UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
(Mark One)
X Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 1998; or
___ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-10541
COMTEX SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)
New York 13-3055012__
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4900 Seminary Road, Suite 800, Alexandria, Virginia 22311
(Address of principal executive office)
Registrant's telephone number, including area code: (703) 820-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
As of September 23, 1998, the aggregate market value of the common stock held by
non-affiliates of the Registrant (based upon the average bid and asked prices of
the common stock as reported by the National Association of Securities Dealers
Inc. through its Electronic OTC Bulletin Board) was approximately $809,115.
As of September 23, 1998, 7,903,399 shares of the Common Stock of the Registrant
were outstanding.
<PAGE>
PART I
Item 1. Business
General
Comtex Scientific Corporation (the "Company" or "Comtex")
was incorporated in New York in 1980. As a result of a series of
transactions during the Company's fiscal year 1989,
Infotechnology, Inc. ("Infotech"), a Delaware business
development corporation, then principally engaged in the
information and communications business, acquired majority
ownership of the Company.
During the 1980s and early 1990s, the Company incurred
significant losses and a resultant shareholder deficit due to the
failure to realize market penetration as a retail source of news
and information. In 1994, new management established a new
direction for the Company by focusing on the aggregation, value-
add and repackaging of content for resale to distributors in the
financial, online and corporate information services markets.
With the new focus, the Company has been able to achieve nearly
20% growth in information services revenues and achieve
profitability during the past two years, while investing in
sales, marketing, technical resources and infrastructure.
Business Information Services
Comtex is an integrator and value-added distributor of real-
time news sources. Comtex aggregates and converts multiple real-
time news sources into editorially enhanced real-time news
products for resellers in a variety of markets, including
financial, online and corporate information services. Real-time
denotes the electronic transmission of breaking news stories
while events are happening and before the story's appearance in
print and television media. The Company's news sources provide
the content for the Company's products and contain late-breaking
U.S. and international news and events, worldwide economic news
and indices, news and information on over 15,000 public and
private companies, Securities and Exchange Commission ("SEC")
filings within 24 hours of release, and up-to-the-minute sports
and entertainment news from around the world.
The Company gathers its news and information from a broad
range of established electronic newswire sources including, but
not limited to, Business Wire, Futures World News, Knight-
Ridder/Tribune, Newsbytes News Network, Phillips Publishing
Corporation, PR Newswire, The Sports Network and United Press
International. The Company also has agreements with a large
collection of international-based news agency services including,
but not limited to, Africa News Service, Agence France Presse,
Asia Pulse, Inter Press Service, ITAR/TASS News Agency, South
American Business Information and Xinhua News Agency.
<PAGE>
The Company has developed a proprietary automated editorial
method for processing and converting the real-time news feeds
into the Comtex value-added format. The conversion process
relies heavily on computer technology and data management
software. As electronic news feeds and other submissions of news
and information are received, the Company's computers convert
each story into a common data format, apply standardized document
coding, and assign relevant keywords, including ticker symbols of
any public companies mentioned in the story. After the
processing has been completed, the Company's data management
software sorts each news story into topic defined product
categories. The Company's editorial and product development
staff monitor and edit the electronic processing and
categorization of incoming news items to ensure the Company's
products meet various market needs and product specifications.
The Company's volume and variety of independent news
sources, automated editorial process and proprietary conversion
process are believed by management to be an advantage over other
individual providers of real-time news services. The automated
editorial process increases the Company's efficiencies of
operation, relevancy of stories routed to pre-defined product
categories and provides the Company's customers with the ability
to create customized information products for their markets. The
Company's value-adds reduce costs and simplify the customer's
development of information products and online, World Wide Web
("WEB") applications.
The Company delivers its information products in a variety
of ways to suit customer requirements. These delivery methods
include:
0 Broadcast news feed via leased lines, FM transmission
or satellite downlink
0 Internet delivery of news products
Customers are provided with implementation specifications and
guidance from the Company's technical services department for
integrating the Company's editorially enhanced news feeds into
their products.
Consistent with standard practice in the information
services industry, the Company generally has renewable long-term
contractual relationships with those information providers and
information distributors with which it does business. These
information services contracts typically provide for both minimum
fees and royalties based upon expected and achieved volumes
of usage. Fees and royalties from information distributors
<PAGE>
comprise the majority of the Company's revenues. Data
communications revenues represent the recovery of costs incurred
in delivering the information over various media.
The Company believes that its aggregation of more than
thirty news and information sources and variety of product
delivery methods, in combination with its automated editorial
process and single delivery format, substantially reduce its
customer's cost of acquiring and installing electronic
information feeds from multiple sources, and increases the
customer's ability to quickly create products from the
categorized information feeds. The Company therefore takes
advantage of a broad range of market opportunities emerging
within the rapidly changing information industry to meet the
needs of information distributors in a variety of markets.
Customers, Sales and Marketing
The Company's customers consist of electronic news and
information distributors who create a product with the Company's
products and in turn sell to their customers: end-user markets
and corporations, who use the combined services for market
research, business intelligence and investment analysis.
Electronic news and information distributors include business and
consumer online services, personal investor WEB sites, general
information WEB sites, Wall Street stock quote vendors,
electronic clipping software and service providers and wireless
information services.
The Company's marketing strategies center on adapting its
pricing model to the business model of each individual
distributor. These models vary from fixed fees to variable
royalties based upon usage against a minimum fee.
The Company's sales force is organized around its three
primary markets - financial, online and corporate information
services. The sales force receives a base salary and earns
commissions on both new customers and revenue growth from
existing customers. The Company's compensation plan is consistent
with industry compensation practices.
Current distributor customers include, but are not limited
to, AT Financial, Bloomberg L.P., Bridge Trading Company,
Burrelle's, CNN Interactive, CompuServe, Inc., NewsEdge, Inc.,
ILX, OneSource Information Services, Inc., PC Quote, PointCast,
Inc., Reuters Ltd., Telerate, Inc., Telescan, Thomson Consumer
Products Group, Time Warner Cable, Track Data and WavePhore
Newscast.
<PAGE>
Product and Service Offerings
The core products currently supported by the Company's
technical and customer service departments include a series of
topic-defined news products marketed under the brand name
"CustomWires TM ". The Company also supports production of original
news products under the brand name "Comtex Newsroom".
CustomWires TM are topic-defined newswires that contain only
the topic-relevant stories from more than thirty newswire
services distributed by the Company. Stories are selected by the
Company's automated editorial software according to the
significance of the story's content relative to specific
CustomWires TM topics. The Company offers fourteen topics under
the CustomWires TM brand name: Business, Community, Energy,
Environment, Finance, Foreign Business, Government, Healthcare,
High Technology, International, Public Companies, Sports, Wall
Street and World Affairs and an additional ten geographical
CustomWires TM focusing on specific international regions.
Comtex Newsroom produces editorially enhanced news products:
Investor Alert, Market Alert and Top Headlines. Investor Alert
tracks significant stock market activity by volume, price points
and price percentage from the New York Stock Exchange, American
Stock Exchange and NASDAQ Stock Market and supplies in-depth,
analytical tables to allow tracking of trends both in industry
and individual company stocks. Market Alert delivers market
activity updates from U.S. securities and commodity exchanges
including early morning calls, active stock lists, closing
volumes, analyst comments and summaries, selected indices in
major international trading centers and weekly U.S. economic
indicators. Top Headlines is an editorial service that selects
the ten most significant news stories of the day in each of
eleven topic-based CustomWiresTM . The Top Headlines categories
are: Business, Community, Energy, Entertainment, Environment,
Finance, Government, Healthcare, High Technology, International
and Sports. Top Headlines are offered as Headlines Only,
Headlines and Summaries or Headlines and Stories, and are updated
and released to customers up to three times a day. Based on
specific market interest, the Company developed an additional
thirteen industry specific categories. A list of the top five to
seven stories from each industry category is generated and
distributed to customers a minimum of once a day. These
categories include vertical industries such as Airlines,
Automobile, Banking, Hardware, Insurance, Oil, Publishing,
Telecommunications and Utilities.
<PAGE>
Utilizing the same automated editorial and format conversion
process, the Company has broadened its services to include
offering news processing services to large-scale content
distributors and information providers. The Company believes
this new offering will increase the reliance that information
providers and distributors have on the Company and, at the same
time, attract even more customers to Comtex.
The Company believes the rapid growth in the use of
electronic information by consumers, businesses and professional
investors will continue to create a significant market for the
Company's information products and outsourcing services.
The Company relies heavily on third-party information
sources for the content of its product offerings. Interruption
in, or the termination of, service from a significant number of
the Company's information sources would affect the Company's
ability to offer products or maintain product quality.
Accordingly, the failure or inability to restore or replace such
interrupted or terminated services could have an adverse effect
on revenues (see Item 7 - Management's Discussion and Analysis of
Financial Conditions and Results of Operation).
Competition
The Company competes with individual national and
international electronic news and information wire services.
Established electronic newswire services such as Associated
Press, Dow Jones News/Retrieval and Reuters are viewed by certain
customers as direct competitors. The Company believes that
because these competitors primarily offer only their proprietary
content, they cannot offer the breadth, depth and magnitude of
real-time news content that is available from the Company.
Additionally, the Company does not believe these entities utilize
a technological approach to processing and delivering value-added
information products similar to that used by the Company and
therefore cannot as efficiently meet the needs of our customers.
Many of the numerous and emerging companies involved in
distributing electronic information services to consumers, the
corporate marketplace and Wall Street firms have become
customers, not competitors, of Comtex. These companies provide a
selection of electronic news and information feeds as a value-
added service to their product offerings. The Company believes
these information services companies are uniquely positioned to
propose total solutions to their specific markets and the Company
is well positioned to enhance their ability to do so.
<PAGE>
Product Development
For the years ended June 30, 1998, 1997 and 1996, the
Company's product development costs were approximately $165,000,
$270,000 and $239,000, respectively. The decrease in the current
period is due to a shift of resources to focus on marketing
strategies for the Company.
In addition, during fiscal year 1998, the Company commenced
a development effort to upgrade its software and computer
hardware system components to expand its product capabilities and
to meet future client requirements. In fiscal year 1998, the
Company incurred and capitalized approximately $170,000 on this
initiative. Completion of the estimated $400,000 upgrade project
is expected early in calendar year 1999.
The Company has broadened its services to offer distributors
and information providers an outsourcing service for the
processing and distribution of their information. For the
information distributor, the Company aggregates and pre-processes
multiple sources of content into the Comtex value-added format,
allowing the distributor to focus efforts on their end-user
products. For the information providers, the Company converts
the information provider's feed into the Comtex value-added
format, allowing for easy integration by their customers, and
distributes the feed to those customers. Additionally, the
information provider has the potential for immediate distribution
access to the customers of Comtex' more than ninety distributors.
Employees
At June 30, 1998, the Company had 30 full-time employees.
The employees are not members of a union and the Company believes
employee relations are generally good. The Company's Chairman,
Chief Financial Officer and Corporate Secretary have similar
duties with Hadron, Inc. More than 50% of their time is spent on
other than Company business.
Other Information
AMASYS Corporation,("AMASYS") (the successor corporation to
Infotechnology, Inc., "Infotech"), legally or beneficially
controls 4,693,940 (approximately 59%) of the issued and
outstanding shares of the Company. As discussed in Note 4 of the
Notes to Financial Statements, 2,540,503 shares of the Company's
common stock owned by AMASYS are subject to option by C.W.
Gilluly, Ed.D., the Chairman of the Board of Directors of both
the Company and AMASYS. Dr. Gilluly and his spouse, Marny
Gilluly, (the "Gillulys") also directly own options to acquire an
additional 2,540,503 shares of the Company's common stock (see
Note 4 of the Notes to Financial Statements).
<PAGE>
Item 2. Properties
The Company owns no real estate. The Company leases office
space at 4900 Seminary Road in Alexandria, Virginia. The Company
currently occupies approximately 9,400 square feet at an annual
rental of approximately $200,000. The lease agreement expires in
August, 2002. Approximately 660 square feet is subleased to
Hadron, Inc. at the same rental rate paid to the Company's
landlord.
Item 3. Legal Proceedings
The Company is involved in routine legal proceedings
occurring in the ordinary course of business which in the
aggregate are believed by management to be immaterial to the
financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock, par value $.01 per share
("Common Stock"), is traded sporadically on the National
Association of Securities Dealers' ("NASD") Electronic OTC
Bulletin Board, under the symbol CMTX.
The range of high and low bid quotations for the Common
Stock, as obtained from Bloomberg Financial Services, for each
quarterly period during fiscal years 1998 and 1997 is shown
below:
<TABLE>
Fiscal Year Ended June 30, 1998 High Low
<CAPTION>
<S> <C> <C>
First Quarter
(7/1 to 9/30/97) 7/32 1/8
Second Quarter
(10/1 to 12/31/97) 1/4 1/8
Third Quarter
(1/1 to 3/31/98) 9/32 3/16
Fourth Quarter
(4/1 to 6/30/98) 1/2 5/32
</TABLE>
<TABLE>
Fiscal Year Ended June 30, 1997 High Low
<CAPTION>
<S> <C> <C>
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
</TABLE>
<PAGE>
The approximate number of holders of record of the Company's
Common Stock as of September 23, 1998 was 590.
The Company has never paid a cash dividend on its Common
Stock and does not anticipate the payment of cash dividends to
shareholders in the foreseeable future.
Item 6. Selected Financial Data
The following table sets forth selected financial data for
each of the last five fiscal years of the Company.
<TABLE>
Fiscal Year Ended June 30,
-----------------------
<CAPTION>
(amounts in thousands except
per share data) 1998 1997 1996 1995 1994
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Information Services Revenues $ 4,830 $ 4,066 $ 3,219 $ 2,769 $3,025
Data Communications Revenues 571 526 330 288 290
Total Comtex Net Revenues $ 5,401 $ 4,592 $ 3,549 $ 3,057 $3,315
Income (Loss) from Operations $ 156 $ 228 $ (362) $ (166) $ 489
Net Income (Loss) $ 64 $ 113 $ (472) $ (260) $ 387
Basic Net Income(Loss) Per Share $ .01 $ .01 $ (.06) $ (.03) $ .05
Diluted Net Income (Loss) Per Share $ .01 $ .01 $ (.06) $ (.03) $ .05
Balance Sheet Data at Year End:
Total Assets $ 1,434 $ 1,531 $ 1,382 $ 1,851 $1,191
Long-term Obligations <F1> $ 833 $ 788 $ 1,083 $ 1,075 $ 79
<FN>
<F1> 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.
</TABLE>
<PAGE>
Item 7.Management's Discussion and Analysis of Financial
Condition and Results of Operation
RESULTS OF OPERATIONS
Comparison of the Fiscal Year ended June 30, 1998 to the Fiscal
Year ended June 30, 1997
During the year ended June 30, 1998, the Company's total
revenues were approximately $5,401,000 or approximately $809,000
(18%) greater than revenues for the year ended June 30, 1997. Of
the approximately $764,000 increase in information services
revenues, approximately 60% represents revenues from new
customers and approximately 40% reflects the net increase in
revenues derived from the sale of Comtex' products to existing
information distributors who pay the Company a royalty based upon
usage. The increase of approximately $45,000 in data
communications revenues reflects billings for delivery of the
Company's products to new customers.
Total costs and expenses for the fiscal year ended June 30,
1998, were approximately $5,245,000, compared to approximately
$4,364,000 for the fiscal year ended June 30, 1997, an increase
of approximately $881,000 (20%). The increase in total costs and
expenses is principally due to increased information services
costs, data communications costs, sales and marketing costs and
general and administrative expenses, offset by a decrease in
product development expenses.
Costs of information services were approximately $2,253,000
for the fiscal year ended June 30, 1998, compared to
approximately $1,846,000 for the fiscal year ended June 30, 1997,
an increase of approximately $407,000 (22%). This increase is
primarily due to an increase in the royalties paid to information
providers based on increased revenues. The increase is also
attributable to increased fees to information providers as
sources were added, additional personnel and increased spending
on computer supplies, software and consulting services.
Data communications costs increased by approximately
$146,000 (25%) to approximately $733,000 for the fiscal year
ended June 30, 1998, from approximately $587,000 in the fiscal
year ended June 30, 1997. This increase is principally due to
the increase in the number of customers and information providers
and increased data volume during the fiscal year ended June 30,
1998.
<PAGE>
Product development expenses were approximately $165,000 for
the fiscal year ended June 30, 1998 compared to $270,000 for the
prior fiscal year. The decrease of approximately $105,000 (39%)
is due to a shift in personnel from this department to focus on
marketing strategies for the Company.
Sales and marketing expenses were approximately $879,000 for
the fiscal year ended June 30, 1998, compared to approximately
$571,000 for the fiscal year ended June 30, 1997, an increase of
approximately $308,000 (54%). This increase is due to increased
marketing and sales personnel, additional travel expenses
associated with business development and increased commissions
related to the increase in information services revenues in the
current year.
General and administrative expenses were approximately
$1,111,000 for the fiscal year ended June 30, 1998 compared to
approximately $985,000 for the prior fiscal year. The increase
of approximately $126,000 (13%) is due to increased legal fees
corresponding to an increase in the number of contracts
negotiated with new customers, increased rent expense associated
with the Company's expanded office space, an increase in the
employee bonus related to revenues and the fees associated with
recruiting technical personnel.
The Company earned operating income of approximately
$156,000 during the fiscal year ended June 30, 1998 compared to
operating income of approximately $228,000 during the fiscal year
ended June 30, 1997. The Company earned net income of
approximately $64,000 for the fiscal year ended June 30, 1998,
compared to approximately $113,000 for the fiscal year ended June
30, 1997. The decrease in operating and net income reflects the
investment of increased revenues in personnel and information
provider content as discussed above, as well as the absence of a
one-time resolution of revenues during the prior year as
discussed in the results for the year ended June 30, 1997, below.
The decrease in net income was partially offset by a decrease in
interest expense related to the reduction in the AMASYS Note and
payment of a vendor note.
Comparison of the Fiscal Year ended June 30, 1997 to the Fiscal
Year ended June 30, 1996
During the year ended June 30, 1997, the Company's revenues
were approximately $4,592,000 or approximately $1,043,000 (29%)
greater than revenues for the year ended June 30, 1996. Of the
increase of approximately $847,000 in information services
revenues, approximately 48% reflects revenues from new customers
and approximately 52% represents the net increase in revenues
from contractual increases and royalties derived from the sale of
Comtex' products to existing information distributors. The
increase of approximately $196,000 in data communications
revenues reflects the Company's increase in billing rates to
fully recover communications costs incurred in delivering the
Company's products and services.
<PAGE>
Total costs and expenses for the fiscal year ended June 30,
1997 were approximately $4,364,000, compared to approximately
$3,911,000 for the fiscal year ended June 30, 1996, an increase
of approximately $453,000 (12%). The increase in total costs and
expenses is principally due to increased information services
costs, product development, sales and general and administrative
expenses offset by a decrease in the cost of data communications
and depreciation expense.
Costs of information services were approximately $1,846,000
for the fiscal year ended June 30, 1997, compared to
approximately $1,658,000 for the fiscal year ended June 30, 1996,
an increase of approximately $188,000 (11%). The increase in
information services costs is due to additional personnel in
support of increased products and customers, increases in fixed
fees to information providers related to enhancing product
breadth and higher royalties to information providers based on
revenue growth. Royalties due to information providers under the
Company's contracts are based on the volume of usage and are
often subject to a minimum fee.
Data communications costs decreased by approximately
$120,000 (17%) from approximately $707,000 for the fiscal year
ended June 30, 1996, to approximately $587,000 for the fiscal
year ended June 30, 1997. This decrease is due to duplicate
telecommunications operations costs during an upgrade in the
Company's processing capability incurred in fiscal year 1996,
improved efficiency in FM and satellite delivery and negotiated
credits from the Company's primary data communications vendor.
Product development costs were approximately $270,000 for
the fiscal year ended June 30, 1997, compared to $239,000 for the
fiscal year ended June 30, 1996, an increase of approximately
$31,000 (13%). This increase is primarily due to increased
personnel costs that have enabled the Company to continue to
improve its product management capabilities and to enhance and
augment the Company's CustomWires TM products.
Sales and marketing expenses were approximately $571,000 for
the fiscal year ended June 30, 1997 compared to approximately
$347,000 for the fiscal year ended June 30, 1996, an increase of
approximately $224,000 (65%). This increase primarily related to
increased compensation expenses arising from the addition of more
experienced sales personnel to the Company's workforce,
additional commissions related to the increase in information
services revenues during the year and increased travel expenses
associated with business development.
General and administrative costs were approximately $985,000
for the fiscal year ended June 30, 1997 compared to approximately
$819,000 for the fiscal year ended June 30, 1996, an increase of
approximately $166,000 (20%). The additional expenses are due to
increases in executive management, shareholder services and rent
expenses related to the Company's expanded office space,
partially offset by decreased legal fees.
<PAGE>
Depreciation and amortization expenses were approximately
$105,000 for the fiscal year ended June 30, 1997, compared to
$141,000 for the fiscal year ended June 30, 1996, a decrease of
approximately $36,000 (26%).
The Company earned operating income of approximately
$228,000 during the fiscal year ended June 30, 1997, compared
with an operating loss of approximately $362,000 during the
fiscal year ended June 30, 1996, an increase of approximately
$590,000 (163%). The Company recorded net income of approximately
$113,000 for the fiscal year ended June 30, 1997, compared to a
net loss of approximately $472,000 for the fiscal year ended June
30, 1996, an increase of approximately $585,000 (124%). The
fiscal year 1997 results reflect the resolution during the fourth
quarter of revenues due for additional distributor usage during
fiscal year 1997 and prior periods. The resolution increased
revenues, operating income and net income by $200,000, $169,000
and $169,000, respectively. The increase in both operating
income and net income also reflects the operating leverage as
revenues increased with a marginal increase in variable expenses.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended June 30, 1998, the Company
reported operating income of approximately $156,000 and net
income of approximately $64,000. At June 30, 1998, the Company
had negative working capital of approximately $286,000 as
compared with negative working capital of approximately $305,000
at June 30, 1997. The Company also reported a net stockholders'
deficit of approximately $757,000 at June 30, 1998 compared to a
net stockholders' deficit of approximately $828,000 at June 30,
1997. The decrease of approximately $71,000 in stockholders'
deficit was due to the retention of net income and additions
through the exercise of stock options and purchases under the
Company's 1997 Employee Stock Purchase Plan.
<PAGE>
The Company has invested significantly in upgrading the
experience level of its sales, marketing and technical support
staff; in expanding its contractual base with information
providers so as to improve the quality and flexibility of its
information products; and in expanding its contracts with
information distributors. All of these factors contribute to
improving the Company's ability to sell and deliver quality
products and services.
In addition, the Company has made capital expenditures of
approximately $170,000 in fiscal year 1998 to upgrade its
software and hardware platforms to expand its product
capabilities and to meet future client processing requirements.
The Company recorded a specific write-off of a receivable
for an overseas customer who filed for bankruptcy. Management
was advised by counsel of the difficulty in collecting on the
account and therefore, the receivable, fully reserved as of June
30, 1997, was written off during fiscal year 1998. There are no
receivables recorded in the balance sheet at June 30, 1998
relating to this customer.
During the fiscal year ended June 30, 1998, the Company's
operations generated approximately $379,000 in cash. To date,
the Company's operations have generated cash flow sufficient to
cover its monthly expenses and management believes that cash from
operations will provide the Company with adequate cash resources
to meet its obligations on a short-term basis.
The Company's ability to meet its liquidity needs on a long-
term basis is dependent on its ability to generate sufficient
billings to cover its current obligations and to pay down its
long-term debt obligations. No assurance may be given that the
Company will be able to expand the revenue base or achieve
ongoing profitable operations that may be necessary to fulfill
its liquidity needs in the future. The Company has had
preliminary discussions with AMASYS regarding the possible
refinancing or restructuring of its note payable. If the Company
is not successful in its efforts, it may undertake other actions
as may be appropriate to preserve asset values.
<PAGE>
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year, resulting in possible system failure or
miscalculations causing disruptions of operations.
The Company has completed an internal review and assessment
of the impact of the Year 2000 issue upon its operating,
financial and accounting systems. At this time the Company
believes that, with respect to its internal systems, the Year
2000 issue will not pose any significant operational problems or
costs. The Company has commenced a program to assess the impact
of the Year 2000 issue with respect to the Company's major
vendors and distributor customers. Letters will be sent
requesting detailed, written information concerning existing or
anticipated Year 2000 compliance by their systems, insofar as the
operating systems relate to the Company's business activities
with such parties. The Company expects to receive replies by
December 31, 1998, and will update its assessment of any impact
at that time.
Except for the historical information contained herein, the
matters discussed in this 10-K include forward-looking statements
that involve a number of risks and uncertainties. There are
certain important external factors and risks, including business
conditions and growth in the demand for real-time, aggregated
custom online news delivery services, and growth in the economy
in general; the impact of competitive products and pricing; the
proliferation of large, global information networks and the
evolution of the Internet. In addition, certain internal factors
and risks exist, including continued success in the acquisition
and growth of new information re-distributor and corporate end-
user client accounts; the ability to continue the Company's
program of technical system upgrades; the timely creation and
market acceptance of new products; the Company's ability to
continue to increase the variety and quantity of sources of
information available to create its products; the Company's
ability to continue to recruit and retain highly skilled
technical, editorial, managerial and sales/marketing personnel;
the Company's ability to generate cash flow sufficient to cover
its current obligations while meeting its long-term debt
obligations; and the other risks detailed from time to time in
the Company's SEC reports, including quarterly reports on Form
10-Q, that could cause results to differ materially from those
anticipated by the statements contained herein.
<PAGE>
Item 8. Financial Statements and Supplementary Data
The information required by this item is set forth under
Item 14, which is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
<PAGE> 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.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) 1. Financial Statements
Report of Independent Accountants F-1
Balance Sheets as of June 30, 1998 and 1997 F-2
Statements of Operations for the fiscal
years ended June 30, 1998, 1997, and 1996 F-3
Statements of Stockholders' Deficit
for the fiscal years ended June 30, 1998,
1997 and 1996 F-4
Statements of Cash Flows for the fiscal
years ended June 30, 1998, 1997 and 1996 F-5
Notes to Financial Statements F-6
2. Financial Statement Schedules
None.
(b) Reports on Form 8-K
None.
(c) Exhibits
3.1 Restated Certificate of Incorporation of the
Company, (incorporated by reference to the
Company's Registration Statement on Form S-18
(File No. 2-72408 NY), declared effective on
July 22, 1981.
3.2 Certificate of Amendment of Certificate of
Incorporation of the Company effective May 14,
1996. (incorporated by reference on Form 10-K
dated June 30, 1996).
<PAGE>
3.3 Amended and Restated By-Laws of the Company
(incorporated by referenced on Form 10-K dated
June 30, 1997).
10.1 Stock Option Agreement between the Company and
C.W. Gilluly and Marny Gilluly, dated May 16,
1995 (incorporated by reference to the Company's
Quarterly Report on Form 10-Q filed on May 22,
1995).
10.2 Stock Option Agreement between the Company and
Telecommunications Industries, Inc., dated May
16, 1995 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q filed on
May 22, 1995).
10.3 Agreement between Infotechnology, Inc. and the
Company, dated May 16, 1995 (incorporated by
reference to the Company's Quarterly Report on
Form 10-Q filed on May 22, 1995).
10.4 Contracts Financing Agreement between the
Company and Princeton Capital Finance Company,
L.L.C., dated February 17, 1995 (incorporated by
reference to the Company's Quarterly Report on
Form 10-Q filed on May 22, 1995).
10.5 Amended, Consolidated and Restated 10% Senior
Subordinated Secured Note, dated May 16, 1995
(incorporated by reference to the Company's
Quarterly Report on Form 10-Q filed on May 22,
1995).
10.6 Comtex Scientific Corporation 1995 Stock Option
Plan (incorporated by reference to the Company's
Proxy Statement dated November 9, 1995).
10.7 Comtex Scientific Corporation 1997 Employee
Stock Purchase Plan (incorporated by reference
to the Company's Proxy Statement dated October
28, 1997).
10.8 Lease Agreement between Plaza IA Associates
Limited Partnership and the Company dated April
6, 1996 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q filed on
May 15, 1996).
<PAGE>
10.9 Employment Agreement with Charles W. Terry dated
July 29, 1994 (incorporated by reference to
Company's Form 10-K dated June 30, 1996).
10.10 Sub-lease Agreement between Hadron, Inc. and the
Company, dated June 12, 1996 (incorporated by
reference to Company's Form 10-K dated June 30,
1996).
10.11 Employment Agreement with Donald E. Ziegler
dated December 20, 1996 (incorporated by
reference to Company's Form 10-Q dated December
31, 1996).
10.12 Release and Settlement Agreement among Princeton
Capital Finance Company, L.L.C., and Comtex
Scientific Corporation, et. al., dated February
21, 1997 (incorporated by reference to Company's
Form 10-K dated June 30, 1996).
24.1 Consent of Independent Auditors.
27 Financial Data Schedule.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, there-
unto duly authorized.
Date: September 25, 1998
COMTEX SCIENTIFIC CORPORATION
By: /s/ Charles W. Terry By: /s/ Donald E. Ziegler
Charles W. Terry Donald E. Ziegler
President and Chief Executive Chief Financial Officer
Officer (Principal Financial and
(Principal Executive Officer) Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
DIRECTORS:
Signature Title Date
/s/ C.W. Gilluly Chairman September 25, 1998
C.W. Gilluly and Director
/s/ Erik Hendricks Director September 25, 1998
Erik Hendricks
/s/ Robert A. Nigro Director September 25, 1998
Robert A. Nigro
/s/ Charles W. Terry Director, September 25, 1998
Charles W. Terry President and CEO
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Comtex Scientific Corporation
We have audited the accompanying balance sheets of Comtex
Scientific Corporation as of June 30, 1998 and 1997 and the
related statements of operations, stockholders' deficit, and cash
flows for each of the three years in the period ended June 30,
1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Comtex Scientific Corporation at June 30, 1998 and 1997, and
the results of its operations and its cash flows for each of the
three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
that Comtex Scientific Corporation will continue as a going
concern. As more fully described in Note 3, the Company has a
working capital deficiency and a high amount of long-term debt in
comparison to total assets. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described
in Note 3. The financial statements do not include any
adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of
this uncertainty.
/s/Ernst & Young LLP
Vienna, Virginia
September 9, 1998
<PAGE>
<TABLE>
COMTEX SCIENTIFIC CORPORATION
BALANCE SHEETS AT JUNE 30, 1998 AND 1997
<CAPTION>
June 30, June 30,
ASSETS 1998 1997
-------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash $170,416 $ 17,927
Accounts Receivable, Net of Allowance of $66,916 and
$77,139 at June 30, 1998 and 1997, respectively 882,001 935,619
Advances to TII, a related party - 266,000
Prepaid Expenses and Other Current Assets 19,512 47,094
-------------- ------------
TOTAL CURRENT ASSETS 1,071,929 1,266,640
PROPERTY AND EQUIPMENT, NET 299,097 199,982
DEPOSITS AND OTHER ASSETS 62,944 64,561
-------------- ------------
TOTAL ASSETS $1,433,970 $1,531,183
============== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts Payable $600,345 $529,612
Accrued Expenses 446,317 459,034
Amounts due to Related Parties, Net 216,815 294,113
Notes Payable 94,660 288,792
-------------- ------------
TOTAL CURRENT LIABILITIES 1,358,137 1,571,551
LONG-TERM LIABILITIES:
Long-Term Notes Payable - Affiliate 732,872 732,872
Other Long-Term Notes Payable 100,000 55,100
-------------- ------------
TOTAL LONG-TERM LIABILITIES 832,872 787,972
-------------- ------------
TOTAL LIABILITIES 2,191,009 2,359,523
COMMITMENTS AND CONTINGENCIES (Note 10)
<PAGE>
STOCKHOLDERS' DEFICIT
Common Stock, $0.01 Par Value -
Shares Authorized: 18,000,000;
Shares issued and outstanding at June 30, 1998 and 1997:
7,896,231 and 7,858,417, respectively 78,962 78,584
Additional Capital 9,987,098 9,980,538
Accumulated Deficit (10,823,099) (10,887,462)
-------------- ------------
TOTAL STOCKHOLDERS' DEFICIT (757,039) (828,340)
-------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,433,970 $1,531,183
============== ============
</TABLE>
The accompanying "Notes to Financial Statements" are an
integral part of these financial statements.
F-2
<PAGE>
<TABLE>
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30,
1998, 1997, AND 1996
<CAPTION>
Fiscal Year Ended
June 30,
--------------------------------------------
1998 1997 1996
------------ ----------- -------------
<S> <C> <C> <C>
REVENUES
Information Services Revenues $ 4,830,298 $ 4,066,092 $ 3,219,028
Data Communications Revenues 570,895 525,645 330,007
------------ ----------- -------------
Total Revenues 5,401,193 4,591,737 3,549,035
COSTS AND EXPENSES
Costs of Information Services 2,252,732 1,845,600 1,658,335
Costs of Data Communications 732,894 586,857 707,232
Product Development 165,187 270,420 238,954
Sales and Marketing 878,740 571,240 346,986
General and Administrative 1,110,933 984,845 818,714
Depreciation and Amortization 104,768 105,102 141,219
------------ ----------- -------------
Total Costs and Expenses 5,245,254 4,364,064 3,911,440
------------ ----------- -------------
INCOME (LOSS) FROM OPERATIONS 155,939 227,673 (362,405)
OTHER INCOME (EXPENSE)
Interest Expense (93,013) (114,114) (107,931)
Interest Income/Other 1,798 57 (1,079)
------------ ----------- -------------
Other Expense, Net (91,215) (114,057) (109,010)
------------ ----------- -------------
INCOME (LOSS) FROM OPERATIONS
BEFORE INCOME TAXES 64,724 113,616 (471,415)
INCOME TAXES 360 346 489
------------ ----------- -------------
NET INCOME (LOSS) $ 64,364 $ 113,270 $ (471,904)
============ =========== =============
BASIC EARNINGS PER COMMON SHARE $ .01 $ .01 $ (.06)
============ =========== =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 7,859,021 7,858,417 7,858,417
============ =========== =============
DILUTED EARNINGS PER COMMON SHARE $ .01 $ .01 $ (.06)
============ =========== =============
WEIGHTED AVERAGE NUMBER OF SHARES ASSUMING DILUTION 10,170,938 7,858,417 7,858,417
============ =========== =============
</TABLE>
The accompanying "Notes to Financial Statements" are an
integral part of these financial statements.
F-3
<PAGE>
<TABLE>
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE FISCAL YEARS ENDED
JUNE 30 ,1998, 1997, AND 1996
<CAPTION>
Common Shares Outstanding
Total
Number of Par Additional Accumulated Stockholders'
Shares Value Capital Deficit Deficit
---------- -------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 7,858,417 $ 78,584 $ 9,829,971 $ (10,528,829) $ (620,274)
Net Loss (471,904) (471,904)
---------- -------- ----------- -------------- -----------
Balance at June 30, 1996 7,858,417 78,584 9,829,971 (11,000,733) (1,092,178)
Reduction in Note to Shareholder 150,565 150,565
Net Income 113,270 113,270
---------- -------- ----------- -------------- -----------
Balance at June 30, 1997 7,858,417 78,584 9,980,536 (10,887,463) (828,343)
---------- -------- ----------- -------------- -----------
Exercise of Stock Options 2,001 20 260 280
Issuance of Stock - ESPP 35,813 358 6,302 6,660
Net Income 64,364 64,364
---------- -------- ----------- -------------- -----------
Balance at June 30, 1998 7,896,231 $ 78,962 $ 9,987,098 $ (10,823,099) $ (757,039)
========== ========= =========== ============== ===========
</TABLE>
The accompanying "Notes to Financial Statements" are an
integral part of these financial statements.
F-4
<PAGE>
<TABLE>
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF CASH FLOW FOR THE FISCAL YEARS ENDED JUNE 30,
1998, 1997 AND 1996
<CAPTION>
Fiscal Year Ended
June 30,
----------------------------------------
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $ 64,364 $ 113,270 $ (471,904)
Adjustments to reconcile net income (loss) to net cash
provided by (used in ) operating activities:
Depreciation and Amortization Expense 104,768 105,102 141,219
Bad Debt Expense 28,590 34,091 38,000
(Gain)/Loss on Sale of Fixed Assets - 53 1,346
Changes in Operating Assets and Liabilities:
Accounts Receivable 25,027 (402,393) (188,886)
Prepaid Expenses and Other Current Assets 27,582 (17,165) (36,312)
Deposits and other assets 864 - (51,232)
Accounts Payable 70,733 19,381 315,691
Accrued Expenses (12,718) 220,584 59,797
Amounts due to Related Parties 70,124 42,399 77,286
----------- ----------- ------------
Net Cash provided by (used in) Operating Activities 379,334 115,322 (114,995)
Cash Flows from Investing Activities:
Purchases of Property and Equipment (203,131) (39,743) (40,792)
Proceeds from Sale of Fixed Assets - 2,386 8,185
Advances to TII - (28,433) (2,025,202)
Repayments of Advances 266,000 42,738 2,665,245
----------- ----------- ------------
Net Cash (used in) provided by Investing Activities 62,869 (23,052) 607,436
Cash Flows from Financing Activities:
Proceeds from Notes Payable 140,000 - -
Payments on Notes Payable (23,232) (122,626) (23,815)
Proceeds from Notes Payable to Related Parties - 20,000 127,422
Repayments on Notes Payable to Related Parties (147,422) - (31,169)
Proceeds from PrinCap Financing Agreement - - 1,936,758
Repayments against PrinCap Financing Agreement (266,000) (29,361) (2,459,156)
Issuance of Stock under Employee Stock Purchase Plan 6,660 - -
Exercise of Stock Options 280 - -
----------- ----------- ------------
Net Cash (used in) Financing Activities (289,714) (131,987) (449,960)
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents 152,489 (39,717) 42,481
Cash and Cash Equivalents Balance at Beginning of Period 17,927 57,644 15,163
----------- ----------- ------------
Cash and Cash Equivalents Balance at End of Period $ 170,416 $ 17,927 $ 57,644
=========== =========== ============
</TABLE>
The accompanying "Notes to Financial Statements" are an
integral part of these financial statements.
F-5
<PAGE>
COMTEX SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
1. THE COMPANY
Comtex Scientific Corporation (the "Company" or "Comtex") is a
value-added real-time distributor of customized newswire
information products (CustomWiresTM) aggregated on a real-time
basis from thousands of news stories drawn from hundreds of broad
and specialized news sources. CustomWiresTM are marketed to
information distributors ranging from online services and World
Wide Web sites to proprietary networks utilized by financial
traders and corporate electronic news clipping services.
Consistent with standard practice in the information aggregation
industry, the Company generally has renewable long-term contractual
relationships with those information providers and information
distributors with which it does business. These information
services contracts typically provide for both minimum fees and
royalties based upon expected and achieved volumes of usage. Fees
and royalties from information distributors comprise the majority
of the Company's revenues. Data communications revenues represent
the contractual charges for delivering the information over various
media. Fees and royalties due to information providers, along with
telecommunications costs and employee payroll costs, comprise the
majority of the Company's costs and expenses.
AMASYS Corporation,("AMASYS") (the successor corporation to
Infotechnology, Inc., "Infotech"), a Delaware corporation, legally
or beneficially controls 4,693,940 (approximately 59%) of the
issued and outstanding shares of the Company. As discussed in Note
4, 2,540,503 shares of the Company's common stock owned by AMASYS
are subject to option by C.W. Gilluly, Ed.D., the Chairman of the
Board of Directors of both the Company and AMASYS. Dr. Gilluly and
his spouse, Marny Gilluly, (the "Gillulys") also directly own
options to acquire an additional 2,540,503 shares of the Company's
common stock (see Note 4).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those
estimates.
<PAGE>
Revenues
Information services revenues are recognized as services are
rendered based on contractual terms such as usage, fixed fee,
percentage of distributor revenues or other pricing models. Data
communications revenues are recognized in accordance with contract
terms as costs are incurred.
Research and Development
The Company conducts ongoing research and development in the
areas of product enhancement and quality assurance. Such costs are
expensed as incurred. Costs for fiscal years 1998, 1997 and 1996
were approximately $165,000, $270,000 and $239,000, respectively.
Property and Equipment
Property and equipment are stated at cost. Maintenance and
repairs are charged to expense as incurred and the cost of renewals
and betterments are capitalized.
Depreciation and amortization are computed using the straight-
line method over the estimated lives of the related assets - five
years for furniture and fixtures and computer equipment and three
years for software. Leasehold improvements are amortized using the
straight-line method over the lesser of the lease term or the
estimated useful lives of the related assets.
Upon retirement or sale, the cost and related accumulated
depreciation or amortization of assets are removed from the
accounts and any resulting gain or loss is included in the
determination of net income.
Income Taxes
The Company follows the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement
and tax bases of assets and liabilities using the enacted tax rates
in effect for the year in which the differences are expected to
reverse.
Risks and Uncertainties
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts
receivable. The Company believes the credit risk associated with
accounts receivable is minimal due to the number of customers and
their dispersion over different industries and geographical
locations.
<PAGE>
Computation of Earnings per Common Share
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings per Share, which the Company
adopted as of December 31, 1997. As required, the Company changed
the method previously used to compute earnings per share and
restated all prior periods. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock
options is excluded. Diluted earnings per share include the
effect, if dilutive, of stock options and other common stock
equivalents.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), Accounting for Stock-Based Compensation, which was
effective for the Company's June 30, 1997 financial statements.
SFAS No. 123 allows companies to either account for stock-based
compensation under the provisions of SFAS No. 123 or under the
provisions of Accounting Principles Board No. 25 ("APB No. 25"),
but requires pro forma disclosures in the footnotes to the
financial statements as if the measurement provisions of SFAS No.
123 had been adopted. The Company accounts for its stock-based
compensation in accordance with the provision of APB No. 25. As
such, the adoption of SFAS No. 123 did not impact the financial
condition or the results of operations of the Company.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, Comprehensive Income, and Statement No. 131,
Disclosures about Segments of an Enterprise and Related
Information, which are required to be adopted for fiscal years
beginning after December 15, 1997. Upon the effective date of each
of the new statements, the Company will make the necessary changes,
as applicable, to comply with the provisions of each statement and
restate all prior periods presented. The Company does not expect
the adoption of these statements to have a material impact on the
Company's financial condition or results of operations.
Reclassifications
Certain fiscal year 1997 and 1996 amounts have been
reclassified to conform to the fiscal year 1998 presentation.
3. MANAGEMENT PLANS FOR OPERATING UNCERTAINTIES
The Company had negative working capital of $286,208 and a net
shareholders' deficit of $757,039 at June 30, 1998. The Company's
negative working capital raises doubt about its ability to continue
as a going concern.
<PAGE>
The Company has invested significantly in upgrading the
experience level of its sales, marketing and technical support
staff during fiscal year 1998; in expanding its contractual base
with information providers so as to improve the quality and
flexibility of its information products; and in expanding its
contracts with information distributors so as to improve its
revenue potential.
In addition, the Company has made capital expenditures of
approximately $170,000 in fiscal year 1998 to upgrade its software
and hardware to expand its product capabilities and to meet future
client processing requirements.
To date, the Company's operations generate cash flow
sufficient to cover its monthly expenses and management believes
that cash from operations will provide the Company with adequate
cash resources to meet its obligations on a short-term basis.
The Company's ability to meet its liquidity needs on a long-
term basis is dependent on its ability to generate sufficient
billings to cover its current obligations and to pay down its
current and long-term debt obligations. No assurance may be given
that the Company will be able to expand the revenue base or achieve
ongoing profitable operations that may be necessary to fulfill its
liquidity needs in the future. The Company has had preliminary
discussions with AMASYS regarding the possible refinancing or
restructuring of its note payable. If the Company is not
successful in its efforts, it may undertake other actions as may be
appropriate to preserve asset values. The accompanying financial
statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
4. RELATED PARTY TRANSACTIONS
AMASYS, in addition to being the Company's majority
stockholder (approximately 59%), is also the majority stockholder
(approximately 82%) of Telecommunications Industries Inc.
("TII") which has ceased operations. Dr. Gilluly was Chairman and
Chief Executive Officer of TII. Dr. Gilluly is Chairman and Chief
Executive Officer of Hadron, Inc., of which AMASYS owns
approximately 12% of the outstanding shares. The Chairman, Chief
Financial Officer and Corporate Secretary of the Company have
similar duties with Hadron, Inc. More than 50% of their time is
spent on other than Company business. During fiscal years 1998,
1997 and 1996, the following related party transactions occurred.
Corporate Services Provided by/to Hadron, Inc.
The Company contracts with Hadron, Inc. for corporate and
shareholder services. Charges for such services are based on time
and material expended by Hadron personnel in providing such
services at a rate equal to Hadron's costs and amounted to
<PAGE>
approximately $27,000, $34,000 and $15,000 for the fiscal years
ended June 30, 1998, 1997 and 1996, respectively. Hadron subleases
office space from the Company at the rental rate paid by the
Company to its landlord and also shares certain office-related
expenses at cost, based upon usage. Total service charges to
Hadron during the fiscal years ended June 30, 1998, 1997 and 1996,
amounted to approximately $30,000, $24,000 and $4,000,
respectively. Management believes the methods used for allocating
the costs are reasonable.
Administrative Services Provided by/to AMASYS Corp.
The Company participated in certain group insurance plans
coordinated by AMASYS for the benefit of employees through fiscal
year 1996. Costs allocated to the Company in connection therewith
for fiscal year 1996 amounted to approximately $6,000. AMASYS and
its wholly-owned subsidiary, Questech Capital Corporation
("Questech") also share certain general and administrative expenses
for which the Company billed, at cost, AMASYS approximately $4,000,
$9,000 and $400 during fiscal years ended June 30, 1998, 1997 and
1996, respectively. Management believes the methods used for
allocating these costs are reasonable.
TII Sublease
The Company subleased office space from TII until April, 1996.
Pursuant to an agreement entered into in September, 1993, the
Company and TII performed programming, marketing, and general and
administrative tasks for each other. Pursuant to the contract with
TII, the Company incurred expenses of approximately $196,000 for
facility rental, computer equipment, staff and office expenses
during the year ended June 30, 1996. In April 1996, the Company
terminated its sublease with TII and signed a lease directly with
the owner of the building for essentially the identical space it
had been renting from TII. In connection with the lease, the
Company executed a demand note bearing interest at eleven and one
half percent (11.5%) per annum in the amount of $147,422 payable to
Dr. Gilluly (the "Gilluly Note"), collateralized by the Company's
accounts receivable, now existing and in the future arising, and
all proceeds of those accounts. Approximately $4,000 and $14,500 of
interest expense was incurred on the Gilluly Note during the years
ended June 30, 1998 and 1997, respectively. In September 1997, the
Company repaid all principal and interest amounts due on the
Gilluly Note.
Acquisition and Divestiture of Micro Research Industries
During fiscal year 1995 the Company acquired certain assets
and assumed certain liabilities of Telecommunications Industries,
Inc. ("TII") representing substantially all the assets of TII's
sole operating division, Micro Research Industries ("MRI") (the
"Acquisition"). MRI provided sales, leasing and maintenance
support of computer hardware and software primarily to the U.S.
<PAGE>
House of Representatives. At the time of the Acquisition, AMASYS
was a majority stockholder of both the Company and of TII, and C.W.
Gilluly served as the Chairman and Chief Executive Officer of the
Company, AMASYS and TII.
The terms of the Acquisition, through a related Put Agreement
(the "Put"), provided that the Company could, upon the failure of
certain conditions, require TII to repurchase all or any portion of
the assets acquired and to assume the liabilities related to MRI.
On March 25, 1996, the Company exercised the Put and transferred to
TII all the assets and liabilities associated with MRI.
In connection with the Acquisition, the Company entered into a
$1 million secured credit facility with Princeton Capital Finance
Company, LLP ("PrinCap"). As partial consideration for the
agreement by the Gillulys to personally guarantee the PrinCap
financing and to make certain loans to TII prior to the PrinCap
financing, AMASYS and Pacific Telecommunications Systems, Inc.
("PTSI"), its wholly-owned subsidiary, granted an option to the
Gillulys, expiring on February 20, 2002, to purchase 2,540,503
shares of common stock of the Company owned by AMASYS and PTSI at
an exercise price of $.10 per share.
The Acquisition required the Company to grant to the Gillulys
an option (the "Gilluly Option") to acquire 2,540,503 shares of the
Company's common stock at an exercise price of $.10 per share. The
Gilluly Option expires on February 20, 2002.
Shortly after the Company exercised the Put, TII sold to a
third-party the MRI assets that the Company had transferred to TII,
which sale PrinCap claimed represented an event of default under
the PrinCap Financing Agreement. In July, 1996, the Company and
PrinCap consolidated the amount outstanding under the PrinCap
Financing Agreement into a single note collateralized by MRI
receivables from the U.S. House of Representatives which had been
pledged to PrinCap.
In August, 1997, TII settled the MRI amounts due from the
House of Representatives and paid the final amounts due to PrinCap,
which released the Company from all obligations under the PrinCap
Financing Agreement and TII from its related indemnification of the
Company.
The Acquisition also provided for the restructuring of the
Company's previously matured promissory notes to Infotech (the
"Infotech Notes"), and allowed the Company to either seek
indemnification from TII or reduce the amount of the Company's
indebtedness under the Infotech Notes for costs or liabilities
incurred by the Company in connection with the MRI business.
<PAGE>
The then outstanding $889,435 principal was rolled into a 10%
Senior Subordinated and Secured Note due July 1, 2002 (the "AMASYS
Note"), subject to future reduction or increase under certain
circumstances. In fiscal year 1996, the Company reduced by
approximately $31,000 the amount it owed under the AMASYS Note for
rent paid to TII's landlord on behalf of TII. At June 30, 1997,
the AMASYS Note was further reduced by approximately $125,000 in
final resolution of the amounts due from TII not recovered through
collection of the MRI receivables, decreasing the Note to $732,872.
The AMASYS Note is secured by a continuing interest in all
receivables, products and proceeds thereof, all purchase orders and
all patents then or in the future held by the Company, and is
subordinated to all Senior Indebtedness. Interest on the note was
$73,284, $89,600 and $104,531 for the years ended June 30, 1998,
1997 and 1996, respectively.
Amounts due to related parties consisted of the following at
June 30:
<TABLE>
1998 1997
---------- -----------
<S> <C> <C>
Note payable to C.W. Gilluly, Ed.D. including
accrued interest of $1,221 at June 30, 1997 $ $ 148,643
Interest due to AMASYS under Amended AMASYS Note 215,333 148,157
Amounts due to/(from) Hadron, Inc. for corporate
and shareholder services 4,749 (2,554)
Due (from) AMASYS for administrative services (3,267) (133)
----------- -----------
Due to Related Parties $ 216,815 $ 294,113
=========== ===========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30:
<TABLE>
1998 1997
--------- ----------
<S> <C> <C>
Computer Equipment $ 829,671 $ 632,560
Furniture and Fixtures 66,628 63,408
Software 77,324 74,524
Leasehold Improvements 29,405 29,405
Other Equipment 6,000 6,000
--------- ---------
1,009,028 805,897
Less Accumulated Depreciation (709,931) (605,915)
--------- ---------
Net $ 299,097 $ 199,982
========= =========
</TABLE>
Depreciation expense for the fiscal years ended June 30, 1998, 1997
and 1996 was $104,015, $104,350 and $136,415, respectively.
<PAGE>
6. NOTES PAYABLE
Notes payable consisted of the following at June 30:
<TABLE>
1998 1997
------------ -----------
<S> <C> <C>
Note Payable to Princeton Capital Finance
Company ("PrinCap")(see Note 4) $ $ 266,000
Note Payable to Century National Bank 140,000
Notes Payable related to Acquisition of
International Intelligence Report, Inc. 4,660 11,430
Notes Payable to vendors 50,000 66,462
------------ -----------
Subtotal 194,660 343,892
Less Current Portion 94,660 288,792
------------ -----------
Total Long-Term Notes Payable $ 100,000 $ 55,100
============ ===========
</TABLE>
Note payable to Century National Bank
In September 1997, the Company obtained a $50,000 line of
credit and a $140,000 three year term loan from Century National
Bank with annual principal repayments of $40,000, $40,000 and
$60,000 due September 1998, September 1999 and September 2000,
respectively. The facilities, guaranteed by C.W. Gilluly and
spouse, bear interest at a rate of prime plus two percent annually
(10.5% at June 30, 1998).
Notes payable related to Acquisition of International Intelligence
Report, Inc.
In December 1993, the Company assumed certain unsecured, non-
interest bearing debt obligations related to the acquisition of
assets and certain liabilities of International Intelligence
Report, Inc. At June 30, 1998, $4,660 was outstanding on these
obligations and will be paid during fiscal year 1999.
Notes payable to Vendors
In June 1997, the Company signed a note with a law firm
converting accounts payable to the firm to a note payable in the
amount of $50,000 due no later than December 17, 1998, together
with all accrued interest thereon. The note bears interest at a
rate of nine percent (9%) per annum.
In July 1996, the Company agreed with a data communications
vendor to convert a net amount of accounts payable to the vendor
and royalties receivable by the Company from the vendor to a note
payable in the amount of $173,712. Due to substandard service
provided by this vendor during the period of July through November
1996, the Company negotiated a one-time credit of approximately
$57,000.
<PAGE>
This credit was applied to the principal balance of the
note. The note was further reduced by $15,000 as of June 30, 1997,
pursuant to a Customer Conversion Agreement with the vendor. The
note bearing interest at 10%, was repaid in December 1997.
7. NET INCOME PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
Fiscal Year Fiscal Year Fiscal Year
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Numerator:
Net Income $ 64,364 $ 113,270 $ (471,904)
=========== =========== ============
Denominator:
Denominator for basic earnings
per share - weighted average shares 7,859,021 7,858,417 7,858,417
Effect of dilutive securities:
Stock Options 2,311,917
----------- ------------ ------------
Denominator for diluted
earnings per share 10,170,938 7,858,417 7,858,417
=========== ============ ============
Basic Earnings Per Share $ .01 $ .01 $ ( .06)
Diluted Earnings Per Share $ .01 $ .01 $ ( .06)
</TABLE>
Shares issuable upon the exercise of stock options have been
excluded from the computation for fiscal years 1997 and 1996
because the effect of their inclusion would be non-dilutive or
anti-dilutive.
8. INCOME TAXES
Income taxes included in the Statements of Operations consist
principally of state income taxes and local franchise taxes. The
tax provision for continuing operations differs from the amounts
computed using the statutory federal income tax rate as follows:
<TABLE>
1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
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%
========= ======== ========
</TABLE>
<PAGE>
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes. Gross
deferred tax assets at June 30, 1998 and 1997, consist primarily of
temporary differences from net operating loss and business tax
credit carryforwards of approximately $1,700,000 and $1,800,000,
respectively, and are fully reserved. The Company has net
operating loss (NOL) and business tax credit carryforwards
available to offset future taxable income of approximately $4.1
million as of June 30, 1998. The net change in valuation allowance
during 1998 was a decrease of approximately $100,000. These NOL
and ITC carryforwards expire beginning in the year 2000.
9. STOCK OPTION PLAN
The Company's 1995 Stock Option Plan provides for both
incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, and non-qualified stock
options to purchase shares by key employees, consultants and
directors of the Company. In December 1997, shareholders approved
an amendment to the 1995 Stock Option Plan to increase the number
of shares reserved for issuance thereunder by 1,200,000 to
2,400,000. Under the 1995 Plan, the exercise price of an incentive
stock option is required to be at least equal to 100% of the fair
market value of the Company's common stock on the date of grant
(110% of the fair market value in the case of options granted to
employees who are 10% shareholders). The exercise price of a non-
qualified stock option is required to be not less than the par
value, nor greater than the fair market value, of a share of the
Company's common stock on the date of the grant. The options vest
in three equal annual installments beginning with the date of
grant. The term of an incentive or non-qualified stock option may
not exceed ten years (five years in the case of an incentive stock
option granted to a 10% stockholder).
<PAGE>
Information with respect to stock options granted through
June 30, 1998, under the 1995 Plan is as follows:
<TABLE>
Incentive Stock Non-Qualified Per Share
Options Stock Options Option Price
--------------- ------------ ------------
<S> <C> <C> <C>
Outstanding at June 30, 1996 692,733 110,000 .10
Granted 384,000 20,000 .10 - .19
Expired ( 37,000) .10
--------------- ------------
Outstanding at June 30, 1997 1,039,733 130,000 .10 - .19
Granted 429,675 20,000 .20 - .44
Expired (62,995) .10 - .22
Exercised ( 2,001) .10 - .22
--------------- ------------
Outstanding at June 30, 1998 1,404,412 150,000 .10 - .44
=============== =============
Exercisable at June 30, 1998 1,061,703 130,002
=============== =============
</TABLE>
The weighted average exercise price of options outstanding at
June 30, 1998, was $.11. The weighted average exercise price of
options exercised in fiscal year 1998 was $.14. The weighted
average remaining contractual life of options outstanding at June
30, 1998 was 7.91 years. The weighted average fair value of
options granted during 1998, 1997 and 1996 was $.23, $.14 and $.10,
respectively.
During fiscal year 1997, the Company adopted the disclosure-
only provisions of SFAS No. 123. Had compensation cost for the
Company's stock option plan been determined based upon the fair
value at the grant date for awards under the plan consistent with
the methodology prescribed under SFAS No. 123, the Company's net
income/(loss) in fiscal years 1998, 1997 and 1996 would have been
approximately $43,000, $80,000 and $(493,000), or $.01, $.01 and
$(.06) per share, respectively. The effect of applying SFAS No.
123 on 1998, 1997 and 1996 pro forma net income/loss as stated
above is not necessarily representative of the effects on reported
net income or loss for future years due to, among other things, (1)
the vesting period of the stock options and (2) the fair value of
additional stock options in future years.
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing fair value model.
The following weighted-average assumptions were used for grants:
dividend yield of 0%; expected volatility of 3.1; expected life of
the option term of 6 years and risk-free interest rate of 5.75%,
6.5% and 5.875% for the years 1998, 1997 and 1996, respectively.
10. EMPLOYEE STOCK PURCHASE PLAN
In December 1997, shareholders approved the 1997 Employee
Stock Purchase Plan. The purpose of the Plan is to secure for the
Company and its shareholders the benefits of the incentive inherent
in the ownership of Common Stock by present and future employees of
the Company. The Plan is intended to comply with the terms of
Section 423 of the Internal Revenue Code of 1986, as amended, and
Rule 16b-3 of the Securities Exchange Act of 1934. Under the terms
of the Plan individual employees may pay up to $10,000 for the
purchase of the Company's common shares at 85% of the determined
market price. During fiscal year 1998, employees paid almost
$7,000 for the purchase of common stock under the Plan.
<PAGE>
11. SUPPLEMENTARY INFORMATION
Income Statement
The following income statement items were charged to costs
and expenses:
<TABLE> Fiscal Year Ended June 30,
1998 1997 1996
------------ ----------- ---------
<S> <C> <C> <C>
Amortization of Intangible Assets $ 753 $ 753 $ 4,804
Maintenance and Repairs 67,634 81,745 72,035
Advertising and Promotion Costs 32,025 44,574 36,302
Royalties 1,501,666 1,129,669 994,760
</TABLE>
Allowance for Doubtful Accounts
The following table summarizes activity in the allowance for
doubtful accounts:
<TABLE> Fiscal Year Ended June 30,
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Beginning Balance $ 77,139 $ 85,284 $ 58,622
Additions 28,590 34,091 38,000
Write-Offs (38,813) (42,236) (11,338)
--------- ---------- ---------
Balance at End of Year $ 66,916 $ 77,139 $ 85,284
========= ========== =========
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The Company leases office space under a noncancelable
operating lease that expires August 31, 2002. The lease requires
fixed escalations and payment of property taxes, insurance and
maintenance costs.
The future minimum rental commitments under this lease are as
follows:
<TABLE>
Fiscal year Minimum Rental
ending June 30, Commitments
--------------- --------------
<S> <C>
1999 $ 200,511
2000 209,314
2001 215,593
2002 222,061
2003 37,931
-------------
$ 885,410
=============
</TABLE>
<PAGE>
Rent expense under all operating leases totaled approximately
$162,000, $129,000 and $107,000 for the fiscal years ended June 30,
1998, 1997 and 1996, respectively.
13. 401(K) PLAN
Effective April 1, 1995, the Company adopted a 401(k) plan
available to all full-time employees who meet a minimum service
requirement. Employee contributions are voluntary and are
determined on an individual basis with a maximum annual amount
equal to the maximum amount allowable under federal tax
regulations. All participants are fully vested in their
contributions. The 401(k) plan provides for discretionary Company
contributions. The Company did not make any contributions during
the fiscal years ended June 30, 1998, 1997 and 1996.
14. STATEMENTS OF CASH FLOW - SUPPLEMENTAL DISCLOSURE
The Company paid cash for interest costs in the amount of
approximately $17,000, $45,000 and $52,000 for the years ended June
30, 1998, 1997 and 1996, respectively. Amounts paid in cash for
income taxes during the years ended June 30, 1998, 1997 and 1996,
were approximately $360, $350 and $500, respectively. During
fiscal year 1996, approximately $71,000 in furniture and computer
equipment were transferred to the Company from TII and the advances
to TII were reduced by a corresponding amount. Additionally,
approximately $31,000 in advances to TII were reduced and offset
against the AMASYS Note at June 30, 1996, as indemnification of
amounts paid on behalf of TII. During fiscal year 1997, the AMASYS
Note was reduced by $150,565 pursuant to the MRI Acquisition and
related Put Agreement (see Note 4). The AMASYS Note was further
reduced by approximately $125,000 for advances made to TII of
approximately $106,000 and a prepayment of approximately $19,000
made on behalf of TII and indemnified by AMASYS.
Exhibit 24.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statements(Form S-8 No. 333-37057 and No. 333-42395) pertaining to
the Comtex Scientific Corporation 1995 Stock Option Plan and the
Comtex Scientific Corporation 1997 Employee Stock Purchase Plan of
our report dated September 9, 1998, with respect to the consolidated
financial statements of Comtex Scientific Corporation included in
the Annual Report (Form 10-K) for the year ended June 30, 1998.
Ernst & Young LLP
Vienna, Virginia
September 24, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCEHDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FISCAL YEAR 1998 FORM 10-K AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH 10-K.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 170,416
<SECURITIES> 0
<RECEIVABLES> 948,917
<ALLOWANCES> (66,916)
<INVENTORY> 0
<CURRENT-ASSETS> 1,071,929
<PP&E> 1,009,028
<DEPRECIATION> (709,931)
<TOTAL-ASSETS> 1,433,970
<CURRENT-LIABILITIES> 1,358,137
<BONDS> 0
0
0
<COMMON> 78,962
<OTHER-SE> (836,001)
<TOTAL-LIABILITY-AND-EQUITY> 1,433,970
<SALES> 5,401,193
<TOTAL-REVENUES> 5,401,193
<CGS> 0
<TOTAL-COSTS> 5,245,254
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91,215
<INCOME-PRETAX> 64,724
<INCOME-TAX> 360
<INCOME-CONTINUING> 64,364
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,364
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
