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 December 31, 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 February 9, 1998, 7,859,417 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 (Unaudited) Balance Sheets 3 at December 31, 1997 and June 30, 1997 Statements of Operations 4 for the Three and Six Months Ended December 31, 1997 and 1996 Statements of Cash Flows 5 for the Six Months Ended December 31, 1997 and 1996 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis 9 of Financial Condition and Results of Operations Part II Other Information: Item 1. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 COMTEX SCIENTIFIC CORPORATION BALANCE SHEETS AT DECEMBER 31, 1997 AND JUNE 30, 1997 December 31, June 30, 1997 1997 -------------- ------------ (Unaudited) ASSETS CURRENT ASSETS Cash $ 38,501 $ 17,927 Accounts Receivable, Net of Allowance of $64,000 and $77,000 at December 31, 1997 and June 30, 1997, respectively 841,807 935,619 Advances to TII, a related party - 266,000 Prepaid Expenses and Other Current Assets 17,245 47,094 ------------- -------------- TOTAL CURRENT ASSETS 897,553 1,266,640 PROPERTY AND EQUIPMENT, NET 214,191 199,982 DEPOSITS AND OTHER ASSETS 64,185 64,561 ------------- -------------- TOTAL ASSETS $ 1,175,929 $ 1,531,183 ============= ============== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts Payable $ 552,393 $ 529,612 Accrued Expenses 315,746 459,034 Amounts due to Related Parties 186,812 294,113 Notes Payable 96,800 288,792 ------------- -------------- TOTAL CURRENT LIABILITIES 1,151,751 1,571,551 LONG-TERM LIABILITIES: Long-Term Notes Payable - Affiliate 732,872 732,872 Other Long-Term Notes Payable 101,150 55,100 ------------- -------------- TOTAL LONG-TERM LIABILITIES 834,022 787,972 ------------- -------------- TOTAL LIABILITIES 1,985,773 2,359,523 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT Common Stock, $0.01 Par Value - Shares Authorized: 18,000,000; Shares issued and outstanding: 7,859,417 and 7,858,417, respectively 78,594 78,584 Additional Capital 9,980,668 9,980,538 Accumulated Deficit (10,869,106) (10,887,462) ------------- -------------- (809,844) (828,340) ------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,175,929 $ 1,531,183 ============= ============== The accompanying "Notes to Financial Statements" are an integral part of these financial statements -3- COMTEX SCIENTIFIC CORPORATION STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996 (UNAUDITED) Three months ended Six months ended December 31, December 31, 1997 1996 1997 1996 ------------ ---------- ----------- ----------- REVENUES Information Services Revenues $ 1,164,445 $ 944,542 $ 2,244,422 $ 1,854,548 Data Communications Revenues 141,284 137,728 280,658 268,010 ------------ ----------- ------------ ----------- Total Revenues $ 1,305,729 $ 1,082,270 $ 2,525,080 $ 2,122,558 ------------ ----------- ------------ ----------- COSTS AND EXPENSES Costs of Information Services 548,496 447,614 1,062,946 839,268 Costs of Data Communications 191,207 106,238 365,759 275,749 Product Development 40,181 70,863 73,804 125,272 Sales and Marketing 184,368 128,948 377,397 239,037 General and Administrative 278,813 250,379 532,626 465,882 Depreciation and Amortization 25,036 37,769 48,677 74,761 ------------ ----------- ------------ ----------- Total Costs and Expenses 1,268,101 1,041,811 2,461,209 2,019,969 INCOME FROM OPERATIONS 37,628 40,459 63,871 102,589 INTEREST AND OTHER EXPENSE, NET (22,939) (28,530) (45,182) (61,381) ------------ ----------- ------------ ----------- INCOME FROM OPERATIONS BEFORE INCOME TAXES 14,689 11,929 18,689 41,208 INCOME TAXES 0 0 332 346 ------------ ----------- ------------ ----------- NET INCOME $ 14,689 $ 11,929 $ 18,357 $ 40,862 ============ =========== ============ =========== BASIC EARNINGS PER COMMON SHARE $ .00 $ .00 $ .00 $ .01 ============ =========== ============ =========== DILUTED EARNINGS PER COMMON SHARE $ .00 $ .00 $ .00 $ .01 ============ =========== ============ =========== The accompanying "Notes to Financial Statements" are an integral part of these financial statements -4- COMTEX SCIENTIFIC CORPORATION STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996 (UNAUDITED) Six Months Ended December 31, 1997 1996 --------- --------- Cash Flows from Operating Activities: Net Income $18,357 $40,862 Adjustments to reconcile net income to net cash provided by (used in ) operating activities: Depreciation and Amortizat 48,677 74,761 Bad Debt Expense 16,225 27,083 Loss on Disposal of Fixed - 68 Changes in Assets and Liabilities: Accounts Receivable 77,587 (125,718) Prepaid Expenses and Other Current Assets 29,849 (9,736) Deposits and Other Assets - 377 Accounts Payable 22,781 (28,197) Accrued Expenses (143,288) 59,541 Amounts due to Related 40,121 25,750 --------- --------- Net Cash provided by Operating Activities 110,309 64,791 --------- --------- Cash Flows from Investing Activities: Purchases of Property and Equipment (62,511) (22,107) Proceeds from Sale of Fixed - 2,401 Advances to TII - (4,795) Repayments of Advances 266,000 27,558 --------- --------- Net Cash provided by Investing Activities 203,489 3,057 --------- --------- Cash Flows from Financing Activities: Proceeds from Notes Payable 140,000 - Repayments on Notes Payable (19,942) (94,145) Repayments on Notes Payable (147,422) (918) Exercise of Stock Options 140 - Repayments against PrinCap Financing Agreement (266,000) - --------- --------- Net Cash used in Financing Activities (293,224) (95,063) --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents 20,574 (27,215) Cash and Cash Equivalents Balance at Beginning of Period 17,927 57,644 --------- --------- Cash and Cash Equivalents Balance at End of Period $38,501 $30,429 ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest $9,323 $18,133 Cash paid for income taxes $332 $346 Supplemental disclosure of noncash financing activities: During the six months ended December 31, 1996, the Amended AMASYS 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- 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. In February, 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which the Company adopted as of December 31, 1997. As required, the Company changed the method previously used to compute the earnings per share and restated all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options is excluded. Diluted earnings per share include the effect, if dilutive, of stock options and other common stock equivalents. Certain amounts for the three and six months ended December 31, 1996, have been reclassified to conform to the presentation of the three and six months ended December 31, 1997. 2. Related Party Transactions AMASYS Corporation ("AMASYS") in addition to being the Company's majority stockholder (approximately 60%), is also the majority stockholder (approximately 82%) of Telecommunications Industries, Inc. ("TII"). 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 six months ended December 31, 1997, the following transactions occurred. 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 $12,000 for these services during the six months ended December 31, 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 six months ended December 31, 1997, amounted to approximately $14,000. 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 six months ended December 31, 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, Infotechnology, Inc. ("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"). 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 amount 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 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 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. The then outstanding 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. 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. Interest on the Note is approximately $6,000 per month. 3. Notes Payable In September 1997, the Company obtained a $50,000 line of credit and a $140,000 three year term loan from Century National Bank with annual principal repayments of $40,000, $40,000 and $60,000. 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. The note, bearing interest at 10%, was repaid in 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 December 31, 1997, $7,950 was outstanding on these obligations, with $6,800 due within one year. 4. Income Taxes The Company has recorded net income for the six months ended December 31, 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Comparison of the three months ended December 31, 1997, to the three months ended December 31, 1996 During the three months ended December 31, 1997, the Company's total revenues were approximately $1,306,000, or approximately $224,000 (21%) greater than the total revenues for the three months ended December 31, 1996. The increase of approximately $220,000 in information services revenues reflects revenues from new customers, certain contractual 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 $4,000 in data communications revenues reflects billings for delivery of the Company's products to new customers. Total costs and expenses for the three months December 31, 1997, were approximately $1,268,000, representing an approximately $226,000 (22%) increase in operating expenses from the three months ended December 31, 1996. This increase in operating expenses is principally due to increases in information services costs, data communications costs, sales and marketing and general and administrative expenses, offset by a decrease in product development expenses. Information services costs during the quarter ended December 31, 1997, increased approximately $101,000 (23%) over these costs in the quarter ended December 31, 1996. This increase was due to an increase in the fees and royalties to information providers, as new sources were added and revenues increased. Data communications costs increased approximately $85,000 (80%) during the quarter ended December 31, 1997 as compared with the quarter ended December 31, 1996. This current period increase is primarily a result of the absence of a one-time credit of approximately $57,000 applied during the three months ended December 31, 1996, from the Company's primary data communications vendor, as well as increased data volume related to additional content delivered to the Company's customers. Product development expenses decreased by approximately $31,000 (43%) for the three months ended December 31, 1997, compared to the three months ended December 31, 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 $55,000 or approximately 43% for the three months ended December 31, 1997, compared to the three months ended December 31, 1996. This increase was due to increased compensation arising from the addition of marketing personnel and additional commissions related to the increase in information services revenues during the period. General and administrative expenses for the three months ended December 31, 1997 totaled approximately $279,000 or approximately $28,000 (11%) greater than these expenses during the three months ended December 31, 1996. This increase was principally due to increased expenses related to an office space expansion and additional personnel. The Company earned operating income of approximately $38,000 during the quarter ended December 31, 1997, compared to operating income of $40,000 during the quarter ended December 31, 1996. The Company earned net income of approximately $15,000 during the quarter ended December 31, 1997, compared to net income of approximately $12,000 for the quarter ended December 31, 1996. The slight increase in net income reflects the increase in revenues with a corresponding increase in operating expenses. Comparison of the six months ended December 31, 1997, to the six months ended December 31, 1996 During the six months ended December 31, 1997, the Company's total revenues were approximately $2,525,000, or approximately $403,000 (19%) greater than the total revenues for the six months ended December 31, 1996. The increase of approximately $390,000 in information services revenues reflects revenues from new customers, certain contractual 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 $13,000 in data communications revenues reflects billings for delivery of the Company's products to new customers. Total costs and expenses for the six months ended December 31, 1997, were approximately $2,461,000, representing an increase of approximately $441,000 (22%) in operating expenses from the six months ended December 31, 1996. This increase in operating expenses is principally due to increases in information services costs, data communications costs, sales and marketing and general and administrative expenses offset by a decrease in product development costs. Information services costs increased by approximately $224,000 (27%) during the six months ended December 31, 1997 compared to the six months ended December 31, 1996. This increase is due to increased personnel and an increase in the fees and royalties paid to information providers as sources were added and revenues increased. Data communications costs increased by approximately $90,000 (33%) during the six months ended December 31, 1997, compared to the six months ended December 31, 1996. This increase is due to the absence of the one-time credit of approximately $57,000 negotiated with the Company's primary data communications vendor during the six months ended December 31, 1996, as well as increased expenses related to greater data volume during the six months ended December 31, 1997. Product development expenses were approximately $51,000 lower during the six months ended December 31, 1997 than those expenses during the six months ended December 31, 1996. This decrease is due to the shift in personnel to focus efforts on marketing strategies for the Company. Sales and marketing expenses increased by approximately $138,000 or approximately 58% in the six months ended December 31, 1997, over the six months ended December 31, 1996, due to increased marketing personnel and additional commissions related to the increase in information services revenues during these six months. General and administrative expenses for the six months ended December 31, 1997, were approximately $67,000 (14%) higher than these expenses for the six months ended December 31, 1996. This increase is due to additional personnel in senior management, increased rent expense related to the Company's expanded office space and increased office supplies and telephone expenses related to additional personnel, offset by decreased recruiting fees and bad debt expense. The Company earned operating income of almost $64,000 during the six months ended December 31, 1997, compared to operating income of approximately $103,000 for the six months ended December 31, 1996. The Company earned net income of approximately $18,000 for the six months ended December 31, 1997, compared to net income for the six months ended December 31, 1996, of approximately $41,000. The decrease in operating and net income reflects the investment of increased revenues in personnel and information provider content as discussed above. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES For the six months ended December 31, 1997, the Company's operations produced operating income of approximately $64,000 and net income of approximately $18,000. At December 31, 1997, the Company had negative working capital of approximately $254,000 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 $810,000 at December 31, 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 six months ended December 31, 1997, the Company's operating activities generated approximately $110,000 in cash. The Company had cash and cash equivalents of approximately $39,000 at December 31, 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. 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. Part II. Other Information Item 1. Legal Proceedings None Item 4. Submission of Matters to a Vote of Security Holders a) The Company's Annual Meeting of Stockholders was held December 11, 1997. a. At the Annual Meeting, the Company's stockholders reelected the Company's four directors, approved an amendment to the Company's 1995 Stock Option Plan to increase by 1,200,000 the shares reserved for issuance thereunder, approved the adoption of the Company's 1997 Employee Stock Purchase Plan, and ratified the appointment of Ernst & Young, LLP as the Company's independent accountants. The following votes were cast at the Annual Meeting with respect to each of the matters above: Directors: Director Votes For Votes Abstentions and Withheld Broker Non-Votes -------- --------- -------- ---------------- C.W. Gilluly 6,783,676 49,300 - Erik Hendricks 6,803,016 29,960 - Robert A. Nigro 6,717,676 115,300 - Charles W. Terry 6,783,676 49,300 - Amendment of 1995 Stock Option Plan: Abstentions and Votes For Votes Against Broker Non-Votes ------------- ------------- ---------------- 5,442,933 212,178 1,177,865 Adoption of 1997 Employee Stock Purchase Plan: Abstentions and Votes For Votes Against Broker Non-Votes ------------- ------------- ---------------- 5,594,161 70,450 1,168,365 Ratification of Appointment of Accountants: Abstentions and Votes For Votes Against Broker Non-Votes ------------- ------------- ---------------- 6,800,546 11,800 20,630 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. 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: February 13, 1998 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)