Item 1. Business
Company History
AMASYS Corporation ("AMASYS" or the "Company") was incorporated in Delaware in 1992, and in 1996 received all remaining assets of Infotechnology, Inc. ("Infotech"), a Delaware company, following the completion of Infotech's Chapter 11 Bankruptcy reorganization, in accordance with an Assignment and Assumption Agreement, dated October 11, 1996. As a result of a series of transactions during the 1980's, Infotech, then principally engaged in the information and communications business, acquired equity interests in COMTEX News Network, Inc. ("COMTEX") and Analex Corporation ("Analex"), formerly known as Hadron, Inc. As of June 30, 2002, AMASYS had a 16% interest in COMTEX and a 1% equity interest in Analex. The Company's principal business is the maintenance of its equity interests in COMTEX and Analex and the Company's income is derived from equity and interest income related to these investments.
On July 2, 2001, the Company filed the following reports with the Securities and Exchange Commission (the "SEC"): Annual Report on Form 10-K for the year ended June 30, 2000; the Quarterly Report on Form 10-Q for the quarter ended September 30, 2000; the Quarterly Report on Form 10-Q for the quarter ended December 31, 2000; and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. Prior to these filings, the Company had not filed reports with the SEC except for a Form 8-A, filed in October 1996, for registration of its common and preferred shares of stock, and a Form 12B-25, filed in December 1996, in which it disclosed that it was unable to file its Form 10-Q for the Quarter ended December 31, 1996 because of the difficulty associated with the preparation of the Company's initial financial statements as successor to Infotech. The Annual Report on Form 10-K for the year ended June 30, 2001 was timely filed. In addition, all Quarterly Reports on Form 10Q were filed for fiscal year 2002.
Overview
AMASYS is the successor to Infotech, pursuant to Infotech's bankruptcy proceeding. AMASYS' primary assets are its equity interests in COMTEX and Analex, which are also its primary sources of revenue. AMASYS owns 16% of the outstanding equity of COMTEX, while the remainder is publicly owned. COMTEX aggregates and redistributes diverse real-time global news and information for the Internet, Wall Street and corporate reseller markets. In addition to its 16% equity ownership of COMTEX, the Company also holds a Note in the amount of $914,954 from COMTEX. It also owns 138,739 shares of common stock of publicly-held Analex Corporation ("Analex") formerly known as Hadron, Inc., a defense contractor specializing in developing innovative technical intelligence and biodefense solutions in support of U.S. national security. As of June 30, 2002, Analex had 14,385,855 shares of common stock outstanding. The Company believes that, by virtue of an exemption to the Investment Company Act of 1940 ("1940 Act"), the Company should not be deemed to be an "investment company" and, accordingly, should not be required to register as such. The rules and interpretations of the SEC and the courts relating to the 1940 Act and to its exemptions are highly complex and uncertain in numerous aspects. As a result, no assurance can be given that the Company will not be deemed an "investment company" for purposes of the 1940 Act and be required to register as an investment company, in which case the Company could be subject to legal actions by regulatory authorities and others and could be forced to suspend or terminate operations. The costs of defending any such action could constitute a material part of the Company's assets.
COMTEX News Network, Inc.
The Company owns 2,153,437 shares of common stock of COMTEX News Network, Inc. (SEC File No. 0-10541). COMTEX trades on the OTC Electronic Bulletin Board under the symbol CMTX. COMTEX is a leading business-to-business "infomediary" providing real-time news content from its worldwide network of news publishers to its network of business information distributors, serving the financial services, individual and institutional investor, wireless and corporate information markets. COMTEX uses internally developed technology to process, generally in less than 5 seconds, more than 20,000 real-time news stories each day from approximately 70 newswire services and other publishers. COMTEX's unique and uniform processing and formatting allows its customers to more effectively select and utilize the content in their products and services. Processing includes, for each news story, conversion to NewsML, an industry standard format, and indexing by category, keyword and ticker symbol.
COMTEX's core products currently include a series of topic-defined real-time news products marketed under the brand name CustomWires(R), editorially selected top news products under the brand name COMTEX Newsroom(R) and complete publisher offerings known as full feeds. These products may be delivered as a real-time XML (or other format) streaming feed or imbedded in the customers' browser-based application via COMTEX's hosted delivery application system, News Solutions(R).
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 its information sources would affect COMTEX' 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.
COMTEX also relies heavily on third party providers for telecommunications, electrical power, internet connectivity, and related or similar services as well as system redundancy for the development and delivery of its products. Failure of, interruption in, or the termination of, these services would also affect the COMTEX' ability to create and deliver products. Accordingly, the failure or inability to restore or replace such interrupted or terminated services could have an adverse effect on revenues.
COMTEX is a publicly-traded company and more information concerning the operations of COMTEX can be found in its own filings with the SEC.
Analex Corporation
The Company owns 138,739 shares of the common stock of Analex Corporation (SEC File No. 0-5404), which trades on the OTC Electronic Bulletin Board under the symbol ANLX. Analex specializes in developing intelligence, systems engineering and biodefense solutions in support of national security. Analex focuses on designing, developing and testing aerospace products and systems; developing innovative technical solutions for the intelligence community; developing medical defenses and treatments for infectious agents used in biological warfare and terrorism; and analyzing and supporting defense systems.
Employees
At June 30, 2002, the Company had 3 part-time employees. The employees of the Company are not members of a union and the Company believes employee relations are generally good.
Relationship With The Pension Benefit Guaranty Corporation ("PBGC")
As previously discussed (see "Company History"), pursuant to the confirmed orders of the United States Bankruptcy Court for the Southern District of New York (the "Court"), entered on June 23, 1994 and finalized on January 2, 1997, Infotech's Third Joint Plan of Reorganization, dated March 30, 1994, as amended (the "Plan"), was confirmed, and the Company and Infotech entered into an Assignment and Assumption Agreement, effective as of June 21, 1996, whereby the Company acquired certain assets and assumed certain liabilities of Infotech. As called for by the Plan, the Company issued to the PBGC, 196,000 shares of the Company's 5% convertible preferred stock (Series "A" Preferred Stock), convertible into 1,960,000 shares of the Company's common stock.
Furthermore, the Company entered into an agreement with the PBGC granting PBGC certain rights. In addition to the issuance to the PBGC of the Company's Series "A" Preferred Stock, the Company:
1) issued to the PBGC a $1,500,000 zero coupon note effective June 21, 1996, for which a settlement was reached ("Settlement") in which $189,998 was paid in full satisfaction of such note on February 1, 2002 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note #5 to the Financial Statements for the year ended June 30, 2002, "Note Payable - Related Party").
2) granted the PBGC the right to name two members to the Boards of Directors of both the Company and COMTEX, which right was waived by the PBGC in the Settlement; and
3) granted the PBGC the unilateral right, through December 31, 2001, which has since expired, to require the Company to use its best efforts to liquidate the Company's interest in Analex and COMTEX through secondary offerings and private sales.
Item 2.
Item 2. Properties
The Company owns no real estate. The Company pays the pro rata portion of its office and administrative expenses to COMTEX for its use of the facilities at 4900 Seminary Road, Alexandria, Virginia.
Item 3.
Item 3. Legal Proceedings
AMASYS has no outstanding, material legal proceedings.
On July 17, 2001, COMTEX filed a breach of contract action against Infospace, Inc., a former customer, in the United States District Court for the Eastern District of Virginia for payments owed under contracts with the defendant corporation. The suit is captioned COMTEX News Network, Inc. v. Infospace, Inc. Case Number CV01-1108-A. On August 13, 2001, Infospace filed an Answer and Counterclaim alleging that COMTEX breached its agreement and sought damages for lost business, loss of reputation and good will.
On March 11, 2002, the court rendered a directed verdict in favor of Infospace on the breach of contract claim and Infospace withdrew the counterclaim without prejudice. Infospace also filed a petition with the court for reimbursement of attorneys' fees and costs.
On April 9, 2002, COMTEX filed a Notice of Appeal to reverse the lower court decision. The case is now fully briefed before the United States Court of Appeals for the Fourth Circuit and a ruling is expected sometime in early 2003.
While the appeal was pending, the court, on August 13, 2002, issued an order awarding attorneys' fees of approximately $393,000 to Infospace with costs still to be determined. COMTEX intends to seek a stay of this award pending a ruling on the appeal. If COMTEX prevails on the appeal, the award of attorneys' fees would likely be reversed. Infospace also has petitioned the court to require COMTEX to reimburse Infospace for approximately $201,000 in costs. This petition is still pending before the court. COMTEX has recorded an accrual to provide for the estimated exposure upon resolution of this matter in the year ended June 30, 2002.
COMTEX is also involved in routine legal proceedings occurring in the ordinary course of business, which in the aggregate are believed by management to be immaterial to COMTEX's financial condition.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock, par value $.01 per share ("Common Stock"), has not traded since its initial registration on Form 8-A with the SEC. There is no established public trading market for the Common Stock.
The approximate number of holders of record of the Company's Common Stock as of June 30, 2002 was 669.
The Company has never declared or paid a cash dividend on its Common Stock and does not anticipate the declaration or payment of cash dividends to shareholders in the foreseeable future.
Item 6.
Item 6. Selected Financial Data
The following table sets forth selected financial data for each of the last five fiscal years of the Company.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation
INCOME SOURCES AND CRITICAL ACCOUNTING POLICIES
The Company's income is derived from earnings and interest income related to investments in COMTEX and Analex. The Company accounts for its investment in COMTEX using the equity method, whereby the Company records its share of income or loss reported by COMTEX based on its ownership interest. The Company also has a note receivable from COMTEX, which bears interest at 10%. The Company's investment in Analex was accounted for using the equity method through March 2000. Due to a change in control at Analex in March 2000, in which a group of investors assumed control of Analex, the investment has since been accounted for pursuant to SFAS 115 Accounting for Certain Investments in Debt and Equity Securities. The Analex investment balance at each reporting period is reported based on the stock's trading value with any increases or decreases being presented as unrealized gains or losses in the statement of stockholders' equity. No investments have been made since the initial acquisition of interests of COMTEX and Analex in 1996, nor has there been any interests nor dividends received. During February 2002, the Company's CEO exercised his options to acquire 2,540,503 shares of COMTEX stock owned by the Company, which resulted in proceeds of $254,000. A portion of the Analex investment was sold in February and May 2002.
RESULTS OF OPERATIONS
Comparison of the Fiscal Year ended June 30, 2002 to the Fiscal Year ended June 30, 2001
The Company had net income of $1,825,000 in 2002 compared to a net loss of $(327,000) in 2001. The increase is comprised primarily of an extraordinary gain of $2,272,000 on early extinguishment of debt.
Other income. Other income increased from $155,000 in 2001 to $181,000 in 2002 due to the gain on sales of investment of $87,000 resulting from the sale of 33,000 shares of Analex stock during February 2002 and the sale of 31,000 shares of Analex stock during May 2002. This was offset by the $58,000 in other income related to the United Press International (UPI) bankruptcy settlement in 2001. The Company had previously written off all amounts associated with UPI.
Operating costs and expenses. Operating costs and expenses decreased $71,000 (21.6%) to $272,000 in 2002 due to a decrease in professional services and general and administrative expenses. In addition, amortization decreased $25,000 because the reorganization costs were fully amortized after the 1st quarter.
Equity in earnings. Equity in earnings decreased $278,000 due primarily to the decrease in the Company's share of earnings of COMTEX, which reported a net loss of $1,361,000 in 2002 compared to net income of $265,000 in 2001.
Interest expense. Interest expense decreased $62,000 due to the retirement of the note payable during the 3rd quarter.
Extraordinary gain. In February 2002, the Company made a payment of $189,998 to PBGC for full satisfaction of a note in the original amount of $1,500,000 plus accrued interest. The difference between the carrying amount of the debt at the date of payment and the amount paid was recognized as an extraordinary gain on the income statement.
Comparison of the Fiscal Year ended June 30, 2001 to the Fiscal Year ended June 30, 2000
The Company had a net loss of $(327,000) in 2001 compared to net income of $57,000 in 2000 due to a decrease in equity in earnings of $176,000 (75.0%) and an increase in operating costs and expenses of $252,000 (280.2%).
Other income. Other income increased from $94,000 in 2000 to $155,000 in 2001 primarily due to the Company recording $58,000 in other income related to the United Press International (UPI) bankruptcy settlement. The Company had previously written off all amounts associated with UPI
Operating costs and expenses. Operating costs and expenses increased $252,000 (280.2%) to $342,000 in 2001 due to an increase in professional services and general and administrative expenses. Professional services increased $220,000 primarily due to a $77,000 increase in accounting and audit fees associated with audits and reviews of Company's financial statements; a $44,000 increase in legal fees and a $99,000 increase in consulting fees. General and administrative expenses increased $33,000 due to an increase in insurance and state and local taxes.
Equity in earnings. Equity in earnings decreased $176,000 (75.4%) due primarily to the decrease in the Company's share of earnings of COMTEX, which reported decreased net income of $265,000 in 2001 compared to $1,241,000 in 2000.
Interest expense. Interest expense increased due to an increase in the note payable balance resulting from compounded interest during the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net working capital of $(11,000) at June 30, 2002. The Company has had minimal operating activity since commencing operations in 1996 and has not had any other uses of funds. Accordingly, the Company has not required any funding sources. The Company expects to meet its short-term obligations through payments of principal and interest from the note receivable from COMTEX and from the sales of interests in Analex.
CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the matters discussed in this Form 10-K include forward- looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology such as "anticipate", "expect", "could", "may" or other words of a similar nature. 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.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
Financial instruments that potentially subject the Company to market risk include the note receivable and the investment that is classified as available-for-sale. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes and is not exposed to any foreign currency exchange risk. The note receivable bears interest at a fixed rate, thereby mitigating any exposure to market risk. The investment in 138,739 shares of Analex, classified as available-for-sale, had a fair market value of $381,532 at June 30, 2002 and a cost basis of $129,738. The gross unrealized gains of $251,794 at June 30, 2002 has been recorded as a separate component of other comprehensive income. Losses resulting from a decrease in the market price of the stock that are considered temporary are recorded as a separate component of other comprehensive income, while losses that are considered permanent are included in the computation of net income. No such permanent losses have been recorded to date.
Item 8.
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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Directors
The following table contains information as of June 30, 2002 as to each director of the Company:
Director Office Held Name Since Age with the Company - ----- -------- --- --------------------- C.W. Gilluly, Ed.D. 1992 56 Chairman of the Board, President and Chief Executive Officer
Robert F. Delaney (1,2) 1992 77 Director
Robert J. Lynch, Jr. (1,2) 1992 69 Director
Thomas E. McMahan (1,2) 1992 59 Director
Robert A. Nigro (1,2) 1992 53 Director
(1) Member of the Audit Committee (2) Member of the Compensation Committee
C.W. GILLULY, Ed.D. has served as Chairman of the Board, President and Chief Executive Officer of the Company since June 1992, and has served as Chairman of the Board of COMTEX since June 1992. Dr. Gilluly served as President of COMTEX from June 1992 until May 1993, and as Chief Executive Officer from June 1992 until September 1997. Dr. Gilluly serves on the Board of Directors of Analex, where he was Chairman of the Board from October 1994 until January 2001, and also served as Chief Executive Officer from May 1993 through March 2000.
ROBERT F. DELANEY has been Facilitator of Long Range Study at the U.S. Naval War College and a management consultant specializing in the area of organizational development. From 1981 through 1991, Mr. Delaney served as president of the RFD Group and Michael W. Moynihan Associates, Management and Public Affairs Consultants. In 1990, Mr. Delaney was an Intelligence Briefing Officer for Operation Desert Storm at the Naval Medical Corps, Fort Dix, New Jersey. Since 1972, Mr. Delaney has been a lecturer at the NATO Defense College, Armed Forces Staff College, Defense Information School, Marine Corp Schools and the U.S. Naval War College.
ROBERT J. LYNCH, JR. is the President of American & Foreign Enterprises, Inc., a private corporation managing U.S. and international investments in industrial and real estate opportunities, for whom he has worked for thirty-six years.
THOMAS E. MCMAHAN is the founder of McMahan Associates, a private corporation that provides strategic investment advice and counsel to the financial information industry. From 1995 to 2000, Mr. McMahan served as senior vice president for corporate development for MERGENT, INC., a $60 million diversified financial information business. Mr. McMahan served as General Manager of Shark Information Systems, a subsidiary of Infotechnology, Inc., in 1993 and served as Vice President for Business Development of Infotechnology, Inc. in 1990. From 1972 though 1990, Mr. McMahan served in various capacities at McGraw-Hill/Standard & Poor's, including Senior Vice President and Chief of Staff of Standard & Poor's Trader Services from 1988 through 1990.
ROBERT A. NIGRO is an investment banker who specializes in corporate development and turnarounds. He joined SEI Investments Company as Senior Vice President in November 1993 and served as Chief Executive Officer of SEI Capital AG from April 1995 through 2002. From 1991 to 1993, Mr. Nigro was Chairman and Chief Executive Officer of the National Abandoned Property Processing Company. Mr. Nigro was associated with the First Boston Corporation in various capacities from 1976 to 1990 including serving as Managing Director in the New York and Atlanta offices. Mr. Nigro also serves as a director of COMTEX.
Executive Officer
As of June 30, 2002, the only executive officer of the Company who is not also a director of the Company is S. Amber Gordon, the Corporate Secretary of the Company.
S. AMBER GORDON (48) was appointed Corporate Secretary and Treasurer of the Company in October 1996. Ms. Gordon also serves as the Corporate Secretary of COMTEX, a position she has held since May 1996. Ms. Gordon has been the President of S.A. Gordon Enterprises, Inc., a financial relations and marketing communications firm, since 1985. Ms. Gordon also served in senior management positions, the most recent of which was Executive Vice President, of Analex, an information technology company serving the intelligence community, from June 1991 through August 2000.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's executive officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Executive officers, directors and greater than 10% stockholders are required by the Securities and Exchange Commission regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on a review of copies of such reports of ownership furnished to the Company, or written representations that no forms were necessary, the Company believes that during the past fiscal year, its executive officers, directors and greater than 10% beneficial owners complied with all applicable filing requirements.
Item 11.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth information concerning all compensation paid or accrued by the Company to its President and Chief Executive Officer, during the fiscal year ended June 30, 2002. Neither Dr. Gilluly nor any other officer of the Company receives compensation in excess of $100,000 per year.
Stock Option Grants
No stock options were granted during the fiscal year ended June 30, 2002. In accordance with the Company's Stock Option Plan, Dr. Gilluly received a grant of 350,000 options in November 1996, at an exercise price of $0.01 per share. He has not received any further grants.
Options Exercised and Year-End Option Values
The following table sets forth certain information regarding the value of unexercised options held by the named executive officer as of June 30, 2002.
Stock Option Plan
The Company's Stock Option Plan was approved pursuant to the Confirmation of the Third Amended Plan of Reorganization of Infotech on June 21, 1994 and was effective as of the Effective Date of the Plan, on June 21, 1996. The Plan provides for the issuance of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and non-qualified stock options in order to recruit and retain key employees, consultants and directors.
Compensation of Directors
The Company pays non-employee members of the Board $625 per board meeting, plus travel expenses incurred in connection with attendance at Board meetings. During fiscal year 2002, each of the Company's non-employee directors received compensation of $2,500 for services rendered to the Company.
Employment Agreements
The Company has no employment agreements.
Compensation Committee Report on Executive Compensation
2002 Compensation for the President and Chief Executive Officer
The Committee reports that during the fiscal year ended June 30, 2002, Dr. Gilluly declined to receive any compensation for his services as President and Chief Executive Officer of the Company.
Submitted by the Compensation Committee
Robert F. Delaney Robert J. Lynch, Jr. Thomas E. McMahan Robert A. Nigro
Compensation Committee Interlocks and Insider Participation
Mr. Nigro also serves as a member of the Board of COMTEX.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of June 30, 2002, regarding the beneficial ownership of the Company's Common Stock of (i) each person known to the Company to be the beneficial owner, within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), of more than 5% of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each executive officer of the Company named in the Summary Compensation Table (see "Executive Compensation") and (iv) all executive officers and directors of the Company as a group. Unless otherwise indicated, the address of each named beneficial owner is c/o AMASYS Corp., 4900 Seminary Road, Suite 800, Alexandria, Virginia 22311. Except to the extent indicated in the footnotes, each of the beneficial owners named below has sole voting and investment power with respect to the shares listed.
Item 13.
Item 13. Certain Relationships and Related Transactions
Dr. Gilluly serves as Chairman of the Board and Chief Executive Officer of the Company. Dr. Gilluly also serves as Chairman of COMTEX, and serves as a member of the Board of Analex.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
Report of Independent Auditors
Balance Sheets at June 30, 2002 and 2001
Statements of Operations for the fiscal years ended June 30, 2002, 2001, and 2000
Statements of Stockholders' Equity (Deficit) for the fiscal years ended June 30, 2002, 2001 and 2000
Statements of Cash Flows for the fiscal years ended June 30, 2002, 2001 and 2000
Notes to Financial Statements
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.
3. Exhibits
Number Description 1.1 Specimen certificate for the Common Stock, $.01 par value, of the Registrant (incorporated by reference to the Company's Form 8-A filed on October 15, 1996).
2.1 Third Joint Chapter 11 Plan of Reorganization for Infotechnology, Inc. dated March 30, 1994, as confirmed by the Bankruptcy Court (incorporated by reference to the Company's Form 8-A filed on October 15, 1996).
2.2 Order Confirming Third Joint Plan of Reorganization dated as of June 23, 1994 of Infotechnology, Inc. and Questech Capital Corporation (incorporated by reference to the Company's Form 8-A filed on October 15, 1996).
2.3 Assignment and Assumption Agreement between the Company and Infotechnology, Inc. (incorporated by reference to the Company's Form 8-A filed on October 15, 1996).
3.1 Restated Certificate of Incorporation of AMASYS Corporation (incorporated by reference to the Company's Form 8-A filed on October 15, 1996).
3.2 Bylaws of AMASYS Corporation (incorporated by reference to the Company's Form 8-A filed on October 15, 1996).
10.1 AMASYS Corporation Stock Option Plan (incorporated by reference to the Company's Form 10-K, for the year ended June 30, 2000, filed on July 2, 2001).
10.2 Second Amendment to Amended, Consolidated and Restated 10% Senior Subordinated Secured Note between the Company and COMTEX News Network, Inc. (incorporated by reference to the Company's Form 10-K, for the year ended June 30, 2001, filed on September 28, 2001).
10.3 Payment and Release Agreement between the Company and the Pension benefit Guaranty Corporation dated February 1, 2002. (incorporated by reference to the Company's Form 10-Q, for the quarter ended December 31, 2001, filed on February 13, 2002).
10.4 Note between the Company and C.W. Gilluly dated December 21, 2001. (incorporated by reference to the Company's Form 10-Q, for the quarter ended December 31, 2001, filed on February 13, 2002).
10.5 Note between the Company and C.W. Gilluly dated February 12, 2002. (incorporated by reference to the Company's Form 8-K filed on February 20, 2002).
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b). Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter of the period covered by this Report.
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 30, 2002
AMASYS CORPORATION
By: /S/ C.W. GILLULY C.W. Gilluly, Ed.D. President and Chief Executive Officer (Principal Executive Officer and Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
DIRECTORS:
Signature Title Date
/S/ C.W. GILLULY Chairman September 30, 2002 C.W. Gilluly, Ed.D. and Director
/S/ ROBERT F. DELANEY Director September 30, 2002 Robert F. Delaney
/S/ ROBERT J. LYNCH, JR. Director September 30, 2002 Robert J. Lynch, Jr.
/S/ THOMAS E. MCMAHAN Director September 30, 2002 Thomas E. McMahan
/S/ ROBERT A.NIGRO Director September 30, 2002 Robert A. Nigro
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, C.W. Gilluly, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of AMASYS Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
September 30, 2002 /S/ C.W. Gilluly Date C.W. Gilluly, Ed.D. President and Chief Executive Officer
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, C.W. Gilluly, Principal Finance Officer, certify that:
1. I have reviewed this annual report on Form 10-K of AMASYS Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
September 30, 2002 /S/ C.W. GILLULY Date C.W. Gilluly. Ed.D. Principal Finance Officer (Chief Financial Officer)
Report of Independent Auditors
Board of Directors AMASYS Corporation
We have audited the accompanying balance sheets of AMASYS Corporation (the "Company") as of June 30, 2002 and 2001 and the related statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended June 30, 2002. 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 auditing standards generally accepted in the United States. 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 AMASYS Corporation at June 30, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States.
/S/ ERNST & YOUNG LLP
McLean, Virginia September 25, 2002
AMASYS Corporation Balance Sheets
See accompanying notes.
AMASYS Corporation Statements of Operations
See accompanying notes.
AMASYS Corporation Statement of Stockholders'Equity (Deficit) Years ended June 30, 2002, 2001 and 2000
See accompanying notes.
See accompanying notes.
AMASYS CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 2002, 2001, and 2000
1. Organization and Basis of Presentation
AMASYS Corporation (the "Company") was incorporated in Delaware in 1992, and in 1996 received all remaining assets of Infotechnology, Inc. ("Infotech"), a Delaware company, following the completion of Infotech's Chapter 11 Bankruptcy reorganization, in accordance with an Assignment and Assumption Agreement, dated October 11, 1996. The Company's primary assets are its equity interests in and note receivable from COMTEX News Network ("COMTEX") and Analex Corporation ("Analex"), formerly known as Hadron, Inc. which are also its principal sources of revenue. The Company owns 2,153,437 shares of COMTEX, which represents an approximately 16% interest at June 30, 2002. The Company owns approximately 1% of the outstanding common stock of Analex.
The Company's principal business is the maintenance of its equity interests in COMTEX and Analex and the Company's revenues are derived from equity in earnings and interest income related to these investments.
2. Summary of Significant Accounting Policies
Risks and Uncertainties
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company deposits its cash, which at times may be in excess of the FDIC insurance limits, with high credit quality financial institutions.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents represent amounts invested in highly liquid short-term investments that can be converted within three months or less.
2. Summary of Significant Accounting Policies (continued)
Investments in Common Stock
The Company's equity interest in the common stock of COMTEX provides the Company with significant influence over their operations. Accordingly, this investment is accounted for using the equity method whereby the investment is recorded at cost and subsequently adjusted for the Company's equity in the income or loss of the investee and cash contributions and distributions.
The Company has an equity interest in the common stock of Analex. This equity investment is classified as available for sale and reported at fair value. Unrealized gain or loss on this security is reported in stockholders' equity as a component of unrealized gain on investment. The investment in Analex was accounted for using the equity method until March 2000 when a change in control of Analex occurred.
Reorganization Value
Reorganization value represents the difference between the fair value of assets and liabilities assigned and assumed in connection with the Assignment and Assumption Agreement and is amortized using the straight-line method for a period of five years. In the fiscal years ended June 30, 2002, 2001 and 2000, the Company recorded amortization of $8,338, $33,358, and $33,358 respectively. As of June 30, 2002 and 2001, respectively, the accumulated amortization was $166,788 and $158,450.
Income Taxes
The Company provides for income taxes in accordance with the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws expected to be in effect when the differences are anticipated to reverse.
Stock-Based Compensation
The Company accounts for its stock-based compensation in accordance with APB No. 25, "Accounting for Stock Issued to Employees" using the intrinsic value method. The Company has granted stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of the grant, and, accordingly, recognized no compensation expense for the stock option grants.
2. Summary of Significant Accounting Policies (continued)
Earnings per Share
Basic earnings per share ("EPS") is computed by dividing net earnings available to common shares by weighted average common shares outstanding. Diluted EPS is computed similarly, except that it includes the dilutive effect of the assumed exercise of stock options and conversion of preferred stock.
Fair Value of Financial Instruments
Interest receivable, accounts payable and accrued expenses and other current assets and liabilities are carried at amounts that reasonably approximate their fair values because of the relatively short maturity of those instruments. It is not practical to estimate the fair value of the Company's note receivable due to its unique nature.
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145") which rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, FASB Statement No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements". It also rescinds FASB Statement No. 44, "Accounting for Intangible Assets or Motor Carriers," and amends FASB Statement No. 13, "Accounting for Leases." Finally SFAS No. 145 amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicablility under changed conditions. The provisions related to the rescission of FASB Statement No. 4 and its amendment Statement No. 64 are effective for fiscal years beginning after May 15, 2002 and all other provisions are effective for financial statements issued on or after May 15, 2002. The Company does not expect that any other provisions of SFAS No. 145 will materially impact the Company subsequent to adoption. The Company believes that the gain from extinguishment of debt is properly classified as extraordinary under the provisions of APB 30, "Reporting the Results of Operations."
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.
2. Summary of Significant Accounting Policies (continued)
The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal year 2003. The Company anticipates that the adoption of these new pronouncements will not have a significant effect on its financial statements.
3. Investments in Common Stock
The Company investments in common stock consist of the following:
The aggregate market value of the investments in common stock as of June 30, 2002, based on the trading price on or nearest to that date totaled $381,532 and $646,031 for Analex and COMTEX, respectively.
The following information presents condensed balance sheet information as of June 30, 2002 and 2001 and condensed income statement information for each of the years ended June 30, 2002, 2001 and 2000 for COMTEX:
3. Investments in Common Stock (continued)
4. Note Receivable - Related Party
The Company was assigned a note receivable from COMTEX in connection with the Assignment and Assumption Agreement, which was initially recorded at its estimated fair value. In June 1999, the note was amended to incorporate outstanding interest of approximately $254,000 into the principal amount of the note receivable, which is due July 1, 2002. The note bears interest at 10% and is collateralized by a continuing interest in all receivables, purchase orders, and all patents and technology now or hereafter held or received by COMTEX.
During August 2001, AMASYS and COMTEX signed an amendment to the Note Payable to AMASYS, (Second Amendment to Amended, Consolidated and Restated 10% Senior Subordinated Secured Note) (the "Amended Note") extending the term of the note from July 1, 2002 until July 1, 2008. In addition to the extension of the term, the Amended Note includes a provision for AMASYS to convert all or a portion of the outstanding principal amount, plus accrued interest, into common stock of COMTEX. The Amended Note is convertible at a price of $1.00 per share, which price increases by $0.10 upon each anniversary of the amendment.
5. Note Payable - Related Party
The Company entered into a Note Payable Agreement dated June 21, 1996 with the Pension Benefit Guaranty Corporation ("PBGC"). The note accrued interest at the rate of 9% per annum compounded semi-annually. The original terms of the note stipulated that it was to be paid prior to its maturity on December 31, 2006 from any proceeds received by the Company from PBGC's pro-rata share of the proceeds of any and all sales of the Company's stock positions in COMTEX and Analex and value received from the 10% Senior Subordinated Note issued by COMTEX to the Company on May 16, 1995. If neither of the above events occured prior to December 31, 2006, the note would be considered cancelled.
5. Note Payable - Related Party (continuted)
The Note was issued pursuant to the Third Joint Plan of Reorganization of Infotechnology, Inc. and Questech Capital Corporation dated January 26, 1994, which was confirmed by order of the United States Bankruptcy Court dated June 24, 1994.
On February 15, 2002, the Company paid $189,998 to PBGC for the note payable, pursuant to an agreement reached on February 1, 2002. The difference between the carrying amount of the debt at the date of payment and the amount paid was recorded as an extraordinary gain on the income statement.
The Company entered into two Note Payable agreements in the amount of $120,000 each dated December 21, 2001 and February 12, 2002 with the President and Chief Executive Officer of the Company. These notes accrued interest at a rate of 10% per annum and were payable on demand. The Company paid off the Notes Payable on February 26, 2002 from the proceeds of exercise of options to acquire COMTEX shares by the Company's Chief Executive Officer.
6. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
Shares issuable upon the exercise of stock options have been excluded from the computation to the extent that their inclusion would be anti- dilutive.
7. Income Taxes
The following table reconciles the assumed statutory tax rate with the effective rate to income tax expense:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets are as follows (in thousands):
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax asset will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which the net operating loss carryforwards are available. Management considers projected future taxable income, the scheduled reversal of deferred tax liabilities and available tax planning strategies that can be implemented by the Company in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the net
7. Income Taxes (continued)
operating loss carryforwards are available to reduce income taxes payable, management has established a valuation allowance such that the net deferred tax asset is $0 as of June 30, 2002 and 2001.
As of June 30, 2002, the Company had net operating loss carryforwards for federal income tax purposes of approximately $19 million that will begin to expire in 2005. Utilization of these net operating losses may be subject to limitations under IRC Section 382, in the event of significant changes in stock ownership of the Company.
8. Stockholders' Equity
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock, of which 196,000 shares have been designated as Series A Preferred Stock (the "Preferred Stock"). The Preferred Stock was issued to PBGC in connection with the Assignment and Assumption Agreement. The Preferred Stock is convertible into shares of common stock of the Company at the rate of 10 shares of common stock for each share of Preferred Stock. Holders of the Preferred Stock are entitled to receive dividends, when, as, and if, declared by the board of directors at a cumulative annual rate of $.50 per share. The holders are entitled to a liquidation preference of $10 per share, plus an amount equal to any accrued but unpaid dividends to the payment date. No such dividends have been declared to date. The holders of the Preferred Stock are entitled to vote, along with the common stockholders, based on each share of Preferred Stock, except in certain circumstances which require an affirmative vote of a majority of the holders of Preferred Stock. The Company has the right to redeem the Preferred Stock, after payment of the Note Payable to PBGC, at a price equal to the greater of $10.50 per share or an amount computed based on market value, as defined, plus accrued but unpaid dividends.
Stock Option Plan
The Company adopted a Stock Option Plan (the "Plan") under which 950,000 shares of common stock were reserved for issuance upon exercise of the granted options. The Plan provides for grants of incentive stock options to eligible employees, officers, and directors of the Company. Eligible employees are defined as any persons regularly employed by the Company, including key employees and consultants. Options were granted with an exercise price equal to fair value at the date of grant. The term of the options granted under the Plan may not exceed 10 years. The stock options granted vest immediately.
8. Stockholders' Equity (continued)
At June 30, 2002, 2001, and 2000, 950,000 options were outstanding and exercisable. All options outstanding were granted in November 1996. There has been no stock option activity since the initial grants of stock options. The exercise price of all options is $.01 per share. The weighted average remaining contractual life of options outstanding at June 30, 2002, 2001, and 2000 is 4.3 years, 5.3 years, and 6.3 years, respectively.
9. Selected Quarterly Financial Information (Unaudited)
The following is a summary of the quarterly results of operations for the years ended June 30, 2002 and 2001.