-----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, Vte/Dwcr/7O0Tnbg0+JmxWbZZRjEqULuQyBegvg83c4+rPr1skjZYgmTbppETvN7 h99uaxQOCkvherZGh+RYqA== 0000352988-97-000012.txt : 19970930 0000352988-97-000012.hdr.sgml : 19970930 ACCESSION NUMBER: 0000352988-97-000012 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 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: 97687321 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 1997 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, 1997; 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 19, 1997, 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 $790,182. As of September 19, 1997, 7,854,667 shares of the Common Stock of the Registrant were outstanding. PART I Item 1. Business Business Information Services Comtex Scientific Corporation (the "Company" or "Comtex"), a New York corporation, 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 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, 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, AsiaInfo, Agence France Presse, Compass Media, 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 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 entire automated editorial process generally takes three to five minutes from receipt of primary news feeds, conversion to Comtex' value-added format, to transmission to customers. 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 providers of real-time news services. The automated editorial process and conversion increase the Company's efficiencies of operation, relevancy of stories routed to pre-defined product categories and ability to create customized information products for customers. This, in turn, reduces costs and simplifies the customer's development of information products and document retrieval applications. The Company delivers its information products in a variety of ways to suit customer requirements. These delivery methods include: ) broadcast news feed via leased lines, FM transmission or satellite downlink ) 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. The Company believes that its aggregation of multiple sources and variety of product delivery methods, in combination with its automated editorial process and single delivery format, substantially reduce a customer's cost of acquiring and installing electronic information feeds from multiple sources, and increase 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. Current Customers The Company's customers consist of electronic news and information distributors who resell the Company's products to their customers, end-user markets and corporations who in turn use the Company's products for market research and business intelligence. Electronic news and information distributors include business and consumer online services, world wide web sites, financial stock quote vendors, electronic clipping software and service providers and wireless information services. Current distributor customers include, but are not limited to, ADP, AirMedia, Inc., AT&T Easylink Services, Bloomberg L.P., Burrelle's, Bridge Trading Company, CNN Interactive, CompuServe, Inc., Data Broadcasting Corp., Desktop Data, Inc., IBM Corp., ILX, Individual, Inc., OneSource Information Services, Inc., PC Quote, Telerate, Inc., Telescan, Thomson Consumer Products Group, Time Warner's PathFinder, Track Data and WavePhore Newscast. General The Company was incorporated in New York in 1980 and operated under the name Academic Micropublishing Company, Inc. until 1981. 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. Infotech filed for reorganization under Chapter 11 of the Federal Bankruptcy Code on March 5, 1991 in the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court"). The Bankruptcy Court entered an order confirming Infotech's Plan of Reorganization and, pursuant to the final order of the Bankruptcy Court, on January 2, 1997, AMASYS Corporation ("AMASYS") acquired the assets and assumed the remaining liabilities of Infotech. Therefore, AMASYS beneficially owns approximately 60% of the issued and outstanding Common Stock of the Company. C.W. Gilluly, Ed.D., the Chairman of the Board of Directors of the Company, and his spouse ("the Gillulys") were granted an option to purchase 2,540,503 shares of the Company's common stock owned by AMASYS at $.10 per share (See Business - Acquisition and Divestiture of Micro Research Industries, and Note 4 of Notes to Financial Statements). 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 "CustomWiresTM". The Company also supports production of original news products under the brand name "Comtex Newsroom". CustomWiresTM 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 CustomWiresTM topics. The Company offers twenty-seven topics under the CustomWiresTM brand name: Business, Community, Emerging Markets, Energy, Entertainment, Environment, Finance, Foreign Business, Government, Healthcare, High Technology, International, Investor Alert, Market Alert, Public Companies, Sports, Wall Street, World Affairs and an additional nine CustomWiresTM focusing on specific international regions. Comtex Newsroom produces two types of daily news products: Top Headlines and Front Page. Top Headlines is an editorial service that generates a dynamic list of the ten most significant news stories of the day in each of eleven CustomWires . The Top Headlines categories are: Business, Community, Energy, Entertainment, Environment, Finance, Government, Healthcare, High Technology, International and Sports. Front Page is a similar editorial service that generates a list of the top ten news stories of the day and is designed to reflect the front page of a major U.S. national newspaper. The Newsroom products are offered as Headlines Only, Headlines and Summaries or Headlines and Stories, and are updated and released to customers three times a day, Monday through Friday. Utilizing the same automated editorial and conversion process, the Company has broadened its services to include offering outsourcing services to large-scale content distributors and information providers. The Company believes this new offering will attract even more information providers to Comtex and, at the same time, increase the reliance that distributors have on the Company. 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 services. The Company relies entirely 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). 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, 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, 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, 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 $0.10 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 $244,449 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 October, 1996, TII commenced litigation against the U.S. House of Representatives to collect the MRI receivables collateralizing the PrinCap Note. In December 1996, PrinCap commenced legal action against TII, Infotech, AMASYS and the Company to collect such outstanding amounts. In February 1997, TII, Infotech, AMASYS and the Company agreed to a judgment of $271,000 to settle all claims made by PrinCap. In August, 1997, TII settled the MRI amounts due from the House of Representatives and paid the final amounts due to PrinCap, which released the Company from all obligations under the PrinCap Financing Agreement, and TII from its related indemnification of the Company. The Acquisition also provided for the restructuring of the Company's previously matured $1,040,000 promissory notes to Infotech (the "Infotech Notes"), and allowed the Company to either seek indemnification from TII or reduce the amount of the Company's indebtedness under the Infotech Notes for costs or liabilities incurred by the Company in connection with the MRI business. As provided in the Acquisition, AMASYS ratified the restructuring of the Infotech Notes, which reduced the principal thereof by $150,565. The resulting $889,435 principal was rolled into a 10% Senior Subordinated and Secured Note due July 1, 2002 (the "AMASYS Note"), subject to future reduction or increase under certain circumstances. In fiscal year 1996, the Company reduced by 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. 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. 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 that these information services companies are uniquely positioned to propose total solutions to their specific markets and that the Company is well positioned to enhance their ability to do so. Product Development For the years ended June 30, 1997, 1996 and 1995, the Company's product development costs were approximately $270,000, $239,000 and $151,000 respectively. During fiscal year 1997, the Company directed its product development efforts toward continued streamlining of editorial production, acquiring additional news content, creating additional products and expanding product distribution capabilities. 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's more than seventy distributors. Employees At September 22, 1997, the Company had 30 full-time employees. The employees are not members of a union and the Company believes employee relations are generally good. 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 8,400 square feet at an annual rental of approximately $175,000. 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 1997 and 1996 is shown below: 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
Fiscal Year Ended June 30, 1996 High Low
First Quarter (7/1 to 9/30/95) Second Quarter (10/1 to 12/31/95) Third Quarter (1/1 to 3/31/96) Fourth Quarter (4/1 to 6/30/96) 1/8 1/32 The Company has no bid information regarding its Common Stock for the first three quarters of the fiscal year ended June 30, 1996.
The approximate number of holders of record of the Company's Common Stock as of September 19, 1997 was 591. 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) 1997 1996 1995 1994 1993 Information Services Revenue $4,066 $3,219 $2,769 $3,025 $2,796 Data Communications Revenues 526 330 288 290 UPI Assigned Contracts - - - - 49 ------ ------ ------ ------ ------- Total Comtex Net Revenues $4,592 $3,549 $3,057 $3,315 $2,845 Income (Loss) from Operation $228 ($362) ($166) $489 ($48) Net Income (Loss) $113 ($472) ($260) $387 ($142) Net Income (Loss) Per Share $0.01 ($0.06) ($0.03) $0.05 ($0.02) Balance Sheet Data at Year End: Total Assets $1,531 $1,382 $1,851 $1,191 $1,096 Long-term Obligations $788 $1,083 $1,075 $79 $138 Data communications revenues were netted against data communications expenses in fiscal year 1993. 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. (See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations").
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, 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. The increase of approximately $847,000 in information services revenues reflects revenues from new customers, certain price increases and royalties derived from the sale of Comtex' news to information distributors who pay the Company a royalty based upon usage. The increase of approximately $196,000 in data communications revenues reflects the Company's increase in billing rates to fully recover communications costs incurred. 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 expenses. 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 CustomWiresTM 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 the current 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. Comparison of the Fiscal Year ended June 30, 1996 to the Fiscal Year ended June 30, 1995 During the year ended June 30, 1996, the Company's revenues were approximately $3,549,000 or approximately $491,000 (16%) greater than revenues for the year ended June 30, 1995. The increase in information services revenues of approximately $450,000 reflects revenues from new customers, certain price increases and royalties derived from the sale of Comtex' news to information distributors who pay the Company a royalty based upon usage. The increase of approximately $42,000 in data communications revenues reflects the Company's increase in billings to recover communications costs from its customers. Total costs and expenses for the fiscal year ended June 30, 1996 were approximately $3,911,000, compared to approximately $3,224,000 for the fiscal year ended June 30, 1995, an increase of approximately $688,000 (21%). The increase in total costs and expenses is principally due to increased expenses for information services, data communications, product development, sales and general and administrative expenses offset by a decrease in expenses for depreciation and amortization. Information services expenses were approximately $1,658,000 for the fiscal year ended June 30, 1996, compared to approximately $1,313,000 for the fiscal year ended June 30, 1995, an increase of approximately $346,000 (26%). This is primarily due to increases in fixed minimum fees and royalties paid to information providers and to increased personnel costs related to the addition of personnel to manage the Company's relationships with its information providers. Data communications costs were approximately $707,000 for the fiscal year ended June 30, 1996 compared to approximately $520,000 for the fiscal year ended June 30, 1995. This increase of approximately $187,000 (36%) was incurred as the Company upgraded the speed and increased its usage of leased lines and sideband telecommunication capabilities. Data communications costs also increased as a result of a price increase from the Company's primary telecommunications vendor. Product development costs were approximately $239,000 for the fiscal year ended June 30, 1996 compared to $151,000 for the fiscal year ended June 30, 1995, an increase of approximately $88,000 (58%). This increase is primarily due to increased personnel costs that enabled the Company to increase its product management capabilities and to enhance and augment the Company's CustomWiresTM products which were first released in March 1995. Such cost increases were partially offset by reductions in the costs of promotional materials, as the Company benefited from development costs for such materials incurred in 1995, and from reduced travel costs and exhibit fees related to reduced attendance at trade shows as compared with 1995. Sales costs were $347,000 for the fiscal year ended June 30, 1996 compared to approximately $286,000 for the fiscal year ended June 30, 1995, an increase of approximately $61,000 (21%). This increase primarily related to increased compensation and commission costs arising from the addition of more experienced sales personnel to the Company's workforce and from the additional commissions related to the increase in sales during the year. General and administrative costs were approximately $819,000 for the fiscal year ended June 30, 1996 compared to approximately $704,000 for the fiscal year ended June 30, 1995, an increase of approximately $115,000 (16%). This increase relates primarily to increased personnel costs as the Company added more experienced management and accounting personnel during fiscal year 1996. Increased costs for rent, as the Company leased additional space for operating purposes, and increased costs for shareholder services, related to the holding of an annual meeting and the preparation and distribution of associated materials also contributed to the overall increase in general and administrative costs. These increases were partially offset by net decreases in costs associated with outside consultants and professional advisors as the Company's management capabilities expanded. Depreciation and amortization expenses were approximately $141,000 for the fiscal year ended June 30, 1996 compared to $250,000 for the fiscal year ended June 30, 1995, a decrease of approximately $109,000 (44%). During fiscal year 1995, the Company expensed approximately $102,000 of contract rights acquired in fiscal year 1994, which was the remaining value of such rights. No such amortization occurred in fiscal year 1996. The Company incurred an operating loss of approximately $362,000 during the fiscal year ended June 30, 1996 compared with an operating loss of approximately $166,000 for the fiscal year ended June 30, 1995, an increase of approximately $196,000 (118%). The Company recorded a net loss of approximately $471,000 for the fiscal year ended June 30, 1996 compared with a net loss of approximately $260,000 for the fiscal year ended June 30, 1995, an increase of approximately $211,000 (81%). The increase in both operating loss and net loss reflects increased expenses predominately related to information providers, telecommunications costs, product development costs and sales personnel, as discussed above. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES For the fiscal year ended June 30, 1997, the Company reported operating income of approximately $228,000 and net income of approximately $113,000. At June 30, 1997, the Company had negative working capital of approximately $305,000 as compared with negative working capital of approximately $342,000 at June 30, 1996. The Company also reported a net stockholders' deficit of approximately $828,000 at June 30, 1997 compared to a net stockholders' deficit of approximately $1,092,000 at June 30, 1996. The decrease of approximately $264,000 in stockholders' deficit was due to the retention of net income and decreases in notes payable to the Company's majority stockholder as discussed below. In October, 1996, AMASYS, the Company's majority stockholder (approximately 60%), ratified the reduction of $150,565 of the principal of the Company's restructured $1,040,000 promissory notes due AMASYS. The remaining principal was rolled into a 10% Senior Subordinated and Secured Note due July 1, 2002 (the "Amended AMASYS Note"). The Amended AMASYS Note was further reduced in June 1997 in the amount of $125,481, in final resolution of the amounts not recovered from TII through the MRI receivables. In October, 1996, TII commenced litigation to collect the MRI receivables collateralizing the PrinCap Note. In December 1996, PrinCap commenced legal action against TII, Infotech, AMASYS and the Company to collect such outstanding amounts. In August, 1997, TII settled the amounts due from the House of Representatives and paid the final amounts due under the PrinCap Financing Agreement, releasing Comtex from its liability on the Note. The Company continues to invest significantly in upgrading the experience level of its sales and senior management 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 contributing to improving the Company's ability to sell and deliver quality products and services. During the fiscal year ended June 30, 1997, the Company's operations generated approximately $35,000 in cash. 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-K 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 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 Information relating to the resignation of the Company's former accountants, Coopers & Lybrand L.L.P., was previously reported in the Company's Form 8-K filed on July 24, 1996. 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 Reports of Independent Accountants F-1 Balance Sheets as of June 30, 1997 and 1996 F-3 Statements of Operations for the fiscal years ended June 30, 1997, 1996, and 1995 F-4 Statements of Stockholders' Deficit for the fiscal years ended June 30, 1997, 1996 and 1995 F-5 Statements of Cash Flows for the fiscal years ended June 30, 1997, 1996 and 1995 F-6 Notes to Financial Statements F-7 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 Amended and Restated By-Laws of the Company. 3.3 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). 10.1 Asset Purchase Agreement between Telecommunications Industries, 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). 10.2 Put Agreement between Telecommunications Industries, 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 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). 10.5 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). 10.6 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). 10.7 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). 10.8 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). 10.9 Comtex Scientific Corporation 1995 Stock Option Plan (incorporated by reference to the Company's Proxy Statement dated November 9, 1995). 10.10 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). 10.11 Demand Note and Security Agreement between C.W. Gilluly and the Company dated April 10, 1997. 10.13 Exercise of Put Agreement between Telecommunications Industries, Inc. and the Company, dated March 25, 1996 (incorporated by reference to Company's Form 10-K dated June 30, 1996). 10.14 Employment Agreement with Charles W. Terry dated July 29, 1994 (incorporated by reference to Company's Form 10-K dated June 30, 1996). 10.15 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). 10.16 Employment Agreement with Donald E. Ziegler dated December 20, 1996 (incorporated by reference to Company's Form 10-Q dated December 31, 1996). 10.17 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). 11.00 Computation of Earnings Per Share. 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 29, 1997 COMTEX SCIENTIFIC CORPORATION By: /s/ C.W. Gilluly By: /s/ Donald E. Ziegler C.W. Gilluly Donald E. Ziegler Chairman of the Board Chief Financial Officer (Principal Executive Officer) (Principal Financial and 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/ Erik Hendricks Director September 29, 1997 Erik Hendricks /s/ Robert A. Nigro Director September 29, 1997 Robert A. Nigro /s/ Charles W. Terry Director and September 29, 1997 Charles W. Terry President 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, 1997 and 1996 and the related statements of operations, stockholders' deficit, and cash flows for the years then ended. 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, 1997 and 1996, and the results of its operations and its cash flows for the years then ended, 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 incurred recurring operating losses and has a working capital deficiency. 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 10, 1997 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Comtex Scientific Corporation We have audited the accompanying statements of operations, stockholders' deficit, and cash flows of Comtex Scientific Corporation for the fiscal year ended June 30, 1995. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Comtex Scientific Corporation for the fiscal year ended June 30, 1995 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has a net capital deficiency and has suffered recurring losses resulting in an accumulated deficit of $10,528,828 as of June 30, 1995. These facts 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 that might result from the outcome of these uncertainties. /s/Coopers & Lybrand LLP Washington, D.C. September 21, 1997 COMTEX SCIENTIFIC CORPORATION BALANCE SHEETS AT JUNE 30, 1997 AND 1996
June 30, June 30, ASSETS 1997 1996 ------------- ------------ CURRENT ASSETS Cash $ 17,927 $ 57,644 Accounts Receivable, Net of Allowance of $77,139 and $85,284 at June 30, 1997 and 1996, respectively (Note9) 935,619 582,318 Advances to TII, a related party (Note 4) 266,000 360,573 Prepaid Expenses and Other Current Assets 47,094 49,133 ------------- ------------ TOTAL CURRENT ASSETS 1,266,640 1,049,668 PROPERTY AND EQUIPMENT, NET (NOTES 2,5) 199,982 267,028 DEPOSITS AND OTHER ASSETS 64,561 65,315 ------------- ------------- TOTAL ASSETS $ 1,531,183 $ 1,382,011 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts Payable $ 529,612 $ 502,962 Accrued Expenses 459,034 238,451 Amounts due to Related Parties, Net (Note 4) 294,113 231,714 Notes Payable (Note 6) 288,792 418,178 ------------- ------------- TOTAL CURRENT LIABILITIES 1,571,551 1,391,305 LONG-TERM LIABILITIES: Long-Term Notes Payable - Affiliate (Note 4) 732,872 1,008,831 Other Long-Term Notes Payable (Note 6) 55,100 74,050 ------------- ------------- TOTAL LONG-TERM LIABILITIES 787,972 1,082,881 ------------- ------------- TOTAL LIABILITIES 2,359,523 2,474,186 COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' DEFICIT Common Stock, $0.01 Par Value - Shares Authorized: 18,000,000;Shares issued and outstanding: 7,854,667 78,547 78,547 Additional Paid-In Capital 9,980,575 9,830,010 Accumulated Deficit (10,887,462) (11,000,732) -------------- ------------- TOTAL STOCKHOLDERS' DEFICIT (828,340) (1,092,175) TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,531,183 $ 1,382,011 ============== =============
The accompanying "Notes to Financial Statements" are an integral part of these financial statements F-3 COMTEX SCIENTIFIC CORPORATION STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1997, 1996, AND 1995 Fiscal Year Ended June 30,
1997 1996 1995 ------------- ------------ -------------- REVENUES Information Services Revenues $ 4,066,092 $ 3,219,028 $ 2,769,329 Data Communications Revenues 525,645 330,007 288,309 ------------- ------------- -------------- Total Revenues 4,591,737 3,549,035 3,057,638 COSTS AND EXPENSES Costs of Information Services 1,845,600 1,658,335 1,312,727 Costs of Data Communications 586,857 707,232 519,950 Product Development 270,420 238,954 150,906 Sales and Marketing 571,240 346,986 286,256 General and Administrative 984,845 818,714 703,973 Depreciation and Amortization 105,102 141,219 249,732 ------------- ------------- -------------- Total Costs and Expenses 4,364,064 3,911,440 3,223,544 INCOME (LOSS) FROM OPERATIONS 227,673 (362,405) (165,906) OTHER INCOME (EXPENSE) Interest Expense (114,114) (107,931) (102,692) Interest Income/Other 57 (1,079) 8,890 ------------- ------------- -------------- Other Expense, Net (114,057) (109,010) (93,802) ------------- ------------- -------------- INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES 113,616 (471,415) (259,708) INCOME TAXES 346 489 294 ------------- ------------- -------------- NET INCOME (LOSS) $ 113,270 $ (471,904) $ (260,002) ============= ============= ============== NET INCOME (LOSS) PER COMMON SHARE $ 0.01 $ (0.06) $ (0.03) ============= ============= ============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON STOCK EQUIVALENTS OUTSTANDING 7,929,080 7,854,667 7,854,667 ============= ============= ==============
The accompanying "Notes to Financial Statements" are an integral part of these financial statements F-4 COMTEX SCIENTIFIC CORPORATION STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE FISCAL YEARS ENDED JUNE 30 ,1997, 1996, AND 1995 Common Shares Outstanding ---------------------------------
Additional Total Number of Par Paid In Accumulated Stockholders' Shares Value Capital Deficit Deficit ----------- ---------- ------------ -------------- -------------- Balance at June 30, 1994 7,854,667 78,547 9,830,010 (10,268,826) (360,269) Net Loss - - - (260,002) (260,002) ----------- ---------- ------------ -------------- -------------- Balance at June 30, 1995 7,854,667 78,547 9,830,010 (10,528,828) (620,271) Net Loss - - - (471,904) (471,904) ----------- ---------- ------------ -------------- -------------- Balance at June 30, 1996 7,854,667 78,547 9,830,010 (11,000,732) (1,092,175) Reduction in Note to Share - - 150,565 - 150,565 Net Income - - - 113,270 113,270 ----------- ---------- ------------ -------------- -------------- Balance at June 30, 1997 7,854,667 $78,547 $9,980,575 $(10,887,462) $ (828,340) =========== ========== ============= ============== ==============
The accompanying "Notes to Financial Statements" are an integral part of these financial statements F-5 COMTEX SCIENTIFIC CORPORATION STATEMENTS OF CASH FLOW FOR THE FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Fiscal Year Ended June 30, ----------------------------------------- 1997 1996 1995 ------------- ----------- ----------- Cash Flows from Operating Activities: Net Income (Loss) $ 113,270 $ (471,904) $(260,002) Adjustments to reconcile net income (loss) to net cash provided by (used in ) operating activities: Depreciation and Amortization Expense 105,102 141,219 249,730 Bad Debt Expense 34,091 38,000 31,996 Loss on Sale of Fixed Assets 53 1,346 - Changes in Operating Assets and Liabilities: Accounts Receivable (402,393) (188,886) (91,911) Prepaid Expenses and Other Current Assets (17,165) (36,312) 15,886 Deposits and other assets - (51,232) (10,823) Accounts Payable 19,381 315,691 197,882 Accrued Expenses 220,584 59,797 (37,019) Amounts due to Related Parties 42,399 77,286 22,904 ------------- ----------- ----------- Net Cash provided by (used in) Operating Activities 115,322 (114,995) 118,643 Cash Flows from Investing Activities: Purchases of Property and Equipment (39,743) (40,792) (124,844) Proceeds from Sale of Fixed Assets 2,386 8,185 - Advances to TII (28,433) (2,025,202) (1,776,086) Repayments of Advances 42,738 2,665,245 704,694 ------------- ----------- ----------- Net Cash (used in) provided by Investing Activities (23,052) 607,436 (1,196,236) Cash Flows from Financing Activities: Payments on Notes Payable (122,626) (23,815) (55,180) Proceeds from Notes Payable to Related Parties 20,000 96,253 - Proceeds from PrinCap Financing Agreement - 1,936,758 1,466,558 Repayments against PrinCap Financing Agreement (29,361) (2,459,156) (674,721) ------------- ----------- ----------- Net Cash (used in) provided by Financing Activities (131,987) (449,960) 736,657 ------------- ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents (39,717) 42,481 (340,936) Cash and Cash Equivalents Balance at Beginning of Period 57,644 15,163 356,099 ------------- ----------- ----------- Cash and Cash Equivalents Balance at End of Period $17,927 $57,644 $15,163 ============= =========== ===========
The accompanying "Notes to Financial Statements" are an integral part of these financial statements F-6 COMTEX SCIENTIFIC CORPORATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 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 contracts typically provide for both minimum fees and for royalties based upon expected and achieved volumes of usage. Fees and royalties from information distributors comprise the majority of the Company's revenues. Fees and royalties due to information providers, along with telecommunications costs and employee payroll costs, comprise the majority of the Company's costs and expenses. AMASYS Corporation,("AMASYS") (the successor corporation to Infotechnology, Inc., "Infotech"), a Delaware corporation, legally or beneficially controls 4,693,940 (approximately 60%) 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 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. 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. 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. Computation of Earnings per Common Share Net income per share of common stock is computed based upon the weighted average number of common and common stock equivalent shares outstanding. Common stock equivalent shares are not included in the net loss per share calculations since the effect of their inclusion would be antidilutive. Common stock equivalent shares result from the assumed exercise of outstanding stock options. 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 is 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 provisions 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 February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact of Statement No. 128 on the calculation of primary earnings per share and fully diluted earnings per share for the periods presented is not expected to be material. Reclassifications Certain fiscal year 1996 and 1995 amounts have been reclassified to conform to the fiscal year 1997 presentation. 3. MANAGEMENT PLANS FOR OPERATING UNCERTAINTIES The Company had negative working capital of $304,911 and a net shareholders' deficit of $828,340 at June 30, 1997. 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 and senior management staff during fiscal year 1997; 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. 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 paydown its current and long-term debt obligations. No assurance may be given that the Company will be able to maintain the revenue base or ongoing profitable operations that may be necessary to achieve its liquidity needs. If the Company is not successful in its efforts, it may undertake other actions as may be appropriate to preserve asset values. 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 60%), is also the majority stockholder (approximately 82%) of Telecommunications Industries Inc. ("TII"). Dr. Gilluly 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 fiscal years 1997, 1996 and 1995, 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 and amounted to approximately $34,000, $15,000 and $6,000 for the fiscal years ended June 30, 1997, 1996 and 1995, 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. Total service charges to Hadron during the fiscal years ended June 30, 1997, 1996 and 1995, amounted to approximately $24,000, $4,000 and $300, respectively. Administrative Services Provided by/to AMASYS Corp. The Company participated in certain group insurance plans coordinated by Infotech for the benefit of employees through fiscal year 1996. Costs allocated to the Company in connection therewith for the fiscal years 1996 and 1995 amounted to approximately $6,000 and $12,000, respectively. AMASYS also shares certain general and administrative expenses for which the Company billed AMASYS approximately $9,000, $400 and $350 during fiscal years ended June 30, 1997, 1996 and 1995, respectively. 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 and $270,000 for facility rental, computer equipment, staff and office expenses during the years ended June 30, 1996 and 1995, respectively. In April 1996, the Company terminated its sublease with TII and signed a lease directly with the owner of the building for essentially the identical space it had been renting from TII. To meet the requirement for the Company to deliver a six-month facility deposit and a build-out deposit under the new lease, and to satisfy other MRI liabilities (for which the Company is indemnified - see Acquisition and Divestiture of Micro Research Industries, below), the Company executed a demand note in the amount of $147,422 payable to Dr. Gilluly (the "Gilluly Note"). The Gilluly Note is due on demand but in no event later than April 11, 1998, and is collateralized by the Company's accounts receivable, now existing and in the future arising, and all proceeds of those accounts. The Gilluly Note bears interest on the principal amount outstanding at a rate of eleven and one half percent (11.5%) per annum and interest is payable monthly. Approximately $14,500 of interest expense was incurred on the Gilluly Note during the year ended June 30, 1997. 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 TII representing substantially all the assets of TII's sole operating division, Micro Research Industries ("MRI") (the "Acquisition"). MRI provided sales, leasing and maintenance support of computer hardware and software primarily to the U.S. House of Representatives. At the time of the Acquisition, Infotech was a majority stockholder of both the Company and of TII, and C.W. Gilluly served as the Chairman and Chief Executive Officer of the Company, Infotech and TII. The terms of the Acquisition, through a related Put Agreement (the "Put"), provided that the Company could, upon the failure of certain conditions, require TII to repurchase all or any portion of the assets acquired and to assume the liabilities related to MRI. On March 25, 1996, the Company exercised the Put and transferred to TII all the assets and liabilities associated with MRI. In connection with the Acquisition, the Company entered into a $1 million secured credit facility with Princeton Capital Finance Company, LLP ("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 $0.10 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 PrinCap claimed represented an event of default under the PrinCap Financing Agreement. In July, 1996, the Company and PrinCap consolidated the $244,449 outstanding under the PrinCap Financing Agreement into a single Note collateralized by MRI receivables from the U.S. House of Representatives which had been pledged to PrinCap. In October, 1996, TII commenced litigation to collect the MRI receivables collateralizing the PrinCap Note. In December 1996, PrinCap commenced legal action against TII, Infotech, AMASYS and the Company to collect such outstanding amounts. In February 1997, TII, Infotech, AMASYS and the Company agreed to a judgment of $271,000 to settle all claims made by PrinCap. In August, 1997, TII settled the MRI amounts due from the House of Representatives and paid the final amounts due to PrinCap, which released the Company from all obligations under the PrinCap Financing Agreement, and TII from its related indemnification of the Company. The Acquisition also provided for the restructuring of the Company's previously matured $1,040,000 promissory notes to Infotech (the "Infotech Notes"), and allowed the Company to either seek indemnification from TII or reduce the amount of the Company's indebtedness under the Infotech Notes for costs or liabilities incurred by the Company in connection with the MRI business. As provided in the Acquisition, AMASYS ratified the restructuring of the Infotech Notes, which reduced the principal thereof by $150,565. The resulting $889,435 principal was rolled into a 10% Senior Subordinated and Secured Note due July 1, 2002 (the "AMASYS Note"), subject to future reduction or increase under certain circumstances. In fiscal year 1996, the Company reduced by $31,000 the amount it owed under the AMASYS Note for rent paid to TII's landlord. At June 30, 1997, the AMASYS Note was further reduced by $125,481 in final resolution of the amounts due from TII not recovered through collection of the MRI receivables. The AMASYS Note is secured by a continuing interest in all receivables, products and proceeds thereof, all purchase orders and all patents then or in the future held by the Company, and is subordinated to all Senior Indebtedness, including amounts due under the PrinCap Financing Agreement. Amounts due to related parties consisted of the following at June 30: 1997 1996 --------- --------- Note payable to C.W. Gilluly, Ed.D. including accrued interest of $1,221 and $3,398 at June 30, 1997 and 1996, respectively $ 148,643 $ 130,820 Interest due to AMASYS under Amended AMASYS Note 148,157 77,223 Amounts due to/(from) Hadron, Inc. for corporate and shareholder services (2,554) 14,182 Due to/(from) AMASYS for administrative services (133) 9,489 ---------- ---------- Due to Related Parties $ 294,113 $ 231,714 ========== ==========
5. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at June 30: 1997 1996 ----------- ----------- Computer Equipment $ 632,560 $ 605,855 Furniture and Fixtures 63,408 58,571 Software 74,524 72,851 Leasehold Improvements 29,405 26,752 Other Equipment 6,000 6,000 ----------- ----------- 805,897 770,029 Less Accumulated Depreciation (605,915) (503,001) ----------- ----------- Net $ 199,982 $ 267,028 =========== ===========
Depreciation expense for the fiscal years ended June 30, 1997, 1996 and 1995 was $104,350, $136,415 and $130,455, respectively. 6. NOTES PAYABLE Notes payable consisted of the following at June 30: 1997 1996 ----------- ------------ Note Payable to Princeton Capital Finance Company ("PrinCap")(see Note 4) $ 266,000 $ 269,439 Notes Payable related to Acquisition of International Intelligence Report, Inc. 11,430 34,930 Notes Payable to vendors 66,462 187,859 ----------- ------------ Subtotal 343,892 492,228 Less Current Portion 288,792 418,178 ----------- ------------ Total Long-Term Notes Payable $ 55,100 $ 74,050 =========== ============
Notes payable related to Acquisition of International Intelligence Report, Inc. On December 31, 1993, the Company assumed certain debt obligations related to the acquisition of assets and certain liabilities of International Intelligence Report, Inc. At June 30, 1997, $11,430 was outstanding relating to these obligations. Of this amount, $5,100 is classified as long-term and will be paid during fiscal year 1999. These obligations are not collateralized and are not interest bearing. Notes payable to vendors On July 1, 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. At June 30, 1997, the balance of the note was $16,462. The note bears interest at 10%, with principal and interest payments in the aggregate amount of $2,824 due monthly through December 1997. On June 17, 1997, the Company signed a note with a law firm converting accounts payable to the firm in the amount of $50,000 to a note payable 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. 7. 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: 1997 1996 1995 ------ ------ ------- 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, 1997 and 1996, consist primarily of temporary differences from net operating loss and business tax credit carryforwards of approximately $1,800,000 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 $4.2 million as of June 30, 1997. These NOL and ITC carryforwards expire beginning in the year 1998. 8. 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 an aggregate of up to 1,200,000 shares by key employees, consultants and directors of the Company. 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, 1997, under the 1995 Plan is as follows: Incentive Non-Qualified Per Share Stock Options Stock Options Option Price ------------- ------------- ------------ Outstanding at June 30, 1995 - - $ - Granted 844,733 110,000 .10 Expired (152,000) - .10 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 ============= ============= ============ Exercisable at June 30, 1997 643,141 114,998
The weighted average exercise price of options outstanding at June 30, 1997, was $0.11. The weighted average remaining contractual life of options outstanding at June 30, 1997 was 9.22 years. The weighted average fair value of options granted during 1997 and 1996 was $.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 1997 and 1996 would have been approximately $80,000 and $(493,000), or $.01 and $(.06) per share, respectively. The effect of applying SFAS No. 123 on 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 1.11; expected life of the option term of 6 years and risk-free interest rate of 6.5% and 5.875% for the years 1997 and 1996, respectively. 9. SUPPLEMENTARY INFORMATION Income Statement The following income statement items were charged to costs and expenses: Fiscal Year Ended June 30,
1997 1996 1995 -------- -------- -------- Amortization of Intangible Assets $753 $4,804 $119,275 Maintenance and Repairs $81,745 $72,035 $54,685 Advertising and Promotion Costs $44,574 $36,302 $71,455 Royalties $181,659 $144,282 $102,319
Allowance for Doubtful Accounts The following table summarizes activity in the allowance for doubtful accounts: Fiscal Year Ended June 30,
1997 1996 1995 -------- --------- --------- Beginning Balance $ 85,284 $ 58,622 $ 88,021 Additions 34,091 38,000 31,996 Write-Offs (42,236) (11,338) (61,395) --------- ---------- ---------- Balance at End of Year $ 77,139 $ 85,284 $ 58,622 ========= ========== ==========
10. 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 - ------------------ ----------------- 1998 $ 176,079 1999 181,361 2000 186,802 2001 192,406 2002 198,178 2003 33,767 ---------------- $ 968,593 ================ Rent expense under all operating leases totaled $129,000, $107,000 and $87,000 for the fiscal years ended June 30, 1997, 1996 and 1995, respectively. 11. 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, 1997, 1996 and 1995. 12. STATEMENTS OF CASH FLOW - SUPPLEMENTAL DISCLOSURE The Company paid cash for interest in the amount of approximately $45,000, $52,000 and $78,000 for the years ended June 30, 1997, 1996 and 1995, respectively. Amounts paid in cash for income taxes during the years ended June 30, 1997, 1996 and 1995, were approximately $350, $500 and $1,100, 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. 13. SUBSEQUENT EVENTS As discussed in Note 4, in August, 1997, TII settled the amounts due from the U.S. House of Representatives and paid the final amounts due under the PrinCap Financing Agreement, which released the Company from its obligation to PrinCap. In September, 1997, the Company obtained a $50,000 line of credit and a $140,000 three year term loan from Century National Bank with principal repayments of $40,000, $40,000 and $60,000 due September 1998, September 1999 and September 2000, respectively. The facilities, guaranteed by C.W. Gilluly, bear interest at a rate of Prime plus two percent annually. The proceeds of the term loan were utilized to repay the Note to C.W. Gilluly. EX-3.2 2 AMENDED AND RESTATED BYLAWS AMENDED AND RESTATED BY - LAWS of COMTEX SCIENTIFIC CORPORATION ARTICLE I Meetings of Shareholders Section 1. Annual Meetings. An annual meeting of shareholders, for the purpose of electing directors and of transacting such other business as may come before it, shall be held annually at the office of the Corporation or at such other place, either within or without the State of New York, as may be fixed by the Board of Directors and specified in the notice of meeting. The annual meeting shall be held at such dated as the Board of Directors may determine. Section 2. Special Meetings. A special meeting of shareholders may be called at any time by the President or by the Board of Directors. Section 3. Place of Meeting. All meetings of the shareholders of the Corporation for the election of directors shall be held at the offices of the Corporation, or at such other location within or without the State of New York as the Board of Directors may determine. All other meetings of the shareholders shall be held at such places, within or without the State of New York, as may from time to time be fixed by the Board of Directors or as shall be specified or fixed in the respective notices or waivers of notice thereof. Section 4. Notice of Meetings. Except as otherwise required by statute, notice of each meeting of shareholders, whether annual or special, shall be given, at least ten days before the day on which the meeting is to be held, be given to each shareholder of record of the Corporation entitled to vote at the meeting (as such shareholders of record are determined by the Board of Directors of the Corporation pursuant to the provisions of Article VI, Section 5, hereof) by delivering a written or printed notice thereof, which notice shall state the time and place thereof, to him personally or at his post office address last known to the officers of the Corporation. Except as otherwise required by statute, no publication of any notice of a meeting of shareholders shall be required. Every notice of a special meeting of shareholders, besides stating the time and place of the meeting, shall state briefly the purposes thereof, and no business other than that specified in such notice shall be transacted at such meeting, except with the unanimous consent in writing of the holders of all the shares of the Corporation. Nevertheless, notice of any meeting of shareholders shall not be required to be given to any shareholder who shall attend such meeting in person or by proxy; and if any shareholder shall, in person or by attorney duly authorized, waive notice of any meeting, whether before or after such meeting is held, notice thereof need not be given to him. Except as otherwise required by statute, no notice of any adjourned meeting of shareholders of the Corporation shall be required to be given. Section 5. Quorum. At any meeting of shareholders of the Corporation, a majority in interest of the shareholders of the Corporation entitled to vote at such meeting shall be present in person or by proxy to constitute a quorum for the transaction of business. In the absence of a quorum, a majority in interest of those present in person or by proxy may adjourn the meeting from time to time, without notice other than by announcement at the meeting, until holders of the amount of shares requisite to constitute a quorum shall be present in person or represented by proxy. At any such adjourned meeting at which a quorum may be present any business may be transacted which might have been transacted at the meeting as originally called. Section 6. Inspectors of Election. Two Inspectors of election shall be chosen by the person presiding at each meeting of the shareholders of the Corporation. The Inspectors shall receive and take in charge all proxies and ballots, and shall decide all questions touching upon the qualifications of voters, the validity of proxies, and the acceptance and rejection of votes. In case of a tie vote by the Inspectors on any questions, the person presiding at such meeting shall decide. Section 7. Organization. At every meeting of shareholders, the President, or in the absence of the President, a chairman chosen by a majority in interest of the shareholders of the Corporation present in person or by proxy, shall act as chairman. The Secretary of the Corporation, or in his absence, an Assistant Secretary, shall act as secretary at all meetings of the shareholders. In the absence from any such meeting of both the Secretary and the Assistant Secretaries, the chairman may appoint any person to act as secretary of the meeting. Such person shall be sworn to the faithful discharge of his duties as such secretary of the meeting before entering thereon. Section 8. Voting. At each meeting of the shareholders, each holder of shares of the Corporation entitled to vote at such meeting shall be entitled to vote for each share held by him and registered in his name on the books of the Corporation on the record date set by the Board of Directors for such meeting. Shares of its own belonging to the Corporation shall not be voted upon directly or indirectly. Persons holding shares in a fiduciary capacity shall be entitled to vote the shares so held and persons whose shares are pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the Corporation he shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent such shares and vote thereon. Any vote may be made in person or by proxy appointed by an instrument in writing signed by a shareholder or by his attorney thereunto authorized and delivered to the secretary of the meeting; provided, however, that no proxy shall be voted on after eleven months from its date unless such proxy provides for a longer period. Except as otherwise required by statute or the Certificate of Incorporation or the By-laws of the Corporation, at all meetings of the shareholders, all matters shall be decided by the vote of a majority in interest of the shareholders of the Corporation entitled to vote thereon, present in person or by proxy, a quorum being present. Section 9. List of Shareholders. It shall be the duty of the Secretary or other officer of the Corporation who shall have charge of the share ledger to prepare and make, at least ten days before every meeting for the election of directors, a complete list of shareholders of the Corporation as of the record date for such meeting, arranged in alphabetical order. Such list shall be produced and kept at the time and place of the election during the whole time thereof, and subject to the inspection of any shareholder who may be present. The original or duplicate share ledger shall be the only evidence as to who are the shareholders entitled to examine such list, or the books of the Corporation, or to vote in person or by proxy, at such meeting. ARTICLE II Board of Directors Section 1. General Powers and Compensation. The property, affairs and business of the Corporation shall be managed by a Board of Directors, whose members shall be reimbursed for traveling expenses incurred in attending any meeting of the Board of Directors or of any Committee thereof and each member, except salaried officers of the Corporation, shall be paid such fee for each meeting of the Board of Directors or of any Committee thereof he attends as may be fixed by the Board of Directors from time to time. Section 2. Number, Term of Office and Qualifications. The number of directors shall be fixed by the Board of Directors but shall not be less than three. The Board of Directors, by a majority of the entire Board, may from time to time increase or decrease the number of directors, but not to less than three. Directors need not be shareholders of the Corporation. The directors shall be elected annually in the manner provided in these By-Laws, and each director shall continue in office until his successor shall have been elected and qualified, or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. In case of any increase in the number of directors, the additional directors may be elected by the Board of Directors, at any regular meeting or at a special meeting of such Board called for such purpose, or by the shareholders at the first annual meeting held after such increase or at a special meeting of shareholders called for such purpose. Section 3. Election. At each meeting of the shareholders for the election of directors at which a quorum is present, directors shall be elected by a plurality of the votes cast at such meeting by the holders of shares entitled to vote in the election. Such election shall be by ballot. Section 4. Organization. At every meeting of the Board of Directors, the Chairman of the Board of Directors, or in his absence, a chairman chosen by a majority of the directors present, shall preside. The Secretary of the Corporation shall act as secretary of the Board of Directors. In case the Secretary shall be absent from any meeting of the Board, an Assistant Secretary shall perform the duties of the Secretary at such meeting; and in the absence from any such meeting of both the Secretary and the Assistant Secretaries the chairman may appoint any person to act as secretary of the meeting, Such person shall be sworn to the faithful discharge of his duties as such secretary of the meeting before entering thereupon. Section 5. Resignation. Any director of the Corporation may resign at any time by giving written notice to the Chairman of the Board of Directors or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 6. Vacancies. Any vacancy in the Board of Directors because of death, resignation, disqualification or any other cause may be filled by vote of the remaining Board of Directors, even though less than a quorum, at any regular or special meeting thereof, and the director or directors so elected shall hold office until the next annual election and until his of their successor or successors shall be duly elected and qualified. Any such vacancy resulting from any cause whatsoever not previously filled as aforesaid may be filled by the shareholders at their first annual meeting held after such vacancy shall occur or at a special meeting thereof held for such purpose or at the special meeting held for the purpose of voting to remove such director as provided in Section 11 of this Article II. Section 7. Place of Meeting. The Board of Directors may hold its meetings, have one or more offices, and keep the books and records of the Corporation, at such place or places within or without the State of New York, as the Board may from time to time determine. Section 8. Regular Meetings. Regular meetings of the Board of Directors shall be held immediately following each annual meeting of shareholders called for the purpose of electing directors and every second month thereafter on a date to be fixed by the Board at the preceding regular meeting., If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be held at the same hour on the next succeeding business day not a legal holiday at such place. Notice of regular meetings need not be given. Section 9. Special Meetings. Special meetings of the Board of Directors shall be held whenever called by the President or a majority of the Board of Directors, Notice of each such meeting shall be mailed to each director, addressed to him at his residence or usual place of business not later than the second day before the day on which the meeting is to be held, or shall be sent to him at such place by telegraph, or be delivered personally or by telephone, not later than the day before the day on which the meeting is to be held. Notice of any meeting of the Board or of any Committee need not be given to any director, however, if waived by him in writing, whether before or after such meeting is held, or if he shall be present at the meeting; and any meeting of the Board of Directors or of any Committee shall be a legal meeting without any notice thereof having been given, if all the members shall be present thereat. Section 10. Quorum and Manner of Acting. A majority of the directors in office at the time of any regular or special meeting of the Board of Directors shall be present in person or by telephone conference call at such meeting in order to constitute a quorum for the transaction of business at such meeting, and, except as otherwise required by statute or the Certificate of Incorporation or the By-Laws of the Corporation, the act of a majority of the directors present at any such meeting at which a quorum is present shall be the act of the Board of Directors. At all meetings of the Board of Directors or any Committee thereof, each member of the Board or Committee shall have one vote. In the absence of a quorum, a majority of the directors present may adjourn the meeting from time to time until a quorum be had. Notice of any adjourned meeting need not be given. Any one or more members of the Board or any Committee thereof may participate in a meeting of the Board or Committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Any action required or permitted to be taken by the Board or any Committee thereof may be taken without a meeting if all members of the Board or the Committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the Board or Committee shall be filed with the minutes of the proceedings of the Board or Committee. Section 11. Removal of Directors. Any director may be removed for cause at any time by the Board of Directors at any regular or special meeting by a majority vote of the entire Board. Any director may be removed with or without cause by the affirmative vote of a majority in interest of the holders of record of the shares of the Corporation entitled to vote thereon at a special meeting of the shareholders called for such purpose; and the vacancy in the Board caused by any such removal may be filled by vote of the shareholders at such meeting or by the Board. Section 12. Committees. The Board of Directors may designate from among the directors an Executive Committee and other Committees, each consisting of three or more directors, to serve at the pleasure of the Board of Directors. Each such Committee shall have such of the authority of the Board of Directors as the Board of Directors shall determine, except that no such Committee shall have authority (a) to submit to the shareholders any action that needs shareholders' authorization pursuant to law, (b) to fill vacancies in the Board of Directors or in any Committee, (c) to fix the compensation of the directors for serving on the Board of Directors or on any Committee, (d) to amend or repeal these By-Laws or to adopt new By-Laws or (e) to amend or repeal any resolution of the Board of Directors which by its terms shall not be so amendable or repealable. The Board of Directors may designate one or more directors, as alternate members of any such Committee, who may replace any absent member or members at any meeting of such Committee. ARTICLE III Officers Section 1. Number. The officers of the Corporation shall be a Chairman of the Board of Directors, a President, one or more Vice Presidents, a Treasurer and a Secretary, and such officers as may be appointed in accordance with the provisions of Section 3 of this Article. One person may hold the offices and perform the duties of any of said officers, including those of President, provided, however, that no offices shall be held by the same person in conflict with the laws of the State of New York. Section 2. Election, Term of Office and Qualifications. The officers of the Corporation shall be appointed annually by the Board of Directors. Each officer, except such officers as may be appointed in accordance with the provisions of Section 3 of this Article, shall hold his office until his successor shall have been duly chosen and qualified, or until his death or until he shall resign, or shall have been removed in the manner hereinafter provided. The Chairman of the Board of Directors shall be and remain a director of the Corporation. The other officers of the Corporation need not be directors of the Corporation. Section 3. Subordinate Officers. The Board of Directors may appoint such other officers as may be deemed necessary, including one or more additional Vice Presidents, one or more Assistant Treasurers, and one or more Assistant Secretaries, each of whom shall hold office for such period, have such authority and perform such duties as are provided in these By- Laws or as the Board of Directors may from time to time determine. The Board of Directors may delegate to any officer or Committee the power to appoint any such subordinate officers. Section 4. Removal. Any officer may be removed, either with or without cause, by the vote of a majority of the entire Board of Directors at a special meeting of the Board of Directors called for such purpose, or, except in the case of any officer elected or appointed by the Board of Directors, by any Committee or superior officer upon whom such power of removal may be conferred by the Board of Directors. Section 5. Resignation. Any officer may resign at any time by giving written notice to the Board of Directors, or to the Chairman of the Board of Directors, the President or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 6. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause, shall be filled for the unexpired portion of the term in the manner prescribed in these By-Laws for regular appointments or elections to such office. Section 7. Chairman of the Board of Directors. The Chairman of the Board of Directors shall preside at meetings of the Board of Directors and shall do and perform such other duties as may from time to time be assigned to him by the Board of Directors. Section 8. The President. The President shall preside at all meetings of the shareholders. He shall be the chief executive and administrative officer and chief operating officer of the Corporation and shall have general management and direction of the business of the Corporation. He may sign, with the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, certificates of shares of the Corporation, and shall do and perform such other duties as may from time to time be assigned to him by the Board of Directors. Section 9. Vice Presidents. The Vice Presidents may also sign with the Treasurer or an Assistant Treasurer, the Secretary or an Assistant Secretary, any or all certificates of shares of the Corporation, and shall perform such other duties as from time to time may be assigned to them by the Board of Directors. Section 10. Secretary. The Secretary shall record all the proceedings of the meetings of the Corporation and of the Board of Directors in books provided for that purpose, see that all notices are duly given in accordance with the provisions of these By-Laws or as required by law, be custodian of the records and of the seal of the Corporation and see that it is affixed to all documents requiring it, have general charge of the share certificate book and share ledger and keep or cause to be kept by the transfer agent all records therein, see that books, reports, statements, certificates and other documents and records required by law are properly kept, made and filed, and, in general, perform all duties incident to the officer of the Secretary and such other duties as may be prescribed by these By-Laws or from time to time assigned to him by the Board of Directors. Section 11. Assistant Secretary. At the request of the Secretary, or in his absence or disability, an Assistant Secretary shall perform all duties of the Secretary, and, when so acting, shall have all the powers of, and be subject to all the restrictions of, the Secretary. He shall perform such other duties as from time to time may be assigned to him by the Board of Directors. Section 12. Treasurer. The Treasurer shall have the custody of all funds, securities, evidences of indebtedness and other valuable documents of the Corporation. He shall enter in the books of the Corporation full and accurate accounts of all moneys received and paid out, and whenever required by the Board of Directors he shall render a statement of the condition of the Corporation's finances, and he shall perform all such other duties as may be incident to the office of the Treasurer or as may be imposed upon him by the Board of Directors. Section 13. Assistant Treasurer. At the request of the Treasurer, or in his absence or disability, an Assistant Treasurer shall perform all the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon, the Treasurer. He shall perform such other duties as from time to time may be assigned to him by the Board of Directors. Section 14. Salaries. The salaries of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation. Section 15. Inability to Act. In case of the absence or inability of any officer of the Corporation to act and of any person herein authorized to act in his place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer or any director or other person whom they may select. ARTICLE IV Indemnification of Directors and Officers On the terms, to the extent, and subject to the conditions, prescribed by statute and by such rules and regulations, not inconsistent with statute, as the Board may in its discretion impose in general or particular cases or classes of cases, (a) the Corporation shall indemnify any person made, or threatened to be made, a party to an action or proceeding, civil or criminal, including, without limitation, an action by or in the right of the Corporation or by or in the right of any other corporation of any type or kind, domestic or foreign, which any director or officer of the Corporation served in any capacity at the request of the Corporation, by reason of the fact that he, his testator or intestate, was a director or officer of the Corporation, or served such other corporation in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, and (b) the Corporation may pay, in advance of final disposition of any such action or proceeding, expenses incurred by such person in defending such action or proceeding. The Corporation shall indemnify, and make advancements to, any person made, or threatened to be made, a party to any such action or proceeding by reason of the fact that he, his testator or intestate, was an agent or employee (other than a director or officer) of the Corporation in any capacity, on the terms, and by any rules and regulations of the Board, which would have been applicable if he had been a director or officer of the Corporation. ARTICLE V Contracts, Checks, Drafts and Bank Accounts Section 1. Contracts. The Board of Directors, except as in these By-Laws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances. Unless so authorized by the Board of Directors, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable pecuniarily for any purpose or to any amount. Section 2. Loans. Any two of the officers of the Corporation as may from time to time be designated for the purpose by the Board of Directors, or by any officer or officers thereunto duly authorized by the Board of Directors, acting together, may effect loans and advances at any time for the Corporation from any bank, trust company or other institution, or from any firm or individual, and for such loans and advances may make, execute and delivery promissory notes and other evidences of indebtedness of the Corporation. No property whatever owned or held by the Corporation shall be pledged, hypothecated or transferred as security for loans and advances except by two officers of the Corporation acting together, who shall have been designated for such purpose by the Board of Directors, or by any officer or officers thereunto duly authorized by the Board of Directors. Section 3. Checks and Drafts. All checks, drafts, orders for the payment of money, bills of lading, warehouse receipts, obligations, bills of exchange, insurance certificates and all endorsements (except endorsements for collections for the account of the Corporation or for deposit to its credit) shall be signed by such officer or officers, employee or employees, of the Corporation or by facsimile signature of such officer or officers, employee or employees, of the Corporation as shall from time to time be determined by resolution of the Board of Directors. Section 4. Deposits. All funds of the Corporation unless otherwise authorized and directed by a resolution of the Board of Directors duly recorded in the minutes of the meetings of the Board of Directors, shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositaries as the Board of Directors may select or as may be selected by any officer or officers, agent or agents of the Corporation to whom such power may from time to time be delegated by the Board of Directors; and for the purpose of such deposit, checks, drafts and other orders for the payment of money which are payable to the order of the Corporation may be endorsed, assigned and delivered by the President, or a Vice President, or the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, or by any agent or employee of the Corporation to whom any of said officers, in writing, or the Board of Directors, by resolution, shall have delegated such power. Section 5. Bank Accounts. The Board of Directors may from time to time authorize the opening and keeping with such banks, trust companies or other depositiaries as the Board may select of general and special bank accounts, and may make such special rules and regulations with respect thereto, not inconsistent with the provisions of these By-Laws, as they may deem expedient. ARTICLE VI Shares Section 1. Certificates. Certificates for shares of the Corporation shall be in such form as shall be approved by the Board of Directors. They shall be numbered in the order of their issue and shall be signed by the President or one of the Vice Presidents and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary. A record shall be made of each certificate issued including the number of the certificate, the name of the person owning the shares represented thereby, the number of shares and the date thereof. Every certificate exchanged or returned to the Corporation shall be marked "Canceled", with the date of cancellation, by the Secretary or the Corporation's transfer agent. Section 2. Transfer of Shares. Transfer of shares of the Corporation shall be made only on the books of the Corporation by the holder thereof, or by his attorney thereunto authorized by a power of attorney duly executed and filed with the Secretary of the Corporation, or its transfer agent, if any, and on surrender of the certificate or certificates for such shares properly endorsed. The Corporation shall at all times maintain in the State of New York, a transfer office or agency, for each class of shares of the Corporation, where shares shall be directly transferable. A person in whose name shares stand on the books of the Corporation shall be deemed the owner thereof as regards the Corporation; provided, that whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact, if known to the Secretary of the Corporation or to said transfer agent shall be so expressed in the entry of the transfer. Section 3. Lost, Destroyed and Mutilated Certificates of Shares. The holder of any shares of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of the certificate therefor, and the Corporation may issue a new certificate in the place of any certificate theretofore issued by it alleged to have been lost or destroyed, and the Board of Directors may, in its discretion, require the owner of the lost or destroyed certificate or his legal representative to give the Corporation a bond in such sum, not exceeding double the value of such shares, and with such surety or sureties, as it may direct, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate. Section 4. Regulations. The Board of Directors may make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the Corporation. Section 5. Closing of Transfer Books or Fixing of Record Dates. The Board of Directors shall have power to close the share transfer books of the Corporation for a period not exceeding thirty days preceding the date of any meeting of shareholders or the date for payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of shares shall go into effect or for a period of not exceeding thirty days in connection with obtaining consent of shareholders for any purpose; provided, however, that in lieu of closing the share transfer books as stated, the Board of Directors may fix in advance a date not exceeding thirty nor less than ten days preceding the date of any meeting of shareholders or not exceeding thirty days preceding the date for the payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of shares shall go into effect or a date in connection with obtaining such consent, as a record date for the determination of the shareholders entitled to notice of, and to vote at, any such meeting, or entitled to receive payment of any such dividend, or entitled to receive any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of shares or to give such consent; and in such case only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after any such record date so fixed. ARTICLE VII Seal The Board of Directors shall provide a corporate seal, which shall be in the form of a circle and shall bear the full name of the Corporation and the words and figures "Incorporated 1980", or words and figures of similar import and the words "New York". ARTICLE VIII Amendments These By-Laws shall be subject to alteration or repeal, and new By-Laws not inconsistent with any provision of the Certificate of Incorporation or any provision of law, may be made either by the affirmative vote of the holders of record of a majority of the outstanding shares of the Corporation, given at an annual meeting or at any special meeting, provided notice of the proposed alteration or repeal or of the proposed new By-laws shall be included in the notice of such meeting, or by the affirmative vote of a majority of the entire Board of Directors given at any meeting of the Board of Directors, provided notice of the proposed alteration or repeal or of the proposed new By-Laws shall be included in the notice of such meeting. By-Laws made or altered by the Board of Directors shall be subject to alteration or repeal by the shareholders. Amended: September 15, 1997 EX-10.11 3 DEMAND NOTE AND SECURITY AGREEMENT $147,422.00 Alexandria, Virginia April 10, 1997 FOR VALUE RECEIVED, the undersigned (the "Borrower") promises to pay to the order of C.W. Gilluly, a resident of the District of Columbia (the "Lender," which term shall include any holder of this Note) without offset, at the Lender's domicile located at 415 First Street, S.E., Washington, D.C. (or at such other address as the Lender shall designate), upon demand, but in no event later than April 9, 1998 (the "Date of Maturity") the principal sum of One Hundred Forty Seven Thousand Four Hundred and Twenty Two Dollars ($147,422.00) (the "Principal Sum"), together with interest on the principal balance outstanding from time to time at the rate provided in this Note. INTEREST RATE. This Note shall bear interest on the principal balance outstanding from time to time, from the date of this Note until paid in full, at a fixed rate per annum equal, at all times, to eleven-and-one-half (11.5%) Any amount of overdue principal shall bear interest, payable on demand, for each day until paid at a fixed rate per annum of fifteen percent (15.0%). Interest shall be computed on the basis of a 360 day year, counting the actual number of days elapsed. PAYMENT OF INTEREST. Interest accrued shall be payable beginning May 10, 1997, and on the same day of each consecutive month thereafter until this Note is paid in full. PREPAYMENT. The Borrower may pay the whole or any part of the outstanding indebtedness evidenced by this Note at any time without penalty by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. SECURITY AGREEMENT. To secure the due and punctual payment of this Note and to secure the due and punctual performance of all of the obligations of the Borrower contained in this Note and in any other Loan Documents, the Borrower hereby grants to the Lender a security interest in all of the Borrower's right, title and interest in, to and under the Borrower's accounts receivable now existing and in the future arising, and all proceeds of those accounts (all of which are herein collectively called the "Collateral"). REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants that the execution, delivery and performance of this Note and the creation of the security interests provided for herein (i) are within the Borrower's corporate power, (ii) have been duly authorized by all necessary corporate action on behalf of the Borrower, (iii) are not in contravention of any provision of the Borrower's articles of incorporation or bylaws, (iv) do not violate any law or regulation or any order or decree of any court or governmental instrumentality applicable to the Borrower, (v) do not result in the creation or imposition of any lien upon any property of the Borrower other than in favor of the Lender and (vi) do not require the consent or approval of any governmental body, agency or official or other person other than those that have been obtained. This Note has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms. COVENANTS. The Borrower covenants and agrees with the Lender that until the payment in full of this Note, the Borrower will, promptly upon the Lender's request and at its expense, cause all filings and recordings and other actions required by the Lender to perfect the Lender's security interest in the Collateral to have been completed; and DEFAULT. Each of the following events or conditions shall constitute a default ("Default") under this Note: (a) the failure to make any payment of principal, interest or any other amount due under this Note when such payment is due; (b) any default under the terms of any of the Loan Documents, or the failure to perform or observe any warranty, covenant, or other condition of any of the Loan Documents; (c) the death, incompetence, merger, consolidation, reorganization, dissolution, or termination of existence of any Party; or the pledge, lease or other disposition of all or substantially all of the assets of any Party; (d) the determination by the Lender that any warranty, representation, certificate, statement or information provided by any Party or any Person on behalf of a Party to the Lender in connection with any of the Loan Documents, or to induce the Lender to make or extend or modify the terms of the loan evidenced by this Note, was false or misleading, or that any Party or any Person on behalf of a Party failed to provide or disclose any facts or information, which failure rendered such warranty, representation, certificate, statement or information misleading; (e) the inability of any Party to pay its debts as they mature, the insolvency of any Party, the filing of a petition by or against any Party under the provisions of any bankruptcy, reorganization, arrangement, insolvency, liquidation or similar law for relief of debtors, the appointment or application for appointment of any receiver for any Party or the property of any Party, the issuance or service of any attachment, levy, garnishment, tax lien or similar process against any Party or the property of any Party, the entry of a judgment against any Party, or an assignment for the benefit of creditors by any Party; or (f) any indorsement or guaranty of the payment of this Note shall cease for any reason to be in full force and effect, or any indorser or guarantor shall contest the validity or enforceability of the indorsement or guaranty or deny that it has any further liability or obligation under the indorsement or guaranty. ACCELERATION. At the option of the Lender, upon the occurrence of a Default as defined above, the full amount remaining unpaid on this Note shall become immediately due and payable without presentment, demand or notice of any kind; and the Lender may exercise any or all remedies available to it under applicable law and the Loan Documents. In addition, upon the occurrence of a Default, in addition to all other remedies available to the Lender, the Lender may exercise any and all of the rights and remedies available upon default to a secured party under the UCC. Any requirements for reasonable notice shall be met if such notice is mailed, postage prepaid, to the Borrower at the Borrower's address as indicated in this Note or at such other address of which the Lender shall have received notice, at least five (5) days prior to the time of sale, disposition or other event or thing giving rise to the requirement of notice. IMMEDIATELY AVAILABLE FUNDS. The principal of and interest on this Note shall be payable in immediately available funds in lawful money of the United States which shall be legal tender for public and private debts at the time of payment. The making of any payment in other than immediately available funds which the Lender, at its option, elects to accept shall be subject to collection, and interest shall continue to accrue until the funds by which payment is made are available to the Lender for its use. WAIVER. The Borrower and any indorser of this Note (i) waive presentment, demand, protest and notice of dishonor and protest, (ii) waive the benefit of their homestead exemptions as to this debt, (iii) waive any right which they may have to require the Lender to proceed against any other Party or any collateral given to secure the payment of this Note, and (iv) agree that, without notice to the Borrower or any indorser and without affecting the liability of the Borrower or any indorser, the Lender, at any time or times, may grant extensions of the time for any payment due on this Note or any other indulgence or forbearance, release any Party from the obligation to make payments on this Note, permit the renewal of this Note, or permit the substitution, exchange or release of any security for this Note. LATE CHARGE; ATTORNEYS' FEES. If the Borrower fails to pay any amount due under this Note within 10 days of the date due, the Borrower shall pay to the Lender on demand a late charge equal to five percent (5%) of the amount due. The Borrower shall pay to the Lender on demand all costs incurred by the Lender, and reasonable attorneys' fees, in the collection or enfocement of this Note in the event of Default, whether or not suit is brought. The Borrower stipulates that, to the extent evidence of the reasonableness of the Lender's attorneys' fees may be required, an affidavit of the Lender setting forth the Lender's attorneys' fees shall be conclusive evidence of such reasonableness, and the Borrower waives the right to a hearing or other proceeding to establish such reasonableness. DEFINITIONS. The uncapitalized terms "account", "chattel paper", "contract right", "document", "bill of lading", "document of title", "instrument", "inventory", "equipment" "general intangible", "money" and "proceeds" have the meanings of such terms as defined in the UCC, and the following terms, as used in this Note, have the following meanings: "Loan Documents" means this Note and any other instrument or agreement which now or hereafter evidences, governs, secures or guaranties the indebtedness evidenced by this Note, including any loan agreement, deed of trust, security agreement or guaranty, and all renewals, extensions and modifications thereof and substitutions therefor. "Party" means the Borrower, any indorser or guarantor of this Note, any grantor or debtor giving security for this Note, and any other obligor on any of the Loan Documents. "Person" means an individual, a corporation, a partnership, an association, a limited liability company, a trust or any other entity or organization. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Borrower. "UCC" means at any time the Uniform Commercial Code as the same may from time to time be in effect in the Commonwealth of Virginia, provided that, if, by reason of mandatory provisions of law, the validity or perfection of any security interest granted herein is governed by the Uniform Commercial Code as in effect in a jurisdiction other than Virginia then, as to the validity or perfection of such security interest, "UCC" shall mean the Uniform Commercial Code in effect in such other jurisdiction. ADDITIONAL TERMS. The Borrower agrees to furnish the Lender, in form acceptable to the Lender, a signed current financial statement at any time upon request. The proceeds of this Note shall be used to acquire or carry on a business, professional, investment, or commercial enterprise or activity. The rights and remedies of the Lender under this Note, the other Loan Documents, and applicable law shall be cumulative and concurrent, and the exercise of any one or more of them shall not preclude the simultaneous or later exercise by the Lender of any or all such other rights or remedies. In the event any provision of this Note is held to be invalid, illegal, or unenforceable for any reason, then such provision only shall be deemed null and void and shall not affect any other provisions of this Note, which shall remain effective. No modification or waiver of any provision of this Note shall be effective unless it is in writing and signed by the Lender, and any such waiver shall be effective only in the specific instance and for the specific purpose for which it is given. The failure of the Lender to exercise its option to accelerate this Note as provided above, or to exercise any other option, right or remedy, in any one or more instances, or the acceptance by the Lender of partial payments or partial performance, shall not constitute a waiver of any Default, or the right to exercise any option, right or remedy at any time. The nouns, pronouns, and verbs used in this Note shall be construed as being of such number and gender as the context may require. This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. WITNESS the following signature and seal: Comtex Scientific Corporation By: /S/ CHARLES W. TERRY Name: Charles W. Terry Title: President 4900 Seminary Road, Suite 800 Alexandria, Virginia 22311 EX-11 4 COMPUTATION OF EARNINGS PER SHARE Exhibit 11.00 COMPUTATION OF EARNINGS PER SHARE
FY 1997 FY 1996 FY 1995 --------------- --------------- --------------- Weighted Average Common Shares Outstanding 7,854,667 7,854,667 7,854,667 Common Stock Equivalents 74,413 Total 7,929,080 7,854,667 7,854,667 Net Income/(Loss) $ 113,270 $ (471,904) $ (260,000) Net Income/(Loss)per share $ .01 $ (.06) $ (.03)
EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE YEAR END FORM 10-K 1997 AND IS QUALFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-K. 1 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 17,927 0 1,012,758 (77,139) 0 1,266,640 805,897 (605,915) 1,531,183 1,571,551 0 0 0 78,547 (906,887) 1,531,183 4,591,737 4,591,737 0 4,364,064 0 0 114,057 113,616 346 113,270 0 0 0 113,270 0.01 0.01
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