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 <F1>
(7/1 to 9/30/95)
Second Quarter <F1>
(10/1 to 12/31/95)
Third Quarter <F1>
(1/1 to 3/31/96)
Fourth Quarter
(4/1 to 6/30/96) 1/8 1/32
<FN>
<F1> 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 <F1>
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 <F2> $788 $1,083 $1,075 $79 $138
<FN>
<F1> Data communications revenues were netted against data
communications expenses in fiscal year 1993.
<F2> 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.