-----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, JpyrrPGl9TSjBXawbdhWLlCrNLq+vyUBRyyswwH0bJkZaqyEKe488j+YG1GcunP8 CkfTkTfU4uuB+yMtELbawQ== 0000352988-98-000013.txt : 19980928 0000352988-98-000013.hdr.sgml : 19980928 ACCESSION NUMBER: 0000352988-98-000013 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980925 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-K405 SEC ACT: SEC FILE NUMBER: 002-72408 FILM NUMBER: 98714920 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-K405 1 FORM 10-K 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-K (Mark One) X Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1998; or ___ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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 (I.R.S. Employer of incorporation or organization) Identification No.) 4900 Seminary Road, Suite 800, Alexandria, Virginia 22311 (Address of principal executive office) Registrant's telephone number, including area code: (703) 820-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of class) 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X As of September 23, 1998, the aggregate market value of the common stock held by non-affiliates of the Registrant (based upon the average bid and asked prices of the common stock as reported by the National Association of Securities Dealers Inc. through its Electronic OTC Bulletin Board) was approximately $809,115. As of September 23, 1998, 7,903,399 shares of the Common Stock of the Registrant were outstanding. PART I Item 1. Business General Comtex Scientific Corporation (the "Company" or "Comtex") was incorporated in New York in 1980. As a result of a series of transactions during the Company's fiscal year 1989, Infotechnology, Inc. ("Infotech"), a Delaware business development corporation, then principally engaged in the information and communications business, acquired majority ownership of the Company. During the 1980s and early 1990s, the Company incurred significant losses and a resultant shareholder deficit due to the failure to realize market penetration as a retail source of news and information. In 1994, new management established a new direction for the Company by focusing on the aggregation, value- add and repackaging of content for resale to distributors in the financial, online and corporate information services markets. With the new focus, the Company has been able to achieve nearly 20% growth in information services revenues and achieve profitability during the past two years, while investing in sales, marketing, technical resources and infrastructure. Business Information Services Comtex is an integrator and value-added distributor of real- time news sources. Comtex aggregates and converts multiple real- time news sources into editorially enhanced real-time news products for resellers in a variety of markets, including financial, online and corporate information services. Real-time denotes the electronic transmission of breaking news stories while events are happening and before the story's appearance in print and television media. The Company's news sources provide the content for the Company's products and contain late-breaking U.S. and international news and events, worldwide 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 from around the world. The Company gathers its news and information from a broad range of established electronic newswire sources including, but not limited to, Business Wire, Futures World News, Knight- Ridder/Tribune, Newsbytes News Network, Phillips Publishing Corporation, PR Newswire, The Sports Network and United Press International. The Company also has agreements with a large collection of international-based news agency services including, but not limited to, Africa News Service, Agence France Presse, Asia Pulse, Inter Press Service, ITAR/TASS News Agency, South American Business Information and Xinhua News Agency. The Company has developed a proprietary automated editorial method for processing and converting the real-time news feeds into the Comtex value-added format. The conversion process relies heavily on computer technology and data management software. As electronic news feeds and other submissions of news and information are received, the Company's computers convert each story into a common data format, apply standardized document coding, and assign relevant keywords, including ticker symbols of any public companies mentioned in the story. After the processing has been completed, the Company's data management software sorts each news story into topic defined product categories. The Company's editorial and product development staff monitor and edit the electronic processing and categorization of incoming news items to ensure the Company's products meet various market needs and product specifications. The Company's volume and variety of independent news sources, automated editorial process and proprietary conversion process are believed by management to be an advantage over other individual providers of real-time news services. The automated editorial process increases the Company's efficiencies of operation, relevancy of stories routed to pre-defined product categories and provides the Company's customers with the ability to create customized information products for their markets. The Company's value-adds reduce costs and simplify the customer's development of information products and online, World Wide Web ("WEB") applications. The Company delivers its information products in a variety of ways to suit customer requirements. These delivery methods include: 0 Broadcast news feed via leased lines, FM transmission or satellite downlink 0 Internet delivery of news products Customers are provided with implementation specifications and guidance from the Company's technical services department for integrating the Company's editorially enhanced news feeds into their products. Consistent with standard practice in the information services industry, the Company generally has renewable long-term contractual relationships with those information providers and information distributors with which it does business. These information services contracts typically provide for both minimum fees and royalties based upon expected and achieved volumes of usage. Fees and royalties from information distributors comprise the majority of the Company's revenues. Data communications revenues represent the recovery of costs incurred in delivering the information over various media. The Company believes that its aggregation of more than thirty news and information sources and variety of product delivery methods, in combination with its automated editorial process and single delivery format, substantially reduce its customer's cost of acquiring and installing electronic information feeds from multiple sources, and increases the customer's ability to quickly create products from the categorized information feeds. The Company therefore takes advantage of a broad range of market opportunities emerging within the rapidly changing information industry to meet the needs of information distributors in a variety of markets. Customers, Sales and Marketing The Company's customers consist of electronic news and information distributors who create a product with the Company's products and in turn sell to their customers: end-user markets and corporations, who use the combined services for market research, business intelligence and investment analysis. Electronic news and information distributors include business and consumer online services, personal investor WEB sites, general information WEB sites, Wall Street stock quote vendors, electronic clipping software and service providers and wireless information services. The Company's marketing strategies center on adapting its pricing model to the business model of each individual distributor. These models vary from fixed fees to variable royalties based upon usage against a minimum fee. The Company's sales force is organized around its three primary markets - financial, online and corporate information services. The sales force receives a base salary and earns commissions on both new customers and revenue growth from existing customers. The Company's compensation plan is consistent with industry compensation practices. Current distributor customers include, but are not limited to, AT Financial, Bloomberg L.P., Bridge Trading Company, Burrelle's, CNN Interactive, CompuServe, Inc., NewsEdge, Inc., ILX, OneSource Information Services, Inc., PC Quote, PointCast, Inc., Reuters Ltd., Telerate, Inc., Telescan, Thomson Consumer Products Group, Time Warner Cable, Track Data and WavePhore Newscast. Product and Service Offerings The core products currently supported by the Company's technical and customer service departments include a series of topic-defined news products marketed under the brand name "CustomWires TM ". The Company also supports production of original news products under the brand name "Comtex Newsroom". CustomWires TM are topic-defined newswires that contain only the topic-relevant stories from more than thirty newswire services distributed by the Company. Stories are selected by the Company's automated editorial software according to the significance of the story's content relative to specific CustomWires TM topics. The Company offers fourteen topics under the CustomWires TM brand name: Business, Community, Energy, Environment, Finance, Foreign Business, Government, Healthcare, High Technology, International, Public Companies, Sports, Wall Street and World Affairs and an additional ten geographical CustomWires TM focusing on specific international regions. Comtex Newsroom produces editorially enhanced news products: Investor Alert, Market Alert and Top Headlines. Investor Alert tracks significant stock market activity by volume, price points and price percentage from the New York Stock Exchange, American Stock Exchange and NASDAQ Stock Market and supplies in-depth, analytical tables to allow tracking of trends both in industry and individual company stocks. Market Alert delivers market activity updates from U.S. securities and commodity exchanges including early morning calls, active stock lists, closing volumes, analyst comments and summaries, selected indices in major international trading centers and weekly U.S. economic indicators. Top Headlines is an editorial service that selects the ten most significant news stories of the day in each of eleven topic-based CustomWiresTM . The Top Headlines categories are: Business, Community, Energy, Entertainment, Environment, Finance, Government, Healthcare, High Technology, International and Sports. Top Headlines are offered as Headlines Only, Headlines and Summaries or Headlines and Stories, and are updated and released to customers up to three times a day. Based on specific market interest, the Company developed an additional thirteen industry specific categories. A list of the top five to seven stories from each industry category is generated and distributed to customers a minimum of once a day. These categories include vertical industries such as Airlines, Automobile, Banking, Hardware, Insurance, Oil, Publishing, Telecommunications and Utilities. Utilizing the same automated editorial and format conversion process, the Company has broadened its services to include offering news processing services to large-scale content distributors and information providers. The Company believes this new offering will increase the reliance that information providers and distributors have on the Company and, at the same time, attract even more customers to Comtex. The Company believes the rapid growth in the use of electronic information by consumers, businesses and professional investors will continue to create a significant market for the Company's information products and outsourcing services. The Company relies heavily on third-party information sources for the content of its product offerings. Interruption in, or the termination of, service from a significant number of the Company's information sources would affect the Company's ability to offer products or maintain product quality. Accordingly, the failure or inability to restore or replace such interrupted or terminated services could have an adverse effect on revenues (see Item 7 - Management's Discussion and Analysis of Financial Conditions and Results of Operation). Competition The Company competes with individual national and international electronic news and information wire services. Established electronic newswire services such as Associated Press, Dow Jones News/Retrieval and Reuters are viewed by certain customers as direct competitors. The Company believes that because these competitors primarily offer only their proprietary content, they cannot offer the breadth, depth and magnitude of real-time news content that is available from the Company. Additionally, the Company does not believe these entities utilize a technological approach to processing and delivering value-added information products similar to that used by the Company and therefore cannot as efficiently meet the needs of our customers. Many of the numerous and emerging companies involved in distributing electronic information services to consumers, the corporate marketplace and Wall Street firms have become customers, not competitors, of Comtex. These companies provide a selection of electronic news and information feeds as a value- added service to their product offerings. The Company believes these information services companies are uniquely positioned to propose total solutions to their specific markets and the Company is well positioned to enhance their ability to do so. Product Development For the years ended June 30, 1998, 1997 and 1996, the Company's product development costs were approximately $165,000, $270,000 and $239,000, respectively. The decrease in the current period is due to a shift of resources to focus on marketing strategies for the Company. In addition, during fiscal year 1998, the Company commenced a development effort to upgrade its software and computer hardware system components to expand its product capabilities and to meet future client requirements. In fiscal year 1998, the Company incurred and capitalized approximately $170,000 on this initiative. Completion of the estimated $400,000 upgrade project is expected early in calendar year 1999. The Company has broadened its services to offer distributors and information providers an outsourcing service for the processing and distribution of their information. For the information distributor, the Company aggregates and pre-processes multiple sources of content into the Comtex value-added format, allowing the distributor to focus efforts on their end-user products. For the information providers, the Company converts the information provider's feed into the Comtex value-added format, allowing for easy integration by their customers, and distributes the feed to those customers. Additionally, the information provider has the potential for immediate distribution access to the customers of Comtex' more than ninety distributors. Employees At June 30, 1998, the Company had 30 full-time employees. The employees are not members of a union and the Company believes employee relations are generally good. The Company's Chairman, Chief Financial Officer and Corporate Secretary have similar duties with Hadron, Inc. More than 50% of their time is spent on other than Company business. Other Information AMASYS Corporation,("AMASYS") (the successor corporation to Infotechnology, Inc., "Infotech"), legally or beneficially controls 4,693,940 (approximately 59%) of the issued and outstanding shares of the Company. As discussed in Note 4 of the Notes to Financial Statements, 2,540,503 shares of the Company's common stock owned by AMASYS are subject to option by C.W. Gilluly, Ed.D., the Chairman of the Board of Directors of both the Company and AMASYS. Dr. Gilluly and his spouse, Marny Gilluly, (the "Gillulys") also directly own options to acquire an additional 2,540,503 shares of the Company's common stock (see Note 4 of the Notes to Financial Statements). Item 2. Properties The Company owns no real estate. The Company leases office space at 4900 Seminary Road in Alexandria, Virginia. The Company currently occupies approximately 9,400 square feet at an annual rental of approximately $200,000. The lease agreement expires in August, 2002. Approximately 660 square feet is subleased to Hadron, Inc. at the same rental rate paid to the Company's landlord. Item 3. Legal Proceedings The Company is involved in routine legal proceedings occurring in the ordinary course of business which in the aggregate are believed by management to be immaterial to the financial condition of the Company. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock, par value $.01 per share ("Common Stock"), is traded sporadically on the National Association of Securities Dealers' ("NASD") Electronic OTC Bulletin Board, under the symbol CMTX. The range of high and low bid quotations for the Common Stock, as obtained from Bloomberg Financial Services, for each quarterly period during fiscal years 1998 and 1997 is shown below: Fiscal Year Ended June 30, 1998 High Low
First Quarter (7/1 to 9/30/97) 7/32 1/8 Second Quarter (10/1 to 12/31/97) 1/4 1/8 Third Quarter (1/1 to 3/31/98) 9/32 3/16 Fourth Quarter (4/1 to 6/30/98) 1/2 5/32
Fiscal Year Ended June 30, 1997 High Low
First Quarter (7/1 to 9/30/96) 1/8 1/32 Second Quarter (10/1 to 12/31/96) 3/32 1/16 Third Quarter (1/1 to 3/31/97) 1/8 3/32 Fourth Quarter (4/1 to 6/30/97) 5/32 5/32
The approximate number of holders of record of the Company's Common Stock as of September 23, 1998 was 590. The Company has never paid a cash dividend on its Common Stock and does not anticipate the payment of cash dividends to shareholders in the foreseeable future. Item 6. Selected Financial Data The following table sets forth selected financial data for each of the last five fiscal years of the Company. Fiscal Year Ended June 30, -----------------------
(amounts in thousands except per share data) 1998 1997 1996 1995 1994 ------- ------- -------- -------- ------- Information Services Revenues $ 4,830 $ 4,066 $ 3,219 $ 2,769 $3,025 Data Communications Revenues 571 526 330 288 290 Total Comtex Net Revenues $ 5,401 $ 4,592 $ 3,549 $ 3,057 $3,315 Income (Loss) from Operations $ 156 $ 228 $ (362) $ (166) $ 489 Net Income (Loss) $ 64 $ 113 $ (472) $ (260) $ 387 Basic Net Income(Loss) Per Share $ .01 $ .01 $ (.06) $ (.03) $ .05 Diluted Net Income (Loss) Per Share $ .01 $ .01 $ (.06) $ (.03) $ .05 Balance Sheet Data at Year End: Total Assets $ 1,434 $ 1,531 $ 1,382 $ 1,851 $1,191 Long-term Obligations $ 833 $ 788 $ 1,083 $ 1,075 $ 79 The Company's notes payable to Infotech were classified as long-term obligations in the fiscal year ended June 30, 1990. The notes were classified as current obligations subsequent to fiscal year 1990 based upon the Company's inability to negotiate an extension of their maturity with Infotech. In fiscal year 1995, the Company restructured the notes into the Amended Infotech Note.
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operation RESULTS OF OPERATIONS Comparison of the Fiscal Year ended June 30, 1998 to the Fiscal Year ended June 30, 1997 During the year ended June 30, 1998, the Company's total revenues were approximately $5,401,000 or approximately $809,000 (18%) greater than revenues for the year ended June 30, 1997. Of the approximately $764,000 increase in information services revenues, approximately 60% represents revenues from new customers and approximately 40% reflects the net increase in revenues derived from the sale of Comtex' products to existing information distributors who pay the Company a royalty based upon usage. The increase of approximately $45,000 in data communications revenues reflects billings for delivery of the Company's products to new customers. Total costs and expenses for the fiscal year ended June 30, 1998, were approximately $5,245,000, compared to approximately $4,364,000 for the fiscal year ended June 30, 1997, an increase of approximately $881,000 (20%). The increase in total costs and expenses is principally due to increased information services costs, data communications costs, sales and marketing costs and general and administrative expenses, offset by a decrease in product development expenses. Costs of information services were approximately $2,253,000 for the fiscal year ended June 30, 1998, compared to approximately $1,846,000 for the fiscal year ended June 30, 1997, an increase of approximately $407,000 (22%). This increase is primarily due to an increase in the royalties paid to information providers based on increased revenues. The increase is also attributable to increased fees to information providers as sources were added, additional personnel and increased spending on computer supplies, software and consulting services. Data communications costs increased by approximately $146,000 (25%) to approximately $733,000 for the fiscal year ended June 30, 1998, from approximately $587,000 in the fiscal year ended June 30, 1997. This increase is principally due to the increase in the number of customers and information providers and increased data volume during the fiscal year ended June 30, 1998. Product development expenses were approximately $165,000 for the fiscal year ended June 30, 1998 compared to $270,000 for the prior fiscal year. The decrease of approximately $105,000 (39%) is due to a shift in personnel from this department to focus on marketing strategies for the Company. Sales and marketing expenses were approximately $879,000 for the fiscal year ended June 30, 1998, compared to approximately $571,000 for the fiscal year ended June 30, 1997, an increase of approximately $308,000 (54%). This increase is due to increased marketing and sales personnel, additional travel expenses associated with business development and increased commissions related to the increase in information services revenues in the current year. General and administrative expenses were approximately $1,111,000 for the fiscal year ended June 30, 1998 compared to approximately $985,000 for the prior fiscal year. The increase of approximately $126,000 (13%) is due to increased legal fees corresponding to an increase in the number of contracts negotiated with new customers, increased rent expense associated with the Company's expanded office space, an increase in the employee bonus related to revenues and the fees associated with recruiting technical personnel. The Company earned operating income of approximately $156,000 during the fiscal year ended June 30, 1998 compared to operating income of approximately $228,000 during the fiscal year ended June 30, 1997. The Company earned net income of approximately $64,000 for the fiscal year ended June 30, 1998, compared to approximately $113,000 for the fiscal year ended June 30, 1997. The decrease in operating and net income reflects the investment of increased revenues in personnel and information provider content as discussed above, as well as the absence of a one-time resolution of revenues during the prior year as discussed in the results for the year ended June 30, 1997, below. The decrease in net income was partially offset by a decrease in interest expense related to the reduction in the AMASYS Note and payment of a vendor note. Comparison of the Fiscal Year ended June 30, 1997 to the Fiscal Year ended June 30, 1996 During the year ended June 30, 1997, the Company's revenues were approximately $4,592,000 or approximately $1,043,000 (29%) greater than revenues for the year ended June 30, 1996. Of the increase of approximately $847,000 in information services revenues, approximately 48% reflects revenues from new customers and approximately 52% represents the net increase in revenues from contractual increases and royalties derived from the sale of Comtex' products to existing information distributors. The increase of approximately $196,000 in data communications revenues reflects the Company's increase in billing rates to fully recover communications costs incurred in delivering the Company's products and services. Total costs and expenses for the fiscal year ended June 30, 1997 were approximately $4,364,000, compared to approximately $3,911,000 for the fiscal year ended June 30, 1996, an increase of approximately $453,000 (12%). The increase in total costs and expenses is principally due to increased information services costs, product development, sales and general and administrative expenses offset by a decrease in the cost of data communications and depreciation expense. Costs of information services were approximately $1,846,000 for the fiscal year ended June 30, 1997, compared to approximately $1,658,000 for the fiscal year ended June 30, 1996, an increase of approximately $188,000 (11%). The increase in information services costs is due to additional personnel in support of increased products and customers, increases in fixed fees to information providers related to enhancing product breadth and higher royalties to information providers based on revenue growth. Royalties due to information providers under the Company's contracts are based on the volume of usage and are often subject to a minimum fee. Data communications costs decreased by approximately $120,000 (17%) from approximately $707,000 for the fiscal year ended June 30, 1996, to approximately $587,000 for the fiscal year ended June 30, 1997. This decrease is due to duplicate telecommunications operations costs during an upgrade in the Company's processing capability incurred in fiscal year 1996, improved efficiency in FM and satellite delivery and negotiated credits from the Company's primary data communications vendor. Product development costs were approximately $270,000 for the fiscal year ended June 30, 1997, compared to $239,000 for the fiscal year ended June 30, 1996, an increase of approximately $31,000 (13%). This increase is primarily due to increased personnel costs that have enabled the Company to continue to improve its product management capabilities and to enhance and augment the Company's CustomWires TM products. Sales and marketing expenses were approximately $571,000 for the fiscal year ended June 30, 1997 compared to approximately $347,000 for the fiscal year ended June 30, 1996, an increase of approximately $224,000 (65%). This increase primarily related to increased compensation expenses arising from the addition of more experienced sales personnel to the Company's workforce, additional commissions related to the increase in information services revenues during the year and increased travel expenses associated with business development. General and administrative costs were approximately $985,000 for the fiscal year ended June 30, 1997 compared to approximately $819,000 for the fiscal year ended June 30, 1996, an increase of approximately $166,000 (20%). The additional expenses are due to increases in executive management, shareholder services and rent expenses related to the Company's expanded office space, partially offset by decreased legal fees. Depreciation and amortization expenses were approximately $105,000 for the fiscal year ended June 30, 1997, compared to $141,000 for the fiscal year ended June 30, 1996, a decrease of approximately $36,000 (26%). The Company earned operating income of approximately $228,000 during the fiscal year ended June 30, 1997, compared with an operating loss of approximately $362,000 during the fiscal year ended June 30, 1996, an increase of approximately $590,000 (163%). The Company recorded net income of approximately $113,000 for the fiscal year ended June 30, 1997, compared to a net loss of approximately $472,000 for the fiscal year ended June 30, 1996, an increase of approximately $585,000 (124%). The fiscal year 1997 results reflect the resolution during the fourth quarter of revenues due for additional distributor usage during fiscal year 1997 and prior periods. The resolution increased revenues, operating income and net income by $200,000, $169,000 and $169,000, respectively. The increase in both operating income and net income also reflects the operating leverage as revenues increased with a marginal increase in variable expenses. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES For the fiscal year ended June 30, 1998, the Company reported operating income of approximately $156,000 and net income of approximately $64,000. At June 30, 1998, the Company had negative working capital of approximately $286,000 as compared with negative working capital of approximately $305,000 at June 30, 1997. The Company also reported a net stockholders' deficit of approximately $757,000 at June 30, 1998 compared to a net stockholders' deficit of approximately $828,000 at June 30, 1997. The decrease of approximately $71,000 in stockholders' deficit was due to the retention of net income and additions through the exercise of stock options and purchases under the Company's 1997 Employee Stock Purchase Plan. The Company has invested significantly in upgrading the experience level of its sales, marketing and technical support staff; in expanding its contractual base with information providers so as to improve the quality and flexibility of its information products; and in expanding its contracts with information distributors. All of these factors contribute to improving the Company's ability to sell and deliver quality products and services. In addition, the Company has made capital expenditures of approximately $170,000 in fiscal year 1998 to upgrade its software and hardware platforms to expand its product capabilities and to meet future client processing requirements. The Company recorded a specific write-off of a receivable for an overseas customer who filed for bankruptcy. Management was advised by counsel of the difficulty in collecting on the account and therefore, the receivable, fully reserved as of June 30, 1997, was written off during fiscal year 1998. There are no receivables recorded in the balance sheet at June 30, 1998 relating to this customer. During the fiscal year ended June 30, 1998, the Company's operations generated approximately $379,000 in cash. To date, the Company's operations have generated 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 billings to cover its current obligations and to pay down its long-term debt obligations. No assurance may be given that the Company will be able to expand the revenue base or achieve ongoing profitable operations that may be necessary to fulfill its liquidity needs in the future. The Company has had preliminary discussions with AMASYS regarding the possible refinancing or restructuring of its note payable. If the Company is not successful in its efforts, it may undertake other actions as may be appropriate to preserve asset values. YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year, resulting in possible system failure or miscalculations causing disruptions of operations. The Company has completed an internal review and assessment of the impact of the Year 2000 issue upon its operating, financial and accounting systems. At this time the Company believes that, with respect to its internal systems, the Year 2000 issue will not pose any significant operational problems or costs. The Company has commenced a program to assess the impact of the Year 2000 issue with respect to the Company's major vendors and distributor customers. Letters will be sent requesting detailed, written information concerning existing or anticipated Year 2000 compliance by their systems, insofar as the operating systems relate to the Company's business activities with such parties. The Company expects to receive replies by December 31, 1998, and will update its assessment of any impact at that time. Except for the historical information contained herein, the matters discussed in this 10-K include forward-looking statements that involve a number of risks and uncertainties. There are certain important external factors and risks, including business conditions and growth in the demand for real-time, aggregated custom online news delivery services, and growth in the economy in general; the impact of competitive products and pricing; the proliferation of large, global information networks and the evolution of the Internet. In addition, certain internal factors and risks exist, including continued success in the acquisition and growth of new information re-distributor and corporate end- user client accounts; the ability to continue the Company's program of technical system upgrades; 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, including quarterly reports on Form 10-Q, that could cause results to differ materially from those anticipated by the statements contained herein. Item 8. Financial Statements and Supplementary Data The information required by this item is set forth under Item 14, which is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions The information required by Items 10, 11, 12 and 13 of Part III of Form 10-K has been omitted in reliance on General Instruction G(3) to Form 10-K and is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission ("SEC") pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements Report of Independent Accountants F-1 Balance Sheets as of June 30, 1998 and 1997 F-2 Statements of Operations for the fiscal years ended June 30, 1998, 1997, and 1996 F-3 Statements of Stockholders' Deficit for the fiscal years ended June 30, 1998, 1997 and 1996 F-4 Statements of Cash Flows for the fiscal years ended June 30, 1998, 1997 and 1996 F-5 Notes to Financial Statements F-6 2. Financial Statement Schedules None. (b) Reports on Form 8-K None. (c) Exhibits 3.1 Restated Certificate of Incorporation of the Company, (incorporated by reference to the Company's Registration Statement on Form S-18 (File No. 2-72408 NY), declared effective on July 22, 1981. 3.2 Certificate of Amendment of Certificate of Incorporation of the Company effective May 14, 1996. (incorporated by reference on Form 10-K dated June 30, 1996). 3.3 Amended and Restated By-Laws of the Company (incorporated by referenced on Form 10-K dated June 30, 1997). 10.1 Stock Option Agreement between the Company and C.W. Gilluly and Marny Gilluly, dated May 16, 1995 (incorporated by reference to the Company's Quarterly Report on Form 10-Q filed on May 22, 1995). 10.2 Stock Option Agreement between the Company and Telecommunications Industries, Inc., dated May 16, 1995 (incorporated by reference to the Company's Quarterly Report on Form 10-Q filed on May 22, 1995). 10.3 Agreement between Infotechnology, Inc. and the Company, dated May 16, 1995 (incorporated by reference to the Company's Quarterly Report on Form 10-Q filed on May 22, 1995). 10.4 Contracts Financing Agreement between the Company and Princeton Capital Finance Company, L.L.C., dated February 17, 1995 (incorporated by reference to the Company's Quarterly Report on Form 10-Q filed on May 22, 1995). 10.5 Amended, Consolidated and Restated 10% Senior Subordinated Secured Note, dated May 16, 1995 (incorporated by reference to the Company's Quarterly Report on Form 10-Q filed on May 22, 1995). 10.6 Comtex Scientific Corporation 1995 Stock Option Plan (incorporated by reference to the Company's Proxy Statement dated November 9, 1995). 10.7 Comtex Scientific Corporation 1997 Employee Stock Purchase Plan (incorporated by reference to the Company's Proxy Statement dated October 28, 1997). 10.8 Lease Agreement between Plaza IA Associates Limited Partnership and the Company dated April 6, 1996 (incorporated by reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 1996). 10.9 Employment Agreement with Charles W. Terry dated July 29, 1994 (incorporated by reference to Company's Form 10-K dated June 30, 1996). 10.10 Sub-lease Agreement between Hadron, Inc. and the Company, dated June 12, 1996 (incorporated by reference to Company's Form 10-K dated June 30, 1996). 10.11 Employment Agreement with Donald E. Ziegler dated December 20, 1996 (incorporated by reference to Company's Form 10-Q dated December 31, 1996). 10.12 Release and Settlement Agreement among Princeton Capital Finance Company, L.L.C., and Comtex Scientific Corporation, et. al., dated February 21, 1997 (incorporated by reference to Company's Form 10-K dated June 30, 1996). 24.1 Consent of Independent Auditors. 27 Financial Data Schedule. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: September 25, 1998 COMTEX SCIENTIFIC CORPORATION By: /s/ Charles W. Terry By: /s/ Donald E. Ziegler Charles W. Terry Donald E. Ziegler President and Chief Executive Chief Financial Officer Officer (Principal Financial and (Principal Executive Officer) Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. DIRECTORS: Signature Title Date /s/ C.W. Gilluly Chairman September 25, 1998 C.W. Gilluly and Director /s/ Erik Hendricks Director September 25, 1998 Erik Hendricks /s/ Robert A. Nigro Director September 25, 1998 Robert A. Nigro /s/ Charles W. Terry Director, September 25, 1998 Charles W. Terry President and CEO REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Comtex Scientific Corporation We have audited the accompanying balance sheets of Comtex Scientific Corporation as of June 30, 1998 and 1997 and the related statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Comtex Scientific Corporation at June 30, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that Comtex Scientific Corporation will continue as a going concern. As more fully described in Note 3, the Company has a working capital deficiency and a high amount of long-term debt in comparison to total assets. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/Ernst & Young LLP Vienna, Virginia September 9, 1998 COMTEX SCIENTIFIC CORPORATION BALANCE SHEETS AT JUNE 30, 1998 AND 1997
June 30, June 30, ASSETS 1998 1997 -------------- ------------ CURRENT ASSETS Cash $170,416 $ 17,927 Accounts Receivable, Net of Allowance of $66,916 and $77,139 at June 30, 1998 and 1997, respectively 882,001 935,619 Advances to TII, a related party - 266,000 Prepaid Expenses and Other Current Assets 19,512 47,094 -------------- ------------ TOTAL CURRENT ASSETS 1,071,929 1,266,640 PROPERTY AND EQUIPMENT, NET 299,097 199,982 DEPOSITS AND OTHER ASSETS 62,944 64,561 -------------- ------------ TOTAL ASSETS $1,433,970 $1,531,183 ============== ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts Payable $600,345 $529,612 Accrued Expenses 446,317 459,034 Amounts due to Related Parties, Net 216,815 294,113 Notes Payable 94,660 288,792 -------------- ------------ TOTAL CURRENT LIABILITIES 1,358,137 1,571,551 LONG-TERM LIABILITIES: Long-Term Notes Payable - Affiliate 732,872 732,872 Other Long-Term Notes Payable 100,000 55,100 -------------- ------------ TOTAL LONG-TERM LIABILITIES 832,872 787,972 -------------- ------------ TOTAL LIABILITIES 2,191,009 2,359,523 COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' DEFICIT Common Stock, $0.01 Par Value - Shares Authorized: 18,000,000; Shares issued and outstanding at June 30, 1998 and 1997: 7,896,231 and 7,858,417, respectively 78,962 78,584 Additional Capital 9,987,098 9,980,538 Accumulated Deficit (10,823,099) (10,887,462) -------------- ------------ TOTAL STOCKHOLDERS' DEFICIT (757,039) (828,340) -------------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,433,970 $1,531,183 ============== ============
The accompanying "Notes to Financial Statements" are an integral part of these financial statements. F-2 COMTEX SCIENTIFIC CORPORATION STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1998, 1997, AND 1996
Fiscal Year Ended June 30, -------------------------------------------- 1998 1997 1996 ------------ ----------- ------------- REVENUES Information Services Revenues $ 4,830,298 $ 4,066,092 $ 3,219,028 Data Communications Revenues 570,895 525,645 330,007 ------------ ----------- ------------- Total Revenues 5,401,193 4,591,737 3,549,035 COSTS AND EXPENSES Costs of Information Services 2,252,732 1,845,600 1,658,335 Costs of Data Communications 732,894 586,857 707,232 Product Development 165,187 270,420 238,954 Sales and Marketing 878,740 571,240 346,986 General and Administrative 1,110,933 984,845 818,714 Depreciation and Amortization 104,768 105,102 141,219 ------------ ----------- ------------- Total Costs and Expenses 5,245,254 4,364,064 3,911,440 ------------ ----------- ------------- INCOME (LOSS) FROM OPERATIONS 155,939 227,673 (362,405) OTHER INCOME (EXPENSE) Interest Expense (93,013) (114,114) (107,931) Interest Income/Other 1,798 57 (1,079) ------------ ----------- ------------- Other Expense, Net (91,215) (114,057) (109,010) ------------ ----------- ------------- INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES 64,724 113,616 (471,415) INCOME TAXES 360 346 489 ------------ ----------- ------------- NET INCOME (LOSS) $ 64,364 $ 113,270 $ (471,904) ============ =========== ============= BASIC EARNINGS PER COMMON SHARE $ .01 $ .01 $ (.06) ============ =========== ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES 7,859,021 7,858,417 7,858,417 ============ =========== ============= DILUTED EARNINGS PER COMMON SHARE $ .01 $ .01 $ (.06) ============ =========== ============= WEIGHTED AVERAGE NUMBER OF SHARES ASSUMING DILUTION 10,170,938 7,858,417 7,858,417 ============ =========== =============
The accompanying "Notes to Financial Statements" are an integral part of these financial statements. F-3 COMTEX SCIENTIFIC CORPORATION STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE FISCAL YEARS ENDED JUNE 30 ,1998, 1997, AND 1996
Common Shares Outstanding Total Number of Par Additional Accumulated Stockholders' Shares Value Capital Deficit Deficit ---------- -------- ----------- -------------- ----------- Balance at June 30, 1995 7,858,417 $ 78,584 $ 9,829,971 $ (10,528,829) $ (620,274) Net Loss (471,904) (471,904) ---------- -------- ----------- -------------- ----------- Balance at June 30, 1996 7,858,417 78,584 9,829,971 (11,000,733) (1,092,178) Reduction in Note to Shareholder 150,565 150,565 Net Income 113,270 113,270 ---------- -------- ----------- -------------- ----------- Balance at June 30, 1997 7,858,417 78,584 9,980,536 (10,887,463) (828,343) ---------- -------- ----------- -------------- ----------- Exercise of Stock Options 2,001 20 260 280 Issuance of Stock - ESPP 35,813 358 6,302 6,660 Net Income 64,364 64,364 ---------- -------- ----------- -------------- ----------- Balance at June 30, 1998 7,896,231 $ 78,962 $ 9,987,098 $ (10,823,099) $ (757,039) ========== ========= =========== ============== ===========
The accompanying "Notes to Financial Statements" are an integral part of these financial statements. F-4 COMTEX SCIENTIFIC CORPORATION STATEMENTS OF CASH FLOW FOR THE FISCAL YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Fiscal Year Ended June 30, ---------------------------------------- 1998 1997 1996 ----------- ----------- ------------ Cash Flows from Operating Activities: Net Income (Loss) $ 64,364 $ 113,270 $ (471,904) Adjustments to reconcile net income (loss) to net cash provided by (used in ) operating activities: Depreciation and Amortization Expense 104,768 105,102 141,219 Bad Debt Expense 28,590 34,091 38,000 (Gain)/Loss on Sale of Fixed Assets - 53 1,346 Changes in Operating Assets and Liabilities: Accounts Receivable 25,027 (402,393) (188,886) Prepaid Expenses and Other Current Assets 27,582 (17,165) (36,312) Deposits and other assets 864 - (51,232) Accounts Payable 70,733 19,381 315,691 Accrued Expenses (12,718) 220,584 59,797 Amounts due to Related Parties 70,124 42,399 77,286 ----------- ----------- ------------ Net Cash provided by (used in) Operating Activities 379,334 115,322 (114,995) Cash Flows from Investing Activities: Purchases of Property and Equipment (203,131) (39,743) (40,792) Proceeds from Sale of Fixed Assets - 2,386 8,185 Advances to TII - (28,433) (2,025,202) Repayments of Advances 266,000 42,738 2,665,245 ----------- ----------- ------------ Net Cash (used in) provided by Investing Activities 62,869 (23,052) 607,436 Cash Flows from Financing Activities: Proceeds from Notes Payable 140,000 - - Payments on Notes Payable (23,232) (122,626) (23,815) Proceeds from Notes Payable to Related Parties - 20,000 127,422 Repayments on Notes Payable to Related Parties (147,422) - (31,169) Proceeds from PrinCap Financing Agreement - - 1,936,758 Repayments against PrinCap Financing Agreement (266,000) (29,361) (2,459,156) Issuance of Stock under Employee Stock Purchase Plan 6,660 - - Exercise of Stock Options 280 - - ----------- ----------- ------------ Net Cash (used in) Financing Activities (289,714) (131,987) (449,960) ----------- ----------- ------------ Net Increase (Decrease) in Cash and Cash Equivalents 152,489 (39,717) 42,481 Cash and Cash Equivalents Balance at Beginning of Period 17,927 57,644 15,163 ----------- ----------- ------------ Cash and Cash Equivalents Balance at End of Period $ 170,416 $ 17,927 $ 57,644 =========== =========== ============
The accompanying "Notes to Financial Statements" are an integral part of these financial statements. F-5 COMTEX SCIENTIFIC CORPORATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 1. THE COMPANY Comtex Scientific Corporation (the "Company" or "Comtex") is a value-added real-time distributor of customized newswire information products (CustomWiresTM) aggregated on a real-time basis from thousands of news stories drawn from hundreds of broad and specialized news sources. CustomWiresTM 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 which it does business. These information services contracts typically provide for both minimum fees and royalties based upon expected and achieved volumes of usage. Fees and royalties from information distributors comprise the majority of the Company's revenues. Data communications revenues represent the contractual charges for delivering the information over various media. 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. AMASYS Corporation,("AMASYS") (the successor corporation to Infotechnology, Inc., "Infotech"), a Delaware corporation, legally or beneficially controls 4,693,940 (approximately 59%) of the issued and outstanding shares of the Company. As discussed in Note 4, 2,540,503 shares of the Company's common stock owned by AMASYS are subject to option by C.W. Gilluly, Ed.D., the Chairman of the Board of Directors of both the Company and AMASYS. Dr. Gilluly and his spouse, Marny Gilluly, (the "Gillulys") also directly own options to acquire an additional 2,540,503 shares of the Company's common stock (see Note 4). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Revenues Information services revenues are recognized as services are rendered based on contractual terms such as usage, fixed fee, percentage of distributor revenues or other pricing models. Data communications revenues are recognized in accordance with contract terms as costs are incurred. Research and Development The Company conducts ongoing research and development in the areas of product enhancement and quality assurance. Such costs are expensed as incurred. Costs for fiscal years 1998, 1997 and 1996 were approximately $165,000, $270,000 and $239,000, respectively. Property and Equipment Property and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred and the cost of renewals and betterments are capitalized. Depreciation and amortization are computed using the straight- line method over the estimated lives of the related assets - five years for furniture and fixtures and computer equipment and three years for software. Leasehold improvements are amortized using the straight-line method over the lesser of the lease term or the estimated useful lives of the related assets. Upon retirement or sale, the cost and related accumulated depreciation or amortization of assets are removed from the accounts and any resulting gain or loss is included in the determination of net income. Income Taxes The Company follows the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. Risks and Uncertainties Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The Company believes the credit risk associated with accounts receivable is minimal due to the number of customers and their dispersion over different industries and geographical locations. Computation of Earnings per Common Share 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 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. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), Accounting for Stock-Based Compensation, which was effective for the Company's June 30, 1997 financial statements. SFAS No. 123 allows companies to either account for stock-based compensation under the provisions of SFAS No. 123 or under the provisions of Accounting Principles Board No. 25 ("APB No. 25"), but requires pro forma disclosures in the footnotes to the financial statements as if the measurement provisions of SFAS No. 123 had been adopted. The Company accounts for its stock-based compensation in accordance with the provision of APB No. 25. As such, the adoption of SFAS No. 123 did not impact the financial condition or the results of operations of the Company. Recent Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement No. 130, Comprehensive Income, and Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, which are required to be adopted for fiscal years beginning after December 15, 1997. Upon the effective date of each of the new statements, the Company will make the necessary changes, as applicable, to comply with the provisions of each statement and restate all prior periods presented. The Company does not expect the adoption of these statements to have a material impact on the Company's financial condition or results of operations. Reclassifications Certain fiscal year 1997 and 1996 amounts have been reclassified to conform to the fiscal year 1998 presentation. 3. MANAGEMENT PLANS FOR OPERATING UNCERTAINTIES The Company had negative working capital of $286,208 and a net shareholders' deficit of $757,039 at June 30, 1998. The Company's negative working capital raises doubt about its ability to continue as a going concern. The Company has invested significantly in upgrading the experience level of its sales, marketing and technical support staff during fiscal year 1998; in expanding its contractual base with information providers so as to improve the quality and flexibility of its information products; and in expanding its contracts with information distributors so as to improve its revenue potential. In addition, the Company has made capital expenditures of approximately $170,000 in fiscal year 1998 to upgrade its software and hardware to expand its product capabilities and to meet future client processing requirements. To date, 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 billings 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 expand the revenue base or achieve ongoing profitable operations that may be necessary to fulfill its liquidity needs in the future. The Company has had preliminary discussions with AMASYS regarding the possible refinancing or restructuring of its note payable. If the Company is not successful in its efforts, it may undertake other actions as may be appropriate to preserve asset values. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. 4. RELATED PARTY TRANSACTIONS AMASYS, in addition to being the Company's majority stockholder (approximately 59%), is also the majority stockholder (approximately 82%) of Telecommunications Industries Inc. ("TII") which has ceased operations. Dr. Gilluly was Chairman and Chief Executive Officer of TII. Dr. Gilluly is Chairman and Chief Executive Officer of Hadron, Inc., of which AMASYS owns approximately 12% of the outstanding shares. The Chairman, Chief Financial Officer and Corporate Secretary of the Company have similar duties with Hadron, Inc. More than 50% of their time is spent on other than Company business. During fiscal years 1998, 1997 and 1996, the following related party transactions occurred. Corporate Services Provided by/to Hadron, Inc. The Company contracts with Hadron, Inc. for corporate and shareholder services. Charges for such services are based on time and material expended by Hadron personnel in providing such services at a rate equal to Hadron's costs and amounted to approximately $27,000, $34,000 and $15,000 for the fiscal years ended June 30, 1998, 1997 and 1996, respectively. 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 at cost, based upon usage. Total service charges to Hadron during the fiscal years ended June 30, 1998, 1997 and 1996, amounted to approximately $30,000, $24,000 and $4,000, respectively. Management believes the methods used for allocating the costs are reasonable. Administrative Services Provided by/to AMASYS Corp. The Company participated in certain group insurance plans coordinated by AMASYS for the benefit of employees through fiscal year 1996. Costs allocated to the Company in connection therewith for fiscal year 1996 amounted to approximately $6,000. AMASYS and its wholly-owned subsidiary, Questech Capital Corporation ("Questech") also share certain general and administrative expenses for which the Company billed, at cost, AMASYS approximately $4,000, $9,000 and $400 during fiscal years ended June 30, 1998, 1997 and 1996, respectively. Management believes the methods used for allocating these costs are reasonable. TII Sublease The Company subleased office space from TII until April, 1996. Pursuant to an agreement entered into in September, 1993, the Company and TII performed programming, marketing, and general and administrative tasks for each other. Pursuant to the contract with TII, the Company incurred expenses of approximately $196,000 for facility rental, computer equipment, staff and office expenses during the year ended June 30, 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. In connection with the lease, the Company executed a demand note bearing interest at eleven and one half percent (11.5%) per annum in the amount of $147,422 payable to Dr. Gilluly (the "Gilluly Note"), collateralized by the Company's accounts receivable, now existing and in the future arising, and all proceeds of those accounts. Approximately $4,000 and $14,500 of interest expense was incurred on the Gilluly Note during the years ended June 30, 1998 and 1997, respectively. In September 1997, the Company repaid all principal and interest amounts due on the Gilluly Note. Acquisition and Divestiture of Micro Research Industries During fiscal year 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, AMASYS 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, AMASYS 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, LLP ("PrinCap"). As partial consideration for the agreement by the Gillulys to personally guarantee the PrinCap financing and to make certain loans to TII prior to the PrinCap financing, AMASYS 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 AMASYS and PTSI at an exercise price of $.10 per share. 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 U.S. 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 $889,435 principal was rolled into a 10% Senior Subordinated and Secured Note due July 1, 2002 (the "AMASYS Note"), subject to future reduction or increase under certain circumstances. In fiscal year 1996, the Company reduced by approximately $31,000 the amount it owed under the AMASYS Note for rent paid to TII's landlord on behalf of TII. At June 30, 1997, the AMASYS Note was further reduced by approximately $125,000 in final resolution of the amounts due from TII not recovered through collection of the MRI receivables, decreasing the Note to $732,872. 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 was $73,284, $89,600 and $104,531 for the years ended June 30, 1998, 1997 and 1996, respectively. Amounts due to related parties consisted of the following at June 30: 1998 1997 ---------- ----------- Note payable to C.W. Gilluly, Ed.D. including accrued interest of $1,221 at June 30, 1997 $ $ 148,643 Interest due to AMASYS under Amended AMASYS Note 215,333 148,157 Amounts due to/(from) Hadron, Inc. for corporate and shareholder services 4,749 (2,554) Due (from) AMASYS for administrative services (3,267) (133) ----------- ----------- Due to Related Parties $ 216,815 $ 294,113 =========== ===========
5. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at June 30: 1998 1997 --------- ---------- Computer Equipment $ 829,671 $ 632,560 Furniture and Fixtures 66,628 63,408 Software 77,324 74,524 Leasehold Improvements 29,405 29,405 Other Equipment 6,000 6,000 --------- --------- 1,009,028 805,897 Less Accumulated Depreciation (709,931) (605,915) --------- --------- Net $ 299,097 $ 199,982 ========= =========
Depreciation expense for the fiscal years ended June 30, 1998, 1997 and 1996 was $104,015, $104,350 and $136,415, respectively. 6. NOTES PAYABLE Notes payable consisted of the following at June 30: 1998 1997 ------------ ----------- Note Payable to Princeton Capital Finance Company ("PrinCap")(see Note 4) $ $ 266,000 Note Payable to Century National Bank 140,000 Notes Payable related to Acquisition of International Intelligence Report, Inc. 4,660 11,430 Notes Payable to vendors 50,000 66,462 ------------ ----------- Subtotal 194,660 343,892 Less Current Portion 94,660 288,792 ------------ ----------- Total Long-Term Notes Payable $ 100,000 $ 55,100 ============ ===========
Note payable to Century National Bank 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 due September 1998, September 1999 and September 2000, respectively. The facilities, guaranteed by C.W. Gilluly and spouse, bear interest at a rate of prime plus two percent annually (10.5% at June 30, 1998). Notes payable related to Acquisition of International Intelligence Report, Inc. 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 June 30, 1998, $4,660 was outstanding on these obligations and will be paid during fiscal year 1999. Notes payable to Vendors In June 1997, the Company signed a note with a law firm converting accounts payable to the firm to a note payable in the amount of $50,000 due no later than December 17, 1998, together with all accrued interest thereon. The note bears interest at a rate of nine percent (9%) per annum. In July 1996, the Company agreed with a data communications vendor to convert a net amount of accounts payable to the vendor and royalties receivable by the Company from the vendor to a note payable in the amount of $173,712. Due to substandard service provided by this vendor during the period of July through November 1996, the Company negotiated a one-time credit of approximately $57,000. This credit was applied to the principal balance of the note. The note was further reduced by $15,000 as of June 30, 1997, pursuant to a Customer Conversion Agreement with the vendor. The note bearing interest at 10%, was repaid in December 1997. 7. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Fiscal Year Fiscal Year Fiscal Year 1998 1997 1996 ------------ ----------- ----------- Numerator: Net Income $ 64,364 $ 113,270 $ (471,904) =========== =========== ============ Denominator: Denominator for basic earnings per share - weighted average shares 7,859,021 7,858,417 7,858,417 Effect of dilutive securities: Stock Options 2,311,917 ----------- ------------ ------------ Denominator for diluted earnings per share 10,170,938 7,858,417 7,858,417 =========== ============ ============ Basic Earnings Per Share $ .01 $ .01 $ ( .06) Diluted Earnings Per Share $ .01 $ .01 $ ( .06)
Shares issuable upon the exercise of stock options have been excluded from the computation for fiscal years 1997 and 1996 because the effect of their inclusion would be non-dilutive or anti-dilutive. 8. INCOME TAXES Income taxes included in the Statements of Operations consist principally of state income taxes and local franchise taxes. The tax provision for continuing operations differs from the amounts computed using the statutory federal income tax rate as follows: 1998 1997 1996 --------- -------- ------- Provision at statutory federal income tax rate 34% 34% 34% Provision - state income tax 4 4 4 Change in valuation allowance (38) (38) (38) Effective income tax rate 0% 0% 0% ========= ======== ========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Gross deferred tax assets at June 30, 1998 and 1997, consist primarily of temporary differences from net operating loss and business tax credit carryforwards of approximately $1,700,000 and $1,800,000, respectively, and are fully reserved. The Company has net operating loss (NOL) and business tax credit carryforwards available to offset future taxable income of approximately $4.1 million as of June 30, 1998. The net change in valuation allowance during 1998 was a decrease of approximately $100,000. These NOL and ITC carryforwards expire beginning in the year 2000. 9. STOCK OPTION PLAN The Company's 1995 Stock Option Plan provides for both incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and non-qualified stock options to purchase shares by key employees, consultants and directors of the Company. In December 1997, shareholders approved an amendment to the 1995 Stock Option Plan to increase the number of shares reserved for issuance thereunder by 1,200,000 to 2,400,000. Under the 1995 Plan, the exercise price of an incentive stock option is required to be at least equal to 100% of the fair market value of the Company's common stock on the date of grant (110% of the fair market value in the case of options granted to employees who are 10% shareholders). The exercise price of a non- qualified stock option is required to be not less than the par value, nor greater than the fair market value, of a share of the Company's common stock on the date of the grant. The options vest in three equal annual installments beginning with the date of grant. The term of an incentive or non-qualified stock option may not exceed ten years (five years in the case of an incentive stock option granted to a 10% stockholder). Information with respect to stock options granted through June 30, 1998, under the 1995 Plan is as follows: Incentive Stock Non-Qualified Per Share Options Stock Options Option Price --------------- ------------ ------------ Outstanding at June 30, 1996 692,733 110,000 .10 Granted 384,000 20,000 .10 - .19 Expired ( 37,000) .10 --------------- ------------ Outstanding at June 30, 1997 1,039,733 130,000 .10 - .19 Granted 429,675 20,000 .20 - .44 Expired (62,995) .10 - .22 Exercised ( 2,001) .10 - .22 --------------- ------------ Outstanding at June 30, 1998 1,404,412 150,000 .10 - .44 =============== ============= Exercisable at June 30, 1998 1,061,703 130,002 =============== =============
The weighted average exercise price of options outstanding at June 30, 1998, was $.11. The weighted average exercise price of options exercised in fiscal year 1998 was $.14. The weighted average remaining contractual life of options outstanding at June 30, 1998 was 7.91 years. The weighted average fair value of options granted during 1998, 1997 and 1996 was $.23, $.14 and $.10, respectively. During fiscal year 1997, the Company adopted the disclosure- only provisions of SFAS No. 123. Had compensation cost for the Company's stock option plan been determined based upon the fair value at the grant date for awards under the plan consistent with the methodology prescribed under SFAS No. 123, the Company's net income/(loss) in fiscal years 1998, 1997 and 1996 would have been approximately $43,000, $80,000 and $(493,000), or $.01, $.01 and $(.06) per share, respectively. The effect of applying SFAS No. 123 on 1998, 1997 and 1996 pro forma net income/loss as stated above is not necessarily representative of the effects on reported net income or loss for future years due to, among other things, (1) the vesting period of the stock options and (2) the fair value of additional stock options in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing fair value model. The following weighted-average assumptions were used for grants: dividend yield of 0%; expected volatility of 3.1; expected life of the option term of 6 years and risk-free interest rate of 5.75%, 6.5% and 5.875% for the years 1998, 1997 and 1996, respectively. 10. EMPLOYEE STOCK PURCHASE PLAN In December 1997, shareholders approved the 1997 Employee Stock Purchase Plan. The purpose of the Plan is to secure for the Company and its shareholders the benefits of the incentive inherent in the ownership of Common Stock by present and future employees of the Company. The Plan is intended to comply with the terms of Section 423 of the Internal Revenue Code of 1986, as amended, and Rule 16b-3 of the Securities Exchange Act of 1934. Under the terms of the Plan individual employees may pay up to $10,000 for the purchase of the Company's common shares at 85% of the determined market price. During fiscal year 1998, employees paid almost $7,000 for the purchase of common stock under the Plan. 11. SUPPLEMENTARY INFORMATION Income Statement The following income statement items were charged to costs and expenses: Fiscal Year Ended June 30, 1998 1997 1996 ------------ ----------- --------- Amortization of Intangible Assets $ 753 $ 753 $ 4,804 Maintenance and Repairs 67,634 81,745 72,035 Advertising and Promotion Costs 32,025 44,574 36,302 Royalties 1,501,666 1,129,669 994,760
Allowance for Doubtful Accounts The following table summarizes activity in the allowance for doubtful accounts: Fiscal Year Ended June 30, 1998 1997 1996 ---------- ---------- --------- Beginning Balance $ 77,139 $ 85,284 $ 58,622 Additions 28,590 34,091 38,000 Write-Offs (38,813) (42,236) (11,338) --------- ---------- --------- Balance at End of Year $ 66,916 $ 77,139 $ 85,284 ========= ========== =========
12. COMMITMENTS AND CONTINGENCIES The Company leases office space under a noncancelable operating lease that expires August 31, 2002. The lease requires fixed escalations and payment of property taxes, insurance and maintenance costs. The future minimum rental commitments under this lease are as follows: Fiscal year Minimum Rental ending June 30, Commitments --------------- -------------- 1999 $ 200,511 2000 209,314 2001 215,593 2002 222,061 2003 37,931 ------------- $ 885,410 =============
Rent expense under all operating leases totaled approximately $162,000, $129,000 and $107,000 for the fiscal years ended June 30, 1998, 1997 and 1996, respectively. 13. 401(K) PLAN Effective April 1, 1995, the Company adopted a 401(k) plan available to all full-time employees who meet a minimum service requirement. Employee contributions are voluntary and are determined on an individual basis with a maximum annual amount equal to the maximum amount allowable under federal tax regulations. All participants are fully vested in their contributions. The 401(k) plan provides for discretionary Company contributions. The Company did not make any contributions during the fiscal years ended June 30, 1998, 1997 and 1996. 14. STATEMENTS OF CASH FLOW - SUPPLEMENTAL DISCLOSURE The Company paid cash for interest costs in the amount of approximately $17,000, $45,000 and $52,000 for the years ended June 30, 1998, 1997 and 1996, respectively. Amounts paid in cash for income taxes during the years ended June 30, 1998, 1997 and 1996, were approximately $360, $350 and $500, respectively. During fiscal year 1996, approximately $71,000 in furniture and computer equipment were transferred to the Company from TII and the advances to TII were reduced by a corresponding amount. Additionally, approximately $31,000 in advances to TII were reduced and offset against the AMASYS Note at June 30, 1996, as indemnification of amounts paid on behalf of TII. During fiscal year 1997, the AMASYS Note was reduced by $150,565 pursuant to the MRI Acquisition and related Put Agreement (see Note 4). The AMASYS Note was further reduced by approximately $125,000 for advances made to TII of approximately $106,000 and a prepayment of approximately $19,000 made on behalf of TII and indemnified by AMASYS. EX-24 2 CONSENT OF INDEPENDENT AUDITORS Exhibit 24.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements(Form S-8 No. 333-37057 and No. 333-42395) pertaining to the Comtex Scientific Corporation 1995 Stock Option Plan and the Comtex Scientific Corporation 1997 Employee Stock Purchase Plan of our report dated September 9, 1998, with respect to the consolidated financial statements of Comtex Scientific Corporation included in the Annual Report (Form 10-K) for the year ended June 30, 1998. Ernst & Young LLP Vienna, Virginia September 24, 1998 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCEHDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FISCAL YEAR 1998 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-K. 1 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 170,416 0 948,917 (66,916) 0 1,071,929 1,009,028 (709,931) 1,433,970 1,358,137 0 0 0 78,962 (836,001) 1,433,970 5,401,193 5,401,193 0 5,245,254 0 0 91,215 64,724 360 64,364 0 0 0 64,364 .01 .01
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