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, 1999; 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, 1999, 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 $5,470,451.
As of September 23, 1999, 8,126,380 shares of the Common Stock of
the Registrant were outstanding.
<PAGE>
PART I
Item 1. Business
Comtex Scientific Corporation ("COMTEX" or the "Company")
was incorporated in New York in 1980.
Overview
COMTEX is a leading full service Internet "Infomediary"
delivering aggregated content from a network of
approximately 45 real-time news wires to Web sites and other
online, wireless and electronic information services. Our customer
or distribution partner network consists of more than 270 Web
sites and information services creating a potential audience
of millions of Internet users, over 200,000 personal
investors, 400,000 Wall Street brokers and 900,000 business
professionals in the corporate market. COMTEX generates its
revenues from licensing content and processing services.
Use of COMTEX aggregated news and services provide both
our distribution partners and content partners with
significant competitive advantages. Their reliance on, and
use of, outsourced COMTEX aggregated news feeds and services
enables them to focus on their core competencies as well as
bring their products to market quickly and less expensively.
Our infomediary services allow each business to first focus
corporate resources on their businesses while outsourcing
news content aggregation and integration to COMTEX.
Our content plays a crucial role for our network of
distribution partners in attracting and retaining customers
to their services. This in turn drives their revenue models
whether they be subscription, advertising or commerce based
models. The real-time nature of the content, as well as the
breadth and depth of coverage, provide the critical element
in developing and maintaining a compelling user experience
on our distribution partner's sites and services. COMTEX'
publisher partners provide the content for COMTEX' products
and contain late-breaking U.S. and international news and
events, worldwide economic news and indices, news and
information on both public and private companies, and up-to-
the-minute sports and entertainment news from around the
world.
We currently aggregate 45 real time news wires. Real-
time denotes the electronic transmission of breaking news
stories while events are actually happening and, in most
cases, before the story's appearance in print and television
media. Using our proprietary automated technology, we re-
package these wires into topical wires called CustomWiresR.
Customers chose those CustomWiresR which best match their
applications and end-users' needs. CustomWiresR include
topics such as business, finance, environment, healthcare,
public companies and energy. Content can also be packaged by
publisher or by more than 15 geographical regions.
<PAGE>
Likewise, our network of over 270 distributors plays a
critical role for our network of content partners. Through
our network of distributors, our content partners gain rapid
access to new markets, incremental revenue and brand
exposure while focusing corporate resources on quality
content generation.
Additional advantages are afforded to our distribution
partners. The integration of content on our distributor's
sites and services requires only one contractual relationship
to manage and one technical format to address. In
addition, licensing content by topical or geographical area
is more cost effective for the distributor since they only
pay for and manage the content they need.
COMTEX' relationship with ever increasing offerings of
our content partners allows us to be the one-stop solution
for our distribution partners. Publishers of real-time news
only cover their editorial perspective and specific area of
coverage or expertise. COMTEX brings together these
disparate sources in a real-time, value added and single
feed and format source. Distributors are able to deliver
better products, significantly faster and more cost
effectively due to our expertise as an infomediary.
A significant portion of the content we aggregate
focuses on business and financial news, both domestic and
international. This real-time news content is a critical
factor in business and investment decisions since it is
updated and distributed in real-time throughout the day.
Distributor information services must provide, in a
timely fashion, the broadest coverage possible to be
competitive in this web-enabled information age. Further,
the content they offer to their constituencies must be
relevant and pertinent to the critical decisions that are
being made. Without COMTEX' aggregation and packaging,
information services would have a difficult time keeping
their sites and services competitive.
Distribution Partners
Access to our growing network of information publishers
or providers via a single business relationship coupled with
our unique packaging is a compelling proposition for Web
sites and information services each of whom are competing in
their markets trying to maintain a compelling and "sticky"
site to maximize the success of their business model. Our
distributor partners can gain the required
critical mass of content quickly and effectively. This
improves their product and helps get them to market faster.
<PAGE>
On the Internet, our distribution partners include Big
Charts, CompuServe, InfoSpace, PC Quote.com, Office.com,
OneSource, StockPoint, Telescan and VerticalNet. Other
corporate distribution partners include NewsEdge, WAVO,
Reuters Business Briefs and Dialog Corporation. Wall Street
distributors include information services such as AT
Financial, Bloomberg, Bridge Information Services, Fidelity,
ILX and Track Data.
Contracts with our distribution partners generally and
historically have a term of one to three years. Our revenues
consist of fixed fees, monthly royalty minimums and
royalties based on the success of the distributor's revenue
model.
Content Partners
The growing list and extensive reach of our
distributors along with unique content packaging creates an
attractive business proposition for our publisher partners.
With a COMTEX relationship, they gain incremental revenues
and substantial branding across all of our Internet,
corporate and Wall Street markets.
Current providers include publishers such as: The
Associated Press, Bridge News, Business Wire, CMP Media,
Knight-Ridder / Tribune, Nelson Information, Newsbytes News
Network, ON24, Phillips Publishing Inc., PR Newswire and
United Press International. COMTEX also has agreements
with a significant number of international based news
agencies including Africa News Service, Asia Pulse,
ITAR/TASS News Agency, Kyodo News International and South
American Business Information.
The contracts with our content partners include the
right to license re-sellers and other information
distributors. This negotiated right is a significant asset
and competitive advantage since it allows COMTEX to generate
revenue based on the end-user reach of our distributor
partners. In addition, it leverages marketing expenditures
and investments made by our distributor partners. Our costs
associated with these licenses include fixed fees, monthly
minimums and / or royalties based on COMTEX' information
services revenue and the content partners' participation in
the distributed products.
<PAGE>
Technology
COMTEX' real-time processing system is an integration
of proprietary technology and industry proven technology.
Utilizing our experience in managing and processing real-
time news feeds we have designed proprietary processes to
maximize the content value-adds, reliability, packaging and
flexibility. Our current systems can manage more than 15,000
stories per day from 45 real-time newswires, classify each
story, index by ticker symbol and other keywords, and
deliver only the stories licensed to each Web site or
information service. An improved processing system, called
Equinox internally, is due to be fully operational before
calendar year-end, and will have the capacity to process
more than 100,000 stories per day and provide even greater
flexibility in the creation of new products and value-adds.
The method for processing and converting the real-time
news feeds into the COMTEX value-added format relies heavily
on computer technology and data management software, in
which COMTEX has invested and will continue to invest
significant amounts to upgrade. As electronic news feeds
and other submissions of news and information are received,
COMTEX' 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, our data management software sorts each news
story into topic defined product categories. COMTEX'
editorial and product development staffs monitor and edit
the electronic processing and categorization of incoming
news items to ensure our products meet various market needs
and product specifications.
COMTEX delivers its information products in a variety
of ways to suit customer requirements. These delivery
methods include:
- broadcast news products via leased lines, frame relay,
FM transmission or satellite downlink
- Internet delivery of news products
Business Model
Our revenue is primarily derived from our distributors
for data communications and the licensing of content,
including our CustomWiresR and / or the publishers' full
wire. The distributor licenses are typically multi-year and
have fixed fees as well as minimum royalty commitments.
Royalties are based upon the customer's business and revenue
model such that their success in their market generates
proportionally increasing revenues for COMTEX.
<PAGE>
Other sources of revenue include content processing for
select distributors and processing and distribution services
for several content providers. Several distributors have
found it advantageous to have COMTEX process additional
content for them so that the additional content is in the
same format with the same value-adds as the content they
license directly from us. Processing fees include initial
implementation fees, monthly minimums and a percentage of
the royalties earned by the licensor of the content.
Likewise several content providers find it to their
advantage to be able to deliver their content through our
distribution network of more than 270 Web sites and
information services. Processing revenues consist of
implementation fees, monthly minimums and a percentage of
their revenues earned through our network.
Customers, Sales and Marketing
COMTEX' customers consist of online and internet
services and information distributors who create products
and services in conjunction with the COMTEX' products and in
turn sell to their customers: end-user markets and
corporations, who use the combined services for market
research, business intelligence, investment analysis and
entertainment. 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 services and
wireless information services.
COMTEX' marketing strategy is to provide the content
infrastructure to information services, which spend
marketing dollars to attract end-users to their services and
product offerings. In this way, we leverage marketing
investment by our customers to attract and assemble a broad
user base for the our content offerings. Our licensing
agreements provide for fees and minimum royalties as well as
variable royalties based on the success of our distribution
customer's individual business models.
COMTEX' sales force is organized around our four
primary markets - professional investor, individual
investor, internet and corporate information services
markets. The sales force receives a base salary and earns
commissions on both new customers and revenue growth from
existing customers. Our compensation plan is consistent with
industry compensation practices.
Current distributor customers include, but are not
limited to, in the professional and individual investor
market: AT Financial, Bloomberg L.P., Bridge Trading
Company, ILX, PC Quote, Track Data; in the internet market:
Big Charts, Inc., CNN Interactive, CompuServe, Inc.,
Infospace, PointCast, Inc., Stockpoint, Telescan, Thomson
Consumer Products Group, VerticalNet, Inc.; and in the
corporate market: NewsEdge, Inc., OneSource Information
Services, Inc., Reuters Ltd., and The Gale Group
<PAGE>
Product and Service Offerings
The core products currently supported by COMTEX'
technical and customer service departments include a series
of topic-defined news products marketed under the brand name
"CustomWiresR". We also support production of original news
products under the brand name "Comtex Newsroom".
CustomWiresR are topic-defined newswires that contain
only the topic-relevant stories from more than forty-five
newswire services distributed by COMTEX representing more
than forty publishing alliances. Stories are selected by
our automated editorial software according to the
significance of the story's content relative to specific
CustomWiresR topics. COMTEX offers fourteen topics under
the CustomWiresR 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 eleven geographical CustomWiresR focusing on
specific international regions.
Comtex Newsroom product line includes 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 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 up to ten of the most
significant news stories of the day in each of fourteen
topic-based CustomWiresR.
<PAGE>
The Top Headlines categories in Comtex Newsroom are:
Business, Community, Energy, Entertainment, Environment,
Finance, Government, Healthcare, High Technology,
International and Sports. Based on specific market interest,
the Company developed an additional fourteen 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. In addition, COMTEX
offers seven financially focused categories that are updated
with five to seven top headlines. These categories include
Bonds, Earnings, Economy, International Markets, Mergers and
a Market Overview. Top Headlines are updated and released to
customers up to five times a day.
Utilizing the same automated editorial and format
conversion process, COMTEX has broadened its services to
include offering news processing services to large-scale
content distributors and information providers. The content
providers and distributors take advantage of and leverage
the standardized format and value-added processing for all
their content. In addition, the information providers can
take advantage of access to our more than 270 web sites and
services. COMTEX believes this new offering will increase
the reliance that information providers and distributors
have on COMTEX and, at the same time, attract even more
customers to Comtex.
COMTEX believes the rapid growth in the use of
electronic information by consumers, businesses and
professional investors will continue to create a significant
market for our information products and outsourcing
services.
COMTEX 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 our information sources would
affect our 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).
<PAGE>
Competition
COMTEX' content offerings, technology platform and
capabilities as well as relationships with our content and
distribution partners uniquely allow these partners to focus
their business efforts and resources on their core
competencies. Our aggregation and integration services as
well as technological capabilities combined with our
established base of content and distribution partners
represent a significant barrier to entry into COMTEX'
markets by potential competitors.
Certain customers view individual national and
international electronic news and information wire services
as direct competitors. Examples include established
electronic newswire services such as Dow Jones
News/Retrieval and Reuters. COMTEX management believes that
because these companies primarily offer only their own
proprietary and editorially selected content, they cannot
offer the breadth, depth and magnitude of the real-time news
content that is available from COMTEX. Additionally, COMTEX
does not believe these entities utilize a technological
approach to processing and delivering value-added
information products similar to that used by COMTEX and
therefore cannot as efficiently meet the needs of our
customers.
Product Development
For the years ended June 30, 1999, 1998 and 1997
COMTEX' product development costs were approximately
$270,000, $165,000, and $270,000 respectively. The decrease
in fiscal year 1998 was due to a shift of resources to focus
on marketing strategies for COMTEX.
In addition, during fiscal year 1998, COMTEX 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 years 1999 and 1998 COMTEX incurred and capitalized
approximately $430,000 and $170,000 on this initiative.
Completion of the estimated $1,000,000 upgrade project is
expected late in calendar year 1999.
COMTEX has broadened its services to offer distributors
and information providers an outsourcing service for the
processing and distribution of their information. During
the past year, COMTEX has added content from a significant
number of important publisher partners: Associated Press,
EDGAR Online, Kyodo News, Nelson's Broker Summaries, ON24
Inc., PrimeZone Media Network, COMLINE Business Data, Inc.,
Market News Publishing, IPO Monitor. COMTEX plans to
continue to add quality publishers to its content offerings
with a continued commitment to serving its markets with the
highest quality content.
<PAGE>
Company History
Comtex Scientific Corporation was incorporated in New
York in 1980. As a result of a series of transactions
during COMTEX' fiscal year 1989, Infotechnology, Inc.
("Infotech"), a Delaware business development corporation,
then principally engaged in the information and
communications business, acquired majority ownership of
COMTEX.
During the 1980s and early 1990s, COMTEX 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 COMTEX by focusing on the
aggregation, value-add, repackaging and distribution of
content for resale to distributors in the professional
investor, individual investor, internet and corporate
information services markets. With the new focus, COMTEX
has been able to achieve significant growth in information
services revenues, over 40% in 1999 alone, as well as
consistent profitability during the past three years, while
investing in management, sales, marketing, technical
resources and infrastructure.
Employees
At June 30, 1999, COMTEX had 39 full-time employees.
The employees are not members of a union and COMTEX believes
employee relations are generally good. COMTEX' Chairman,
Treasurer and Corporate Secretary have similar duties with
Hadron, Inc. More than 50% of their time is spent on other
than COMTEX business.
Other Information
AMASYS Corporation, ("AMASYS") (the successor
corporation to Infotechnology, Inc., "Infotech"), legally or
beneficially controls 4,693,940 (approximately 58%) of the
issued and outstanding shares of COMTEX. As discussed in
Note 3 of the Notes to Financial Statements, 2,540,503
shares of COMTEX' 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 1,783,003
shares of COMTEX' common shares.
<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.
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 1999 and 1998 is shown
below:
<TABLE>
Fiscal Year Ended June 30, 1998 High Low
- ------------------------------- ------ ------
<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, 1999 High Low
- ------------------------------- ------ ------
<S> <C> <C>
First Quarter
(7/1 to 9/30/98) 1/2 3/16
Second Quarter
(10/1 to 12/31/98) 7/16 1/5
Third Quarter
(1/1 to 3/31/99) 4 11/16 3/8
Fourth Quarter
(4/1 to 6/30/99) 2 7/8 1 3/4
</TABLE>
The approximate number of holders of record of the Company's
Common Stock as of September 23, 1999 was 564.
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.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
The following table sets forth selected financial data for
each of the last five fiscal years of the Company.
<CAPTION>
Fiscal Year Ended June 30,
(amounts in thousands except 1999 1998 1997 1996 1995
per share data)
<S> <C> <C> <C> <C> <C>
Information Services Revenues $ 6,885 $ 4,830 $ 4,066 $ 3,219 $ 2,769
Data Communications Revenues $ 672 $ 571 $ 526 $ 330 $ 288
Total Comtex Net Revenues $ 7,557 $ 5,401 $ 4,592 $ 3,549 $ 3,057
Income (Loss) from Operations $ 542 $ 156 $ 228 $ (362) $ (166)
Net Income (Loss) $ 456 $ 64 $ 113 $ (472) $ (260)
Basic Net Income(Loss) Per Share $ .06 $ .01 $ .01 $ (.06) $ (.03)
Diluted Net Income (Loss) Per Share $ .04 $ .01 $ .01 $ (.06) $ (.03)
Balance Sheet Data at Year End:
Total Assets $ 2,407 $ 1,434 $ 1,531 $ 1,382 $ 1,851
Long-term Obligations $ 1,047 $ 833 $ 788 $ 1,083 $ 1,075
</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, 1999 to the Fiscal
Year ended June 30, 1998
During the year ended June 30, 1999, the Company's total
revenues were approximately $7,557,000 or approximately
$2,156,000 (40%) greater than revenues for the year ended June
30, 1998. Of the approximately $2,055,000 increase in
information services revenues, approximately 13% represents
revenues from new customers and approximately 87% 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
$101,000 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,
1999, were approximately $7,015,000, compared to approximately
$5,245,000 for the fiscal year ended June 30, 1998, an increase
of approximately $1,770,000 (34%). The increase in total costs
and expenses is due to increased information services costs, data
communications costs, product development costs, sales and
marketing costs and general and administrative expenses.
Costs of information services were approximately $2,985,000
for the fiscal year ended June 30, 1999, compared to
approximately $2,253,000 for the fiscal year ended June 30, 1998,
an increase of approximately $733,000 (33%). 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 costs and increased
consulting fees, offset by a decrease in software maintenance
costs.
Data communications costs increased by approximately $24,000
(3%) to approximately $757,000 for the fiscal year ended June 30,
1999, from approximately $733,000 in the fiscal year ended June
30, 1998. 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, 1999, partially
offset by a decrease in costs associated with the termination of
an outdated method of delivery.
Product development expenses were approximately $270,000 for
the fiscal year ended June 30, 1999 compared to $165,000 for the
prior fiscal year. The increase of approximately $105,000 (63%)
is due to additional personnel costs.
<PAGE>
Sales and marketing expenses were approximately $1,281,000
for the fiscal year ended June 30, 1999, compared to
approximately $879,000 for the fiscal year ended June 30, 1998,
an increase of approximately $402,000 (46%). This increase is
due to increased marketing and sales personnel, additional travel
expenses associated with business development, increased bonus
and commissions related to the increase in information services
revenues in the current year, as well as increased spending on
advertising, promotional materials and sales collateral.
General and administrative expenses were approximately
$1,617,000 for the fiscal year ended June 30, 1999 compared to
approximately $1,111,000 for the prior fiscal year. The increase
of approximately $506,000 (46%) is primarily due to an increase
in bad debt expense related principally to the increase in the
number of new customers, increased rent expense associated with
the Company's expanded office space, and increased compensation
corresponding to reaching targeted revenue and net income goals.
The Company earned operating income of approximately
$542,000 during the fiscal year ended June 30, 1999 compared to
operating income of approximately $156,000 during the fiscal year
ended June 30, 1998. The Company earned net income of
approximately $456,000 for the fiscal year ended June 30, 1999,
compared to approximately $65,000 for the fiscal year ended June
30, 1998. The increase in operating and net income reflects the
increased revenues during the year offset partially by the
continued investments in personnel and information provider
content as discussed above.
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.
<PAGE>
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 the increased data volume during the fiscal year ended June
30, 1998.
Product development expenses were approximately $165,000 for
the fiscal year ended June 30, 1998 compared to $270,000 for the
prior fiscal year. The decrease of approximately $105,000 (39%)
is due to a shift in personnel from this department to focus on
marketing strategies for the Company.
Sales and marketing expenses were approximately $879,000 for
the fiscal year ended June 30, 1998, compared to approximately
$571,000 for the fiscal year ended June 30, 1997, an increase of
approximately $308,000 (54%). This increase is due to increased
marketing and sales personnel, additional travel expenses
associated with business development and increased commissions
related to the increase in information services revenues in the
current year.
General and administrative expenses were approximately
$1,111,000 for the fiscal year ended June 30, 1998 compared to
approximately $985,000 for the prior fiscal year. The increase
of approximately $126,000 (13%) is due to increased legal fees
corresponding to an increase in the number of contracts
negotiated with new customers, increased rent expense associated
with the Company's expanded office space, an increase in the
employee bonus related to revenues and the fees associated with
recruiting technical personnel.
The Company earned operating income of approximately
$156,000 during the fiscal year ended June 30, 1998, compared to
operating income of approximately $228,000 during the fiscal year
ended June 30, 1997. The Company earned net income of
approximately $64,000 for the fiscal year ended June 30, 1998,
compared to approximately $113,000 for the fiscal year ended June
30, 1997. The decrease in operating and net income reflects the
investment of increased revenues in personnel and information
provider content as discussed above, as well as the absence of a
one-time resolution of revenues during the prior year. 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.
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended June 30, 1999, the Company
reported operating income of approximately $542,000 and net
income of approximately $456,000. At June 30, 1999, the Company
had negative working capital of approximately $106,000 as
compared with negative working capital of approximately $286,000
at June 30, 1998. The decrease in negative working capital was
due primarily to the reclassification of interest due on a long-
term note to notes payable to affiliate. The decrease was offset
partially by an increase in deferred revenue from one customer.
At the end of the year, the Company executed an amended Note
Payable to Affiliate to incorporate the interest into the
principal amount of the note.
The Company also reported a net stockholders' deficit of
approximately $254,000 at June 30, 1999 compared to a net
stockholders' deficit of approximately $757,000 at June 30, 1998.
The decrease of approximately $503,000 in stockholders' deficit
was due to the retention of net income and additions to equity
resulting from the exercise of Company incentive stock options
and purchases under the Company's Employee Stock Purchase Plan.
During the fiscal year ended June 30, 1999, the Company's
operations generated approximately $615,000 in cash flows.
Operating cash flows were used to invest in the improvement of
company operations, as well as to fund capital expenditures and
the repayment of long-term notes. 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, as well as
continued investment in company operations.
The Company has a $250,000 line of credit in place and
available to assist with short-term flucuations in cash flow, if
necessary. To date, the Company has not needed to use this
facility, but may need to do so in the future to assist with
investments in the Company.
As noted above, the Company has invested significantly in
upgrading the experience level of its management, 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 distributor customers.
All of these factors contribute to improving the Company's
ability to sell and deliver quality products and services.
<PAGE>
In addition, the Company has made capital expenditures of
approximately $643,000 in fiscal year 1999, primarily to upgrade
its software and hardware platforms thus expanding both its
product capabilities and its ability meet future client
processing requirements. The Company anticipates continued
investment at similar levels in fiscal year 2000 to continue to
upgrade its technology platforms and infrastructure.
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. Therefore, these computer programs do not
properly recognize a year that begins with "20" instead of the
familiar "19, " 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, including those with embedded
controls. It has undertaken, or is currently undertaking,
corrective actions where issues were discovered. Specific
contingency plans are currently being developed where significant
risks may exist despite corrective actions taken or planned. All
corrective actions and contingency plans are scheduled to be
completed and/or put into place by December 31, 1999.
The first of a two-phase project to evaluate the Company's
primary systems for processing feeds from information providers
and distributing them to its customers has been completed with
generally positive results. Not all systems were found to be Year
2000 compliant. The second phase will correct known problems,
further identify areas for correction and develop contingency
plans where no remediation is possible. Management believes
these systems will operate satisfactorily in a Year 2000
environment with little or no impact.
The Company estimates that its total Year 2000 compliance
costs will approximate less than $50,000, of which less than
$20,000 has been expended to date. This amount includes the cost
of duplicative equipment for testing, the replacement of non-
compliant systems and personnel and consulting expenses to affect
the review and remediation.
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 have been 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 has received a significant number of
replies with generally complete answers and positive assurances
regarding Year 2000 readiness. The Company is in the process of
completing this portion of the evaluation as well as following up
on non-replies, incomplete replies and issues arising out of
replies received.
<PAGE>
The Company has no means of ensuring that its external
agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-
compliance by external agents is not determinable.
Based upon the activities described above, the Company does
not believe that the Year 2000 problem is likely to have a
material adverse effect on the Company's business or results of
operations. However, the above discussion regarding the Year
2000 issue contains forward-looking statements that reflect the
Company's current expectations or beliefs concerning future
results and events. These statements are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that forward looking
statements contained in the Year 2000 discussion should be read
in conjunction with the following disclosures of the Company.
The dates on which the Company believes its Year 2000
compliance efforts will be completed are based on management's
best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain
resources, third-party modification plans and other factors.
Unanticipated failures by critical vendors, as well as a failure
by the Company to execute successfully its own remediation
efforts, however, could have a material adverse effect on the
costs associated with year 2000 compliance and on the completion
of efforts to effect such compliance. Some important factors
that might cause differences between the estimates and actual
results include, but are not limited to, the availability and
cost of personnel trained in these areas, the ability to locate
and correct all relevant computer code, the timely and accurate
responses to and correction by third-parties and suppliers, the
ability to implement interfaces between new systems and the
systems not being replaced and similar uncertainties. Due to the
general uncertainty inherent in the Year 2000 problem, the
Company cannot ensure its ability to timely and cost-effectively
resolve problems associated with the Year 2000 issue that may
affect its operations and business or expose it to third-party
liability.
Cautionary Statements Concerning Forward-Looking Statements
Except for the historical information contained herein, the
matters discussed in this 10-K include forward-looking
statements. Forward-looking statements, which the Company
believes to be reasonable and are made in good faith, are subject
to certain risks and uncertainties that could cause actual
results to differ materially from those expressed in any forward-
looking statement made by, or on behalf of, the Company.
<PAGE>
There are certain important external factors and risks,
including business conditions and growth in the demand for real-
time, aggregated custom online news delivery services, and growth
in the economy in general; the impact of competitive products and
pricing; the proliferation of large, global information networks
and the evolution of the Internet. In addition, certain internal
factors and risks exist, including continued success in the
acquisition and growth of new information re-distributor and
corporate end-user client accounts; the ability to continue the
Company's program of technical system upgrades; the timely
creation and market acceptance of new products; the Company's
ability to continue to increase the variety and quantity of
sources of information available to create its products; the
Company's ability to continue to recruit and retain highly
skilled technical, editorial, managerial and sales/marketing
personnel; the Company's ability to generate cash flow sufficient
to cover its current obligations while meeting its long-term debt
obligations; and the other risks detailed from time to time in
the Company's SEC reports, including quarterly reports on Form 10-
Q, that could cause results to differ materially from those
anticipated by the statements contained herein.
Item 7A. Quantitative and Qualitative Disclosure about Market
Risk.
The information required by this item has been omitted as
the Company's market risk exposure is not material.
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 Auditors F-1
Balance Sheets as of June 30, 1999 and 1998 F-2
Statements of Income for the fiscal
years ended June 30, 1999, 1998, and 1997 F-3
Statements of Stockholders' Deficit
for the fiscal years ended June 30, 1999,
1998 and 1997 F-4
Statements of Cash Flows for the fiscal
years ended June 30, 1999, 1998 and 1997 F-5
Notes to Financial Statements F-6
2. Financial Statement Schedules
The schedules for which provision
is made in the applicable accounting regulation of
the Securities and Exchange Commission are not
required under the related instructions or are
inapplicable and therefore have been omitted.
(b) Reports on Form 8-K
None.
(c) Exhibits
3.1 Restated Certificate of Incorporation
of the Company, (incorporated by reference to
the Company's Registration Statement on Form S-
18 (File No. 2-72408 NY), declared effective on
July 22, 1981.
3.2 Certificate of Amendment of
Certificate of Incorporation of the Company
effective May 14, 1996. (incorporated by
reference on Form 10-K dated June 30, 1996).
3.3 Amended and Restated By-Laws of the Company.
<PAGE>
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).
10.6 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).
10.8 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).
10.14 Employment Agreement with Charles W.
Terry dated October 1, 1998 (incorporated by
reference to Company's Form 10-Q dated September
30, 1998).
10.15 First Allonge to Amended, Consolidated and Restated
10% Senior Subordinated Secured Note between the
Company and AMASYS Corporation dated as of
June 30, 1999.
23 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 23, 1999
COMTEX SCIENTIFIC CORPORATION
By: /s/ Charles W. Terry By: /s/ Aaron N. Daniels
Charles W. Terry Aaron N. Daniels
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 23, 1999
C.W. Gilluly and Director
/s/ Erik Hendricks Director September 23, 1999
Erik Hendricks
/s/ Robert A. Nigro Director September 23, 1999
Robert A. Nigro
/s/ Dr. John D. Sanders, Ph.D. Director September 23, 1999
Dr. John D. Sanders, Ph.D.
/s/ Charles W. Terry Director, September 23, 1999
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, 1999 and 1998 and the
related statements of income, stockholders' deficit, and cash
flows for each of the three years in the period ended June 30,
1999. 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, 1999 and 1998, and
the results of its operations and its cash flows for each of the
three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles.
/s/Ernst & Young LLP
Vienna, Virginia
September 3, 1999
F-1
<PAGE>
<TABLE>
COMTEX SCIENTIFIC CORPORATION
BALANCE SHEETS AT JUNE 30, 1999 AND 1998
<CAPTION>
June 30, June 30,
ASSETS 1999 1998
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 95,283 $ 170,416
Accounts Receivable, Net of Allowance of $350,868 and
$66,916 at June 30, 1999 and 1998, respectively 1,340,337 882,001
Prepaid Expenses and Other Current Assets 72,662 19,512
------------- ------------
TOTAL CURRENT ASSETS 1,508,282 1,071,929
PROPERTY AND EQUIPMENT, NET 836,988 299,097
DEPOSITS AND OTHER ASSETS 62,255 62,944
------------- ------------
TOTAL ASSETS $2,407,525 $ 1,433,970
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts Payable $ 755,223 $ 600,345
Accrued Expenses 815,883 446,317
Amounts due to Related Parties, Net 3,498 216,815
Notes Payable 40,000 94,660
------------- ------------
TOTAL CURRENT LIABILITIES 1,614,604 1,358,137
LONG-TERM LIABILITIES:
Long-Term Notes Payable - Affiliate 986,954 732,872
Other Long-Term Notes Payable 60,000 100,000
------------- ------------
TOTAL LONG-TERM LIABILITIES 1,046,954 832,872
------------- ------------
TOTAL LIABILITIES 2,661,558 2,191,009
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' DEFICIT
Common Stock, $0.01 Par Value - Shares Authorized: 18,000,000;
Shares issued and outstanding at June 30, 1999 and 1998:
8,124,430 and 7,896,231, respectively 81,244 78,962
Additional Capital 10,031,801 9,987,098
Accumulated Deficit (10,367,078) (10,823,099)
------------- ------------
TOTAL STOCKHOLDERS' DEFICIT (254,033) (757,039)
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,407,525 $ 1,433,970
============= ============
</TABLE>
The accompanying "Notes to Financial Statements" are an integral
part of these financial statement.
F-2
<PAGE>
<TABLE>
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF INCOME FOR THE FISCAL YEARS ENDED JUNE 30,
1999, 1998, AND 1997
<CAPTION> Fiscal Year Ended
June 30,
-------------- ----------- -------------
1999 1998 1997
-------------- ----------- -------------
<S> <C> <C> <C>
REVENUES
Information Services Revenues $ 6,885,530 $ 4,830,298 $ 4,066,092
Data Communications Revenues 671,867 570,895 525,645
-------------- ----------- -------------
Total Revenues 7,557,397 5,401,193 4,591,737
COSTS AND EXPENSES
Costs of Information Services 2,985,279 2,252,732 1,845,600
Costs of Data Communications 756,637 732,894 586,857
Product Development 270,070 165,187 270,420
Sales and Marketing 1,280,887 878,740 571,240
General and Administrative 1,617,135 1,110,933 984,845
Depreciation and Amortization 105,256 104,768 105,102
-------------- ----------- -------------
Total Costs and Expenses 7,015,264 5,245,254 4,364,064
-------------- ----------- -------------
INCOME FROM OPERATIONS 542,133 155,939 227,673
OTHER INCOME (EXPENSE)
Interest Expense (86,679) (93,013) (114,114)
Interest Income/Other 1,008 1,798 57
-------------- ----------- -------------
Other Expense, Net (85,671) (91,215) (114,057)
-------------- ----------- -------------
INCOME FROM OPERATIONS BEFORE INCOME TAXES 456,462 64,724 113,616
INCOME TAXES 441 360 346
-------------- ----------- -------------
NET INCOME $ 456,021 $ 64,364 $ 113,270
============== =========== =============
BASIC EARNINGS PER COMMON SHARE $ .06 $ .01 $ .01
============== =========== =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 7,984,389 7,859,021 7,858,417
============== =========== =============
DILUTED EARNINGS PER COMMON SHARE $ .04 $ .01 $ .01
============== =========== =============
WEIGHTED AVERAGE NUMBER OF SHARES ASSUMING DILUTION 11,343,804 10,170,938 7,858,417
============== =========== =============
</TABLE>
The accompanying "Notes to Financial Statements" are an integral
part of these financial statement.
F-3
<PAGE>
<TABLE>
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE FISCAL YEARS ENDED
JUNE 30 ,1999, 1998, AND 1997
<CAPTION>
Common Stock Outstanding
------------------------ Total
Number of Par Additional Accumulated Stockholders'
Shares Value Capital Deficit Deficit
--------- --------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
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 113,270 113,27
--------- --------- ----------- -------------- --------------
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
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)
--------- --------- ----------- -------------- --------------
Exercise of Stock Options 154,492 1,545 18,995 20,540
Issuance of Stock - ESPP 73,707 737 25,708 26,445
Net Income 456,021 456,021
--------- --------- ----------- -------------- --------------
Balance at June 30, 1999 8,124,430 $ 81,244 $10,031,801 $ (10,367,078) $ (254,033)
========= ========= =========== ============== ==============
</TABLE>
The accompanying "Notes to Financial Statements" are an integral
part of these financial statement.
F-4
<PAGE>
<TABLE>
COMTEX SCIENTIFIC CORPORATION
STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED JUNE 30,
1999, 1998 AND 1997
<CAPTION>
Fiscal Year Ended
June 30,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 456,021 $ 64,364 $ 113,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization Expense 105,256 104,768 105,102
Bad Debt Expense 349,045 28,590 34,091
Loss on Sale of Fixed Assets - - 53
Changes in Operating Assets and Liabilities:
Accounts Receivable (807,380) 25,027 (402,393)
Prepaid Expenses and Other Current Assets (53,150) 27,582 (17,165)
Deposits and other assets 250 864 -
Accounts Payable 154,878 70,733 19,381
Accrued Expenses 369,566 (12,718) 220,584
Amounts due to Related Parties 40,764 70,124 42,399
----------- ---------- ----------
Net Cash provided by Operating Activities 615,250 379,334 115,322
Cash Flows from Investing Activities:
Purchases of Property and Equipment (642,708) (203,131) (39,743)
Proceeds from Sale of Fixed Assets - - 2,386
Advances to Affiliate - - (28,433)
Repayments of Advances to Affiliate 266,000 42,738
----------- ---------- ----------
Net Cash (used in) provided by Investing Activities (642,708) 62,869 (23,052)
Cash Flows from Financing Activities:
Proceeds from Notes Payable - 140,000 -
Payments on Notes Payable (94,660) (23,232) (122,626)
Proceeds from Notes Payable to Related Parties - - 20,000
Repayments on Notes Payable to Related Parties - (147,422) -
Repayments against PrinCap Financing Agreement - (266,000) (29,361)
Issuance of Stock under Employee Stock Purchase Plan 26,445 6,660 -
Exercise of Stock Options 20,540 280 -
----------- ---------- ----------
Net Cash (used in) Financing Activities (47,675) (289,714) (131,987)
----------- ---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (75,133) 152,489 (39,717)
Cash and Cash Equivalents Balance at Beginning of Period 170,416 17,927 57,644
----------- ---------- ----------
Cash and Cash Equivalents Balance at End of Period $ 95,283 $ 170,416 $ 17,927
=========== ========== ==========
</TABLE>
The accompanying "Notes to Financial Statements" are an integral
part of these financial statement.
F-5
<PAGE>
COMTEX SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
1. THE COMPANY
Comtex Scientific Corporation (the " Company" or "COMTEX") is
a value-added real-time distributor of customized newswire
information products (CustomWiresR) aggregated on a real-time basis
from thousands of news stories drawn from hundreds of broad and
specialized news sources. CustomWiresR 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. The Company operates and reports in one
segment, information services.
AMASYS Corporation,( "AMASYS") (the successor corporation to
Infotechnology, Inc., "Infotech"), a Delaware corporation, legally
or beneficially controls 4,693,940 (approximately 58%) of the
issued and outstanding shares of the Company. Of the Company's
common stock owned by AMASYS, 2,540,503 shares 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 1,783,003 shares of the Company's common
stock.
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. Amounts received in advance are
deferred and recognized over the service period.
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 1999, 1998 and 1997
were approximately $270,000, $165,000 and $270,000, 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
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
Basic earnings per share ("EPS") is calculated by dividing net
earnings available to common shares by weighted average common
shares outstanding. Diluted EPS is calculated similarly, except
that it includes the dilutive effect of the assumed exercise of
shares issuable under the Company's Stock Option Plan (see Note 8).
Stock-Based Compensation
The Company grants stock options for a fixed number of shares
to employees at an exercise price equal to the fair market value of
the shares at the date of grant. The Company accounts for its stock-
based compensation in accordance with the provisions of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and accordingly
recognizes no compensation expense for the stock option grants.
Fair Value of Financial Instruments
Accounts receivable, accounts payable, accrued expenses and
other current assets and liabilities are carried at amounts which
reasonably approximate their fair values because of the relatively
short maturity of those instruments. The estimated fair value of
the Companies variable rate note payable approximates its carrying
value of $100,000. It is not practicable to estimate the fair
value of the Company's Long-term Note Payable-Affiliate due to its
unique nature.
Reclassifications
Certain fiscal year 1998 and 1997 amounts have been
reclassified to conform to the fiscal year 1999 presentation.
3. RELATED PARTY TRANSACTIONS
AMASYS, is the Company's majority stockholder (approximately
58%). Dr. Gilluly, Chairman of the Company, is also Chairman and
Chief Executive Officer of Hadron, Inc. ("Hadron"), of which AMASYS
owns approximately 12% of the outstanding shares. The Chairman,
Treasurer and Corporate Secretary of the Company have similar
duties with Hadron. More than 50% of their time is spent on other
than Company business. During fiscal years 1999, 1998 and 1997,
the following related party transactions occurred.
Note Payable to AMASYS
At the end of the year, the Company executed an amended Note
Payable to Affiliate with AMASYS to incorporate outstanding
interest of approximately $254,000 into the principal amount of the
note payable to AMASYS.
<PAGE>
Corporate Services Provided by/to Hadron
The Company contracted with Hadron for corporate and
stockholder services. Charges for such services are based on time
and material expended by Hadron personnel in providing such
services at a rate approximately equal to Hadron's costs and
amounted to approximately $20,000, $27,000 and $34,000 for the
fiscal years ended June 30, 1999, 1998 and 1997, respectively.
Hadron subleased office space from the Company at the same rental
rate paid by the Company to its landlord and also shared certain
office-related expenses at cost, based upon usage. Total service
charges to Hadron during the fiscal years ended June 30, 1999, 1998
and 1997, amounted to approximately $18,000, $30,000 and $24,000,
respectively. Management believes the methods used for allocating
these charges are reasonable. At January 31, 1999, Hadron
terminated their sublease with the Company and relocated to other
facilities.
Administrative Services Provided by/to AMASYS Corp.
AMASYS shared certain general and administrative expenses with
the Company based on usage for which the Company billed, at cost,
approximately $200, $4,000 and $9,000 during fiscal years ended
June 30, 1999, 1998 and 1997, respectively. Management believes
the methods used for allocating these charges were reasonable.
<TABLE>
Amounts due to related parties consisted of the following at
June 30:
<CAPTION>
1999 1998
---------- ------------
<S> <C> <C>
Interest due to AMASYS under Amended AMASYS NOTE $ - $ 215,333
Amounts due to Hadron for corporate and
shareholder services 6,407 4,749
Due (from) AMASYS for administrative services (2,909) (3,267)
---------- ------------
Due to Related Parties $ 3,498 216,815
========== ============
Long-term Notes Payable - Affiliate $ 986,954 732,872
========== ============
</TABLE>
<PAGE>
4. PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment consisted of the following at June 30:
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Computer Equipment $1,404,566 $ 829,671
Furniture and Fixtures 78,038 66,628
Software 128,660 77,324
Leasehold Improvements 34,472 29,405
Other Equipment 6,000 6,000
----------- ----------
1,651,736 1,009,028
Less Accumulated Depreciation (814,748) (709,931)
----------- ----------
Net $ 836,988 $ 299,097
=========== ==========
</TABLE>
<PAGE>
Depreciation expense for the fiscal years ended June 30, 1999, 1998
and 1997 was $105,000, $104,000 and $104,000 respectively.
<TABLE>
5. NOTES PAYABLE
Notes payable consisted of the following at June 30:
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Note Payable to Century National Bank $ 100,000 $ 140,000
Notes Payable-other - 4,660
Notes Payable to vendors - 50,000
----------- -----------
Subtotal 100,000 194,660
Less Current Portion 40,000 94,660
----------- -----------
Total Long-Term Notes Payable $ 60,000 $ 100,000
=========== ===========
</TABLE>
Approximately $46,000, $17,000 and $45,000 in interest was paid
during the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
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. Both facilities are guaranteed by C.W. Gilluly,
Ed.D. The line of credit facility was renewed for one year in
December 1998. In May 1999, the line of credit was increased to
$250,000 bearing interest at a rate of prime plus one percent
annually (8.75% at June 30, 1999). The term note bears interest at
a rate of prime plus two percent annually (9.75% at June 30, 1999).
Note 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. In December 1998, the principal
and accrued interest, totaling $56,750, was paid.
<PAGE>
6. NET INCOME PER SHARE
<TABLE>
The following table sets forth the computation of basic and
diluted earnings per share:
<CAPTION>
Fiscal Year ended June 30,
--------------------------
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Numerator:
Net Income $ 456,021 $ 64,364 $ 113,270
=========== ============ ============
Denominator:
Denominator for basic
earnings per share -
weighted average shares 7,984,389 7,859,021 7,858,417
Effect of dilutive
securities:
Stock Options 3,359,415 2,311,917
Denominator for diluted
earnings per share 11,343,804 10,170,938 7,858,417
=========== ============ ============
Basic Earnings Per Share $ .06 $ .01 $ .01
Diluted Earnings Per Share $ .04 $ .01 $ .01
</TABLE>
Shares issuable upon the exercise of stock options have been
excluded from the computation for fiscal year 1997 because the
effect of their inclusion would be non-dilutive or anti-dilutive.
7. INCOME TAXES
Income taxes included in the Statements of Income 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, 1999 and 1998, consist primarily of
temporary differences from net operating loss and business tax
credit carryforwards of approximately $1,200,000 and $1,700,000,
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 $3,200,000
million as of June 30, 1999. The net change in valuation allowance
during 1999 was a decrease of approximately $470,000. These NOL
and ITC carryforwards expire beginning in the year 2000.
8. STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "1995 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. The Company has 2,400,000 shares
reserved for issuance 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 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>
<TABLE>
Information with respect to stock options granted through June
30, 1999, under the 1995 Plan is as follows:
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 1,554,412 $ .14 1,169,733 $ .11 802,733 $ .10
Granted 398,000 .62 449,675 .22 404,000 .13
Exercised (154,492) .13 (2,001) .14
Expired (30,337) .26 (62,995) .15 (37,000) .10
---------- ---------- ----------
Outstanding
at end of year 1,767,583 .25 1,554,412 .14 1,169,733 .11
========== ========== ==========
Options
exercisable
at year-end 1,417,718 .18 1,191,705 .12 645,489 .11
Weighted
average fair
value of
options
granted $ .62 $.23 $.14
</TABLE>
<PAGE>
The weighted average remaining contractual life of options
outstanding at June 30, 1999 was 7.66 years. The range of exercise
prices of options outstanding at June 30, 1999 was $ 0.10 to $2.22.
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 in fiscal years 1999, 1998 and 1997 would have been
approximately $ 328,000, $43,000, and $80,000, or $ .04, $.01,and
$.01 per share, respectively.
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 to 3.10; expected
life of the option term of 5 to 6 years and risk-free interest rate
of 5.75% to 5.97%.
9. EMPLOYEE STOCK PURCHASE PLAN
In December 1997, stockholders approved the 1997 Employee
Stock Purchase Plan. The purpose of the Plan is to secure for the
Company and its stockholders 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.
<PAGE>
10. SUPPLEMENTARY INFORMATION
Income Statement
<TABLE>
The following income statement items were charged to costs and
expenses:
<CAPTION>
Fiscal Year Ended June 30,
1999 1998 1997
---------- ----------- ------------
<S> <C> <C> <C>
Amortization of Intangible Assets $ 439 $ 753 $ 753
Maintenance and Repairs 48,355 67,634 81,745
Advertising and Promotion Costs 74,033 32,025 44,574
Royalties 2,014,141 1,501,666 1,129,669
</TABLE>
<PAGE>
Allowance for Doubtful Accounts
<TABLE>
The following table summarizes activity in the allowance for
doubtful accounts:
<CAPTION>
Fiscal Year Ended June 30,
------------------------------------
1998 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Beginning Balance $ 66,916 $ 77,139 $ 85,284
Additions 349,045 28,590 34,091
Write-Offs (65,093) (38,813) (42,236)
--------- ---------- ----------
Balance at End of Year $350,868 $ 66,916 $ 77,139
========= ========== ==========
</TABLE>
11. 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.
<TABLE>
The future minimum rental commitments under this lease are as
follows:
<CAPTION>
Fiscal year Minimum Rental
ending June 30, Commitments
--------------- --------------
<S> <C>
2000 209,314
2001 215,593
2002 222,061
2003 37,931
--------------
$ 684,899
==============
</TABLE>
Rent expense under all operating leases totaled approximately
$ 192,000, $162,000, and $129,000 for the fiscal years ended June
30, 1999, 1998 and 1997, respectively.
12. 401(K) PLAN
The Company has 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, 1999, 1998 and
1997.
<PAGE>
FIRST ALLONGE TO AMENDED, CONSOLIDATED
AND RESTATED 10% SENIOR SUBORDINATED SECURED NOTE
THIS FIRST ALLONGE TO AMENDED, CONSOLIDATED AND
RESTATED 10% SENIOR SUBORDINATED SECURED NOTE (this
"Allonge") is dated as of June 30, 1999 by and between
Comtex Scientific Corporation, a New York corporation (the
"Company"), and AMASYS Corporation, a Delaware corporation
("Holder").
A. Holder is the successor in interest and the holder
pursuant to that certain Assignment and Assumption Agreement
dated October 11, 1996 of that certain Amended, Consolidated
and Restated 10% Senior Subordinated Secured Note dated as
of May 16, 1995, executed and delivered by Company to the
order of Infotechnology, Inc. in the principal amount of
Eight Hundred Eighty Nine Thousand, Four Hundred Thirty Five
Dollars ($889,435) (as amended, supplemented, replaced,
restated or otherwise modified from time to time, the
"Note"). Capitalized terms used in this Allonge and not
otherwise defined herein shall have the respective meanings
assigned in the Note.
B. Company and Holder affirm and agree that the
unpaid principal balance of the Note as of the date hereof
is Seven Hundred Thirty Two Thousand, Eight Hundred Seventy
Two Dollars ($732,872), with accrued, unpaid interest as of
the date hereof of Two Hundred Fifty Four Thousand, Eighty
Two Dollars ($254,082).
C. Company and Holder have agreed to increase the
principal amount of the Note to Nine Hundred Eighty Six
Thousand, Nine Hundred Fifty Four Dollars ($986,954), and to
waive any and all defaults existing as of the date of this
Allonge.
<PAGE>
AGREEMENT
NOW, THEREFORE, in consideration of the mutual
covenants herein and for Ten Dollars ($10.00) and other good
and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. Incorporation of Recitals. The Recitals set forth
above are incorporated herein by reference as if fully set
forth in the text of this Allonge.
2. Definitions. Capitalized terms used in this Allonge
and not otherwise defined shall have the meanings assigned
in the Note.
3. Increase in Principal Amount of Note. The Note is
hereby amended and modified to increase the principal amount
thereof to Nine Hundred Eighty Six Thousand, Nine Hundred
Fifty Four Dollars ($986,954). Accordingly, effective as of
the date hereof, the principal amount of Eight Hundred
Eighty Nine, Four Hundred Thirty Five Dollars ($889,435)
which appears in the second line of the second page of the
Note is deleted and replaced instead with the principal
amount of Nine Hundred Eighty Six Thousand, Nine Hundred
Fifty Four Dollars ($986,954).
4. Acknowledgment. Company acknowledges and affirms its
agreement to pay the Note, as modified by this Allonge, in
accordance with the terms hereof and thereof, and to
perform, comply with and be bound by each and every one of
the other terms and provisions of the Note, as modified by
this Allonge.
5. No Novation. Company and Holder agree that this
Allonge shall not constitute a novation of the indebtedness
evidenced by the Note. Nothing herein contained shall in
any way be construed to impair the Note (as modified hereby)
as evidencing a single principal indebtedness of Company
payable to the order of Holder.
6. Full Force and Effect. Except as specifically set
forth herein, all terms and provisions of the Note shall
remain unchanged and in full force and effect.
7. Successors and Assigns. This Allonge shall be binding
upon and shall inure to the benefit of the parties thereto
and their respective heirs, executors, administrators,
personal representatives, successors and assigns.
<PAGE>
8. Severability. In case any one or more of the
provisions contained in this Allonge shall be invalid,
illegal or unenforceable, the validity and enforceability of
the remaining provisions contained herein shall not in any
way be affected or impaired thereby.
IN WITNESS WHEREOF, the parties hereto have caused this
Allonge to be executed under seal as of the day and year
first above written.
COMPANY:
COMTEX SCIENTIFIC CORPORATION
By: /S/ DONALD E. ZIEGLER (SEAL)
Name: Donald E. Ziegler
Title: CFO and Treasurer
AMASYS CORPORATION
By: /S/ C.W. GILLULY (SEAL)
Name: C.W. Gilluly
Title: President
<PAGE>
Exhibit 23
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 1995 Stock Option Plan and the 1997 Employee Stock
Purchase Plan of our report dated September 3, 1999, with respect
to the financial statements of Comtex Scientific Corporation
included in the Annual Report (Form 10-K) for the year ended June
30, 1999.
/s/ Ernst & Young LLP
Vienna, Virginia
September 22, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS
ENTIRELY BY REFERENCE TO SUCH 10-K.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 95,283
<SECURITIES> 0
<RECEIVABLES> 1,691,205
<ALLOWANCES> (350,868)
<INVENTORY> 0
<CURRENT-ASSETS> 1,508,282
<PP&E> 1,651,736
<DEPRECIATION> (814,748)
<TOTAL-ASSETS> 2,407,525
<CURRENT-LIABILITIES> 1,614,604
<BONDS> 0
0
0
<COMMON> 81,244
<OTHER-SE> (335,277)
<TOTAL-LIABILITY-AND-EQUITY> 2,407,525
<SALES> 7,557,397
<TOTAL-REVENUES> 7,557,397
<CGS> 0
<TOTAL-COSTS> 7,015,264
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85,671
<INCOME-PRETAX> 456,462
<INCOME-TAX> 441
<INCOME-CONTINUING> 456,021
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 456,021
<EPS-BASIC> .06
<EPS-DILUTED> .04
</TABLE>
