertainment news. Real-time denotes the
electronic transmission of breaking news stories while events are
happening, or directly upon their completion, and before the
stories' placement in conventional print, radio and television
media.
During March of fiscal year 1995, utilizing its data management
process, the Company released a new product line, called
CustomWires, which offers customers the option of selecting news
stories by topic rather than publisher. The CustomWires are topic-
defined newswire products that draw from each Comtex news source
items relevant to the topic of the specific CustomWire.
Additionally, for customers who require news that focuses on topics
not highlighted in basic CustomWires, Comtex has the ability to
develop a unique CustomWire to meet the specific needs of certain
end-user markets.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1996, TO THE THREE
MONTHS ENDED MARCH 31, 1995
During the three months ended March 31, 1996, the Company's
revenues were approximately $795,000, or approximately $156,000
(24%) greater than revenues for the three months ended March 31,
1995. This increase reflects revenues from new customers, price
increases for certain customers and royalties derived from the sale
of Comtex' news to information distributors who pay Comtex a royalty
based upon usage. These revenue increases were partially offset by
customer losses and revenue decreases due to pricing and usage
factors.
9
Operational expenses for the three months ended March 31, 1996
were approximately $866,000, representing a $172,000 (25%) increase
in operational expenses as compared with the three months ended
March 31, 1995. The increase in operational expenses is principally
due to increased expenses for operations and general and
administrative expenses. The increase in operational expenses is
primarily due to an increase in amounts paid to information
providers to enhance product breadth, personnel costs and
telecommunications costs. The increase in expenses related to
information providers allows the Company to obtain additional
product content which improves its service to existing customers and
enhances the Company's ability to attract new customers. Increased
personnel costs are related to the Company's efforts to implement
and support its new products. Increased telecommunications costs
are related to a price increase from the Company's primary
distribution vendor and an upgrade in transmission speed. During
the quarter ended March 31, 1996, the Company began attempting to
pass a portion of the increase in telecommunication costs to its
customers and to modify operations to reduce such costs. The
increase in general and administrative expenses principally relates
to increases in personnel costs associated with the Company's
operations.
The Company incurred an operating loss of approximately $71,000
during the quarter ended March 31, 1996 as compared with an
operating loss for the quarter ended March 31, 1995 of approximately
$55,000. The Company recorded a net loss of approximately $97,000
for the three months ended March 31, 1996 as compared with a net
loss for the three months ended March 31, 1995 of approximately
$78,000. The decline in both operating income and net income
reflects increased expenses predominately related to information
providers and telecommunications costs as discussed above.
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 1996, TO THE NINE
MONTHS ENDED MARCH 31, 1995
During the nine months ended March 31, 1996, the Company's
revenues were approximately $2,311,000, or approximately $221,000
(11%) greater than revenues for the nine months ended March 31,
1995. This increase in revenues reflects revenues from new
customers, price increases for certain customers and royalties
derived from the sale of Comtex' news to information distributors
who pay Comtex a royalty based upon usage. These revenue increases
were partially offset by customer losses and revenue decreases due
to pricing and usage factors.
Operational expenses for the nine months ended March 31, 1995
were approximately $2,710,000, representing a $682,000 (34%)
increase in operational expenses as compared with the nine months
ended March 31, 1995. The increase in operational expenses is
principally due to increased expenses for operations, product
10
development and general and administrative expenses. The increase
in operational expenses is primarily due to an increase in amounts
paid to information providers to enhance product breadth, personnel
costs and telecommunication costs. The increase in expenses related
to information providers allows the Company to obtain additional
product content which improves its service to existing customers and
enhances the Company's ability to attract new customers. Increased
personnel costs are related to the Company's efforts to implement
and support its new products. Increased telecommunications costs
include approximately $33,000 of non-recurring conversion costs and
duplicative charges related to the Company's upgrade in processing
speed. Increased telecommunications costs are also related to a
price increase from the Company's primary distribution vendor.
Increases in product development represent expenses related to
enhancement and augmentation of the Company's CustomWire products
which were released in March 1995. The increase in general and
administrative expenses relates to increases in personnel costs
associated with the Company's operations.
The Company incurred an operating loss of approximately
$399,000 during the nine months ended March 31, 1996 as compared
with operating income for the nine months ended March 31, 1995 of
approximately $62,000. The Company recorded a net loss of
approximately $479,000 for the nine months ended March 31, 1996 as
compared with a net loss for the nine months ended March 31, 1995 of
approximately $9,000. The decline in both operating income and net
income reflects increased expenses predominately related to
information providers, telecommunications and product development as
discussed above.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had a negative working capital
of approximately $346,000 as compared with working capital of
approximately $134,000 at June 30, 1995. This decrease in working
capital is primarily the result of operational losses.
The Company had cash and cash equivalents in the amount of
approximately $45,000 at March 31, 1996, which was slightly larger
than the cash and cash equivalents position at June 30, 1995. The
Company's operating activities generated approximately $63,000 of
cash during the nine months ended March 31, 1996. This was
primarily due to increases in accounts payable of approximately
$481,000 and increases in accrued expenses of approximately $72,000
which offset operating losses and an increase in accounts receivable
of approximately $218,000 (see Statement of Cash Flows).
On February 17, 1995, the Company entered into a $1 million
Contracts Financing Agreement with Princeton Capital Finance
Company, L.L.C. ("PrinCap"). The PrinCap Contracts Financing
Agreement provides for the financing of approved inventory, unbilled
11
accounts receivable and accounts receivable to support both the MRI
business (see below) and Comtex' operations. Under the financing
agreement, PrinCap will finance approved inventory and unbilled
accounts receivable at an annualized interest rate of Prime plus 4%
and accounts receivable at an annualized interest rate of Prime plus
3% based upon the Prime rate as defined by The Wall Street Journal
on the date of borrowing. At March 31, 1996, the Company owed
PrinCap approximately $701,000 plus accrued interest.
Through March 31, 1996, all PrinCap proceeds had been utilized
for the financing of purchase orders and accounts receivable to
support the MRI business. Accordingly, all such borrowings from
PrinCap by the Company have been for the benefit of TII (see below).
The Company made no borrowings under the PrinCap Contracts
Financing Agreement in April or early May 1996. Through May 2,
1996, the Company received approximately $437,000 from TII and
repaid such amount to PrinCap, reducing the PrinCap balance to
approximately $264,000.
Historically, the Company has not utilized the PrinCap
Contracts Financing Agreement to finance its news and information
business. The Company's ability to utilize the PrinCap Contract
Financing Agreement is dependent upon the Company generating
sufficient orders and billings to utilize as a borrowing base. No
assurance may be given that the Company will be able to maintain
this borrowing base.
During fiscal 1995, the Company entered into an Asset Purchase
Agreement (the "MRI Acquisition") to acquire certain assets of
Telecommunications Industries, Inc. ("TII"). The assets to be
acquired included substantially all of the assets of TII's sole
operating division, Micro Research Industries ("MRI"). MRI's
business consisted of providing sales, leasing and maintenance
support of computer hardware and software primarily to the U.S.
House of Representatives. Infotechnology, Inc. ("Infotech"), which
owns approximately 60% of the outstanding common stock of the
Company, also owns approximately 82% of the outstanding common stock
of TII. C.W. Gilluly, Ed.D, Chairman of the Board of Directors and
Chief Executive Officer of the Company, also is the Chairman of the
Board of Directors and Chief Executive Officer of TII and Chairman
of the Board of Directors and President of Infotech.
The terms of the MRI Acquisition were embodied in a number of
documents, including an Asset Purchase Agreement and a Put Agreement
each dated May 16, 1995 and entered into by the Company and TII
(collectively the "MRI Agreements"). These agreements granted to
the Company the right, under certain terms and conditions, to
require TII to retain the assets of the MRI business and to retain
the liabilities associated therewith (the "Put Right"). On March
25, 1996, the Company exercised its Put Right.
12
Pursuant to the MRI Agreements and a subsequent letter
agreement dated March 25, 1996, the Company exercised the Put Right
related to all of the assets, rights and properties constituting or
used exclusively in the MRI business, 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 have
agreed with the Company that, in the event the Company incurs any
damage, loss, judgement, 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
reduce the principal amount of its indebtedness to Infotech (the
"Infotech Note"), discussed below, by the amount of such liability.
At March 31, 1996, the Company's balance Sheet reflected
$859,346 owed to the Company by MRI (the "MRI Advances"). Of this
amount, approximately $701,000 consisted of borrowings from PrinCap
advanced by the Company to the MRI business and approximately
$159,000 of uncollateralized cash advances. Management believes
that most of the portion of the MRI Advances attributable to PrinCap
borrowings will be paid off as accounts receivable of the MRI
business, pledged as collateral for the PrinCap loan, are collected.
A portion of the uncollateralized accounts receivable will be repaid
through the transfer of assets, at book value, pursuant to the
Company entering into a new facility lease and accepting certain
operational assets from TII. Beyond the amount of the transfer of
assets from TII, management believes that it is unlikely that TII
will be able to repay to the Company the balance of the MRI Advances
attributable to uncollateralized cash advances, or that TII will be
able to indemnify the Company against any other liabilities of the
MRI business. Management therefore anticipates that any such
amounts which are not repaid to the Company by TII, or losses
incurred by the Company for which TII does not provide
indemnification, will be used to reduce the principal of the
Infotech Note. Any such nonpayment or loss could have a material
adverse effect on the Company's financial condition.
Immediately following the exercise by the Company of the Put
Right, the Infotech Note had a principal balance of $1,040,000,
subject to reduction by the Company under the circumstances
described above. The Infotech Note carries an interest rate of ten
percent (10%) on the unpaid principal balance and is due on July 1,
2002. Interest only is payable quarterly, commencing June 30, 1995.
The Infotech Note is collateralized by a continuing collateral
interest in all accounts receivable, all products of such receivables and
the proceeds thereof, all purchase orders, and all patents and
technology now or hereafter held or received by the Company. The
Infotech Note is subordinated in right of payment to the prior
payment in full of all Senior Indebtedness of the Company. The term
"Senior Indebtedness" includes the principal and interest charges,
existing or hereafter incurred on the Company's obligations,
including borrowings from PrinCap. In March 1996, the Company
13
incurred an approximately $31,000 liability related to the MRI
business in connection with its lease of space formerly subleased
from TII, as discussed below. Thus, in
accordance with the MRI Agreements which include provisions to
adjust the Infotech Note, the Infotech Note was reduced by a
corresponding $31,000 to a principal balance of $1,009,000 at March
31, 1996. Since Infotech agreed to reduce the principal balance of
the Infotech Note for all MRI business liabilities bourn by the
Company, the $31,000 reduction did not affect the Company's results
of operations during the three and nine months ended March 31, 1996.
Management believes the cash from operations and the existing
cash balances will provide the Company with adequate cash resources
to meet its obligations on a short-term basis, provided the Company
is able to negotiate extended payment terms on certain current
liabilities or is able to maintain an adequate borrowing collateral
base with PrinCap.
The Company has an agreement in principle with its primary
telecommunications vendor to convert its net accounts payable of
approximately $188,000 into a note payable which will allow the
Company to satisfy this debt over an 18 month period beginning in
July 1996.
In April 1996, the Company terminated its sublease with TII and
signed a lease directly with the owner of the building for
essentially the identical space it had been renting from TII. This
lease will begin May 1, 1996. To consummate this lease, to satisfy
other building related MRI liabilities (for which the Company is
indemnified), and to meet the requirement for the Company to deliver
a six-month facility deposit and a build-out deposit, the Company
executed a demand note in the amount of $127,422 from Dr. Gilluly
(the "Gilluly Note"). The Gilluly Note is due on demand but in no
event later than April 11, 1997. The Gilluly Note bears
interest on the principal amount outstanding at a rate of twelve
percent (12%) per annum and interest is payable monthly. The
Gilluly Note is collateralized by a security interest in the
Company's accounts receivable, now existing and in the future
arising, and all proceeds of those accounts.
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PART II - OTHER INFORMATION
Item 5. Recent Developments
MRI Acquisition; Put Agreement
During fiscal 1995, the Company entered into an Asset Purchase
Agreement (the "MRI Acquisition") to acquire certain assets of
Telecommunications Industries, Inc. ("TII"). The assets to be
acquired included substantially all of the assets of TII's sole
operating division, Micro Research Industries ("MRI"). MRI's
business consisted of providing sales, leasing and maintenance
support of computer hardware and software primarily to the U.S.
House of Representatives. Infotechnology, Inc. ("Infotech"), which
owns approximately 60% of the outstanding common stock of the
Company, also owns approximately 82% of the outstanding common stock
of TII. C.W. Gilluly, Ed.D, Chairman of the Board of Directors and
Chief Executive Officer of the Company, also is the Chairman of the
Board of Directors and Chief Executive Officer of TII and Chairman
of the Board of Directors and President of Infotech.
The terms of the MRI Acquisition were embodied in a number of
documents, including an Asset Purchase Agreement and a Put Agreement
each dated May 16, 1995 and entered into by the Company and TII
(collectively the "MRI Agreements"). These agreements granted to
the Company the right, under certain terms and conditions, to
require TII to repurchase the assets of the MRI business and to
assume liabilities associated therewith (the "Put Right"). On March
25, 1996, the Company exercised its Put Right.
Pursuant to the MRI Agreements and a subsequent letter
agreement dated March 25, 1996, the Company exercised the Put Right
related to all of the assets, rights and properties constituting or
used exclusively in the MRI business, 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 have
agreed with the Company that, in the event the Company incurs any
damage, loss, judgement, 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
reduce the principal amount of its indebtedness to Infotech by the
amount of such liability.
Facility Lease; Gilluly Loan
In April 1996, the Company terminated its sublease with TII and
signed a lease directly with the owner of the building for
essentially the identical space it had been renting from TII. This
lease will begin May 1, 1996. To consummate this lease and to
satisfy other building related MRI liabilities (for which the
15
Company is indemnified) and to meet the requirement for the Company
to deliver a six-month facility deposit and a build-out deposit, the
Company executed a demand note in the amount of $127,422 from Dr.
Gilluly (the "Gilluly Note"). The Gilluly Note is due on demand but
in no event later than April 11, 1997. The Gilluly Note shall bear
interest on the principal amount outstanding at a rate of twelve
percent (12%) per annum and interest is payable monthly. The
Gilluly Note is collateralized by the Company's accounts receivable,
now existing and in the future arising, and all proceeds of those
accounts.
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Item 6. Exhibits
10.1 Lease Agreement Plaza IA Associates Limited
Partnership and the Company dated April 6, 1996.
10.2 Demand Note and Security Agreement between C.W.
Gilluly and the Company dated April 10, 1996.
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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: May 15, 1996 By: /s/ C.W. Gilluly
C.W. Gilluly
Chairman of the Board and
Chief Executive Officer
By: /s/ Thomas Wollman
Thomas Wollman
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18