UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| X | Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2003
OR
| _ | Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period from ___ to ___
Commission file number 0-7642
MEGADATA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 11-2208938
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
47 ARCH STREET, GREENWICH, CT 06830
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area
code: 203-629-8757
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
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 the 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]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of the voting shares of the Registrant held by
non-affiliates as of April 30, 2003 was $ 274,000
The number of shares of common stock, $0.01 par value,
outstanding as of January 28, 2004 was 4,088,115
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange Commission
within 120 days of October 31, 2003, are incorporated by reference into Part III
of this Form 10-K.
PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS.
Megadata Corporation ("Megadata" or the "Company"), a New York
corporation founded in 1967, is a supplier of information and decision support
software serving the needs of the aviation industry, primarily airlines,
airports and other aviation related companies. Its principal business is the
delivery of information and decision support software by subscription from a
database of flight and travel-related information, of which a primary data
component is its PASSUR(TM) (Passive Secondary Surveillance Radar) Network of
flight tracking systems.
Revenues are generated from information and decision support products
that provide a range of services to airlines, airports, and aviation related
companies. The Company's strategy is to gain baseline acceptance as an
affordable, usually web-based, solution provider, to grow the number of
web-based solutions an individual customer uses once they have started with one
or more of the Company's products, and to team with partners to provide a
greater range of solutions, as well as cost-effectively expand the reach of the
Company's marketing and distribution. Three years ago, the Company transitioned
its business model from selling PASSUR systems to selling subscription services.
The objectives of the Company's strategy are to (1) increase
subscription sales per customer by providing multiple solutions for customers
with primarily web-based products that target different needs and problems, (2)
increase subscription sales per airport location (airport, airlines, and other
aviation related customers) by identifying as many customers as possible, (3)
reduce the selling cycle and costs per sale through the shift to web-based
products and partnering with decision support software partners; and (4)
increase available market share by identifying national and international
opportunities for the Company's information and decision support products.
The Company's information is primarily derived from the PASSUR
System. PASSUR is a passive radar, which, without emitting any active signals,
receives aircraft identification and altitude information from aircraft
transponder transmissions, which are interrogated by existing secondary
surveillance radars. In the past year, several additional data sources have been
added to the Company's database to provide an integrated data solution.
The Company's services address airspace capacity enhancement, airline
and airport operational efficiency, customer service, safety and security, and
airport revenue management. Management believes this market is in excess of $15
billion. We believe that limited availability of accurate and timely flight,
terminal airspace, airport condition information, and the poor flow of that
information throughout the aviation system is a major impediment to improving
operating efficiency of airlines and airports, reducing delays and
cancellations, and making timely decisions required to handle emergencies that
might threaten safety and security. Currently there are a number of large and
sophisticated command and control systems designed to help airlines and airports
with these issues, but their acceptance is limited for several reasons,
including the quality and availability of timely and accurate information,
technical complexity, and cost. Access to domestic and international arrival
information is fragmented and often controlled and filtered by government
sources or not available at all.
Page 2 of 61
The Company has a suite of information and decision support software
products, including AirportMonitor(TM), Pulse Operations(TM), Pulse
Financial(TM), OpsNet(TM) (formerly IROPSNet), FlightPerform(TM), and
FlightSure(TM), currently available for distribution.
o AirportMonitor, patent pending, is an internet-based application
which provides the surrounding airport communities with live flight tracking and
information (delayed for security purposes) as part of their public relations
and community outreach programs.
o Pulse Operations, patent pending, provides a web-based live and
archived capability to provide affordable and easily distributed access to the
PASSUR database of operational information.
o Pulse Financial, patent pending, provides a web-based live and
archived capability that allows an airline or airport to gain an immediate
detailed, accurate landing report in order to properly account for landing fees,
providing a single standard for landing fee reconciliation and creating maximum
revenue efficiency and maximum fee fairness by ensuring all airport users are
carrying their true and accurate proportion of the landing fee obligation.
o OpsNet, patent pending, is an internet-based application designed
to improve airport/airline management coordination through instant
communications between all the necessary parties during costly disruptions
caused by weather, security and emergency situations.
o FlightPerform is a live airspace analysis and awareness system used
by airports and airlines for real-time dispatch, arrivals and airside facilities
management; and
o FlightSure provides data and software for integrated aircraft noise
management and monitoring systems.
The Company generates revenues by selling either (1)
subscription-based information - primarily derived from a PASSUR system, which
is part of the "PASSUR Network", or (2) equipment - a PASSUR system. Under the
subscription-based model, the customer subscribes to the information on a
monthly basis pursuant to a subscription agreement, which may be for a
multi-year period. The agreement also provides that the information from the
PASSUR system cannot be resold or used for unauthorized purposes. When systems
are sold, Megadata retains both proprietary and distribution rights to the data
generated from such systems and can distribute such data at the Company's sole
discretion.
Currently, PASSUR flight track coverage is available for 30 of the
top 40 airports in the United States. In addition, more than 10 airlines and 40
airports utilize the information, data and software information products derived
from the Megadata PASSUR Network. There are over 50 PASSUR system installations
worldwide.
The Company has incorporated the strictest levels of security in both
the information generated by the PASSUR Network and the availability of that
information to the end users.
TECHNICAL DESCRIPTION
The PASSUR system, without emitting any active signals, receives
aircraft identification and altitude information from aircraft transponder
transmissions, which are interrogated by existing secondary surveillance radars.
Received signals are processed in a standard workstation and displayed on a
high-resolution color graphics data display to provide the PASSUR application
software real-time identification and tracking of aircraft in flight. The
presentation of flight tracks can be in real time or can be switched to a mode
that permits observance of historical data for selected time periods.
Page 3 of 61
AIRLINE AND AIRPORT CUSTOMERS
PASSUR is used by many of the largest airports and airlines in the
country and in different parts of the world. Airlines and airports use the
PASSUR information to drive a number of operating efficiencies that improve
performance and increase customer satisfaction, and operating profits.
Information derived from the PASSUR systems and related suite of software
applications is utilized to:
o Provide accurate arrival and estimated time of arrival ("ETA")
information available, particularly during irregular operations. The information
is also used in terminal passenger data services such as Flight Information
Display Systems ("FIDS") or other displays. The ETA information can be utilized
to provide compliance with the aviation community's goal of providing timely and
accurate flight information to customers.
o Provide accurate arrival data and ETA's for managing airport
operations. With better arrival information airlines can more effectively manage
connecting flights during push periods. This tool complements gate management
and staff scheduling programs and thus, enhances productivity improvements for
ground personnel and support functions.
o Provide accurate arrival information for airlines and at times
airports to help manage diversions, connections, and reduce the incidence of
aircraft arriving at a gate without proper airline or airport reception. A more
accurate picture of the terminal airspace, more accurate ETA's, and views of
current holding patterns enable airlines and airports to make better decisions.
o Provide enhanced collaborative decision making tools that provide
the Federal Aviation Administration, airlines and the local airport authorities
with a "real-time" communication tool to better communicate and make more
effective decisions during irregular operations.
o Provide Web-based flight tracking tools to improve public relations
by providing the surrounding airport communities with live flight traffic and
information (delayed for security purposes) as part of their public relations
and community outreach programs.
o Provide Web-based performance tools to improve operational
performance by providing affordable and easily distributed access to the PASSUR
database of operational information.
o Provide Web-based financial tools to improve operational
performance by allowing an airline or airport to gain an immediate snapshot of
landing reports in order to properly account for landing fees.
o Provide the ability to replay flight events to support
post-operations analysis. The playback of flight tracks and events allows
airlines to conduct a more thorough analysis of those events and thereby creates
opportunities to improve the efficiency and safety of operations.
o Enhance safety and security. Real time situational awareness and an
immediate replay capability provide airlines and governmental agencies with the
ability to be fully informed and proactive in responding to emergency events.
o Enforce the laws and regulations regarding noise levels emitted by
an aircraft. When used as part of an airport noise monitoring system, airport
managers and noise control officers can correlate noise events in the local
community with specific airline flight tracks.
During fiscal 2002, the Company completed and released new
information and decision support products in direct response to customer
requests and needs, including AirportMonitor (real time updates to educate the
local community on flight behavior relating to noise issues) and OpsNet
(formerly IROPSNet) (airport and airline community collaborative decision making
tool).
Page 4 of 61
During fiscal 2003, the Company completed and released several new
products, most specifically, Mode S, Pulse for Operations and Pulse for
Revenue. In addition, the Company released new versions of AirportMonitor and
continues development on new enhanced versions of existing software
applications. The Company continues to develop software applications, both
internet-based and end-user based, in direct response to the needs of the
aviation community.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Not applicable.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
The Company is a supplier of information and decision support
software serving the needs of the aviation industry, primarily airlines,
airports and other aviation related companies. Its principal business is the
delivery of information and decision support software by subscription from a
database of flight and travel-related information, of which a primary data
component is its PASSUR (Passive Secondary Surveillance Radar) Network of flight
tracking systems.
1. PRODUCTS.
The Company has transitioned from being a supplier of passive
surveillance systems (a capital equipment business) to a provider of
subscription-based information and decision support software products. These
products leverage the extensive passive surveillance data available through the
PASSUR Network to provide application-specific efficiency tools to airlines,
airports and related commercial businesses.
(i) The PASSUR System
The PASSUR system, together with associated data and software
products is a reliable and cost effective source of time-critical and valuable
information about the position and flight path of aircraft. PASSUR is an
important ingredient to the database that drives all present and future data,
information, and Company solution products. The Company, under an exclusive
license for patented technology owned by a third party, has used its proprietary
hardware, data, and software to develop an enhanced line of products. This
license agreement which includes various patents issued by the United States and
various foreign countries has patent expirations varying through the year 2010
and 2013 for patents issued by the United States and foreign countries,
respectively. These PASSUR systems receive and process aircraft identification
from aircraft transponder transmissions interrogated by existing secondary
surveillance radars.
(ii) Custom Hardware and Software Activities
The Company is not involved in specialized research and development
projects sponsored and paid for by customers.
Page 5 of 61
2. SERVICES.
(i) Information Services from the PASSUR Network
Information services include timely, accurate, user-friendly
information important to the efficient operation of airlines and airports. The
information services leverage the PASSUR Network, and are tailored to address
specific customer requirements, many of which can only be satisfied by
information generated from the PASSUR Network. The services provide airline and
airport customers with specific and timely information needed to efficiently
manage their airport, airside, and ground operations. The ETA's generated from
the PASSUR system are an example of an information service currently being used
throughout the customer network.
(ii) Decision Support Software from the PASSUR Network
Decision support tools and software solutions have been developed to
improve quality and operating efficiency of specific airline and airport
operations. OpsNet is an example of a decision support service.
(iii) Maintenance Services
The Company offers maintenance services pursuant to contractual
arrangements or an "on-call" basis. "On-call" services are provided on a time
and material basis.
3. SOURCES OF RAW MATERIALS.
The Company obtains its raw materials from component distributors and
manufacturers throughout the United States. The Company has multiple sources of
supply for a majority of its components.
4. DEPENDENCE ON CERTAIN CUSTOMERS.
During the fiscal year ended October 31, 2003, two (2) customers
(Continental Airlines and Aviation Development Council) accounted for
approximately 37% of revenues. Those two customers accounted for 24% and 13% of
revenues, respectively. As of October 31, 2002, two (2) customers (Continental
Airlines and Massachusetts Department of Airports) accounted for approximately
34% of revenues. Those two customers accounted for 19% and 15% of revenues,
respectively. As of October 31, 2001, one (1) customer (Continental Airlines)
accounted for approximately 15% of revenues.
5. BACKLOG FOR SUBSCRIPTION REVENUE AGREEMENTS.
The Company's committed backlog for subscription and maintenance
services at October 31, 2003 amounted to approximately $1,781,000. Of this
amount, $1,574,000 is scheduled for delivery or performance before October 31,
2004 and the balance of $ 207,000 is scheduled for delivery or performance in
subsequent years. The backlog at October 31, 2002 and 2001 amounted to
approximately $3,346,000 and $1,027,000 respectively. Backlog consists of
written purchase orders or contracts.
Page 6 of 61
6. COMPETITION.
The Company offers the PASSUR system for passive detection of
aircraft in flight with related suite software applications. These applications
are, to the best of the Company's knowledge, relatively unique, but continued
competition of flight tracking products is becoming readily available. Depending
on the end use of the Company's products, the Company's primary competitors
include Dimensions International, Lochard Pty, Ltd, Rannoch Corporation and
Sabre, Inc. The Company also sells certain data solutions through systems
integrators, including BAE, Inc, and Bruel & Kjaer Inc., some of which may also
sell products that are competitive with those offered by the Company. Most of
these companies are significantly larger than the Company, and have larger sales
forces and greater financial resources than the Company.
7. RESEARCH AND DEVELOPMENT.
The Company's Research and Development ("R&D") efforts are primarily
focused on the continued software and hardware enhancements and maintenance to
the existing PASSUR systems and related suite of software applications as well
as additional resources in developing and maintaining the new software
applications and decision support products, currently in development, which will
eventually expand the Company's software suite of products.
During the fiscal year ended October 31, 2003, the Company incurred
approximately $403,000 in expenditures for R&D, none of which was customer
sponsored. In fiscal year ended October 31, 2002, approximately $405,000 was
expended on R&D and in fiscal year 2001 approximately $288,000 was expended on
R&D.
8. ENVIRONMENTAL COSTS.
The Company is not aware of any environmental issues which would have
a material adverse effect on future capital expenditures or current and future
business operations.
9. EMPLOYEES.
As of October 31, 2003, the Company employed 12 full time employees,
including 5 officers.
(d) FINANCIAL INFORMATION ABOUT
GEOGRAPHIC AREAS
The following table sets forth the dollar amounts and the percentages
attributable to the sale by the Company of its products and services during the
past three fiscal years in and outside the United States:
NET REVENUES 2003 2002 2001
- ------------ -------------------- ------------------- --------------------
Domestic $2,063,000 96.5% $1,563,000 94.9% $ 909,000 96.6%
- ---------
Exports 74,000 3.5% 83,000 5.1% 32,000 3.4%
- --------- ---------- ----- ---------- ----- --------- -----
Total
Revenues: $2,137,000 100.0% $1,646,000 100.0% $ 941,000 100.0%
========== ===== ========== ===== ========== =====
Page 7 of 61
ADDITIONAL INFORMATION
The Company's internet address is WWW.PASSUR.COM. We make available
on our website under "SEC Filings", via a link to the United States Securities
and Exchange Commission's website, access to our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and as soon as reasonably practical subsequent
to electronic filing with or furnishing to the Securities Exchange Commission.
All such filings on our website are available free of charge. The Company
assumes no obligation to update or revise any forward-looking statements in this
annual report on Form 10-K, whether as a result of new information, future
events or otherwise, unless we are required to do so by law. A copy of this
annual report on Form 10-K is available without charge upon written request to:
Investor Relations, Megadata Corporation, 47 Arch Street, Greenwich, CT 06830.
ITEM 2. PROPERTIES.
The Company's manufacturing and research facility is located in a
one-story, 36,000 square foot building at 35 Orville Drive, Bohemia, New York.
The building previously was owned by the Company and was sold in October 1999 to
an unaffiliated buyer. The Company leases 12,000 square feet at an annual rental
cost of $83,460.
The Company's executive offices are located in a three-story office
building at 47 Arch Street, Greenwich, Connecticut. Effective October 1998, the
Company began leasing space from Field Point Capital Management Company, a
company 100% owned by the Company's Chairman of the Board, at $1,000 per month
rent. The Company believes these rates are competitive and are at or below
market rates.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not aware of any material pending legal proceedings to
which the Company or any of its subsidiaries is a party or to which any of their
properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matter to a vote of its security
holders during the fourth quarter of fiscal 2003.
Page 8 of 61
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION.
The Company's Common Stock, par value $0.01 per share (the "Common
Stock"), is traded on the over-the-counter bulletin board.
The following table sets forth the reported high and low sales prices
for the Company's common stock for each quarterly period during the
Company's last two fiscal years, as reported by the National
Quotation Bureau, Inc.:
Period Prices*
------------------------------------ ---------------------
High Low
---- ---
FISCAL YEAR ENDED OCTOBER 31, 2003
FIRST QUARTER $ .75 $ .25
SECOND QUARTER .51 .25
THIRD QUARTER .66 .25
FOURTH QUARTER .60 .30
Fiscal Year Ended October 31, 2002
First Quarter $ .90 $ .35
Second Quarter .65 .26
Third Quarter .50 .25
Fourth Quarter 1.01 .25
- --------------------------------------------------------------------------------
* The quotations represent prices on the over-the-counter bulletin board between
dealers in securities, do not include retail markup, markdown or commission, and
do not necessarily represent actual transactions.
(b) HOLDERS.
The number of registered equity security holders of record at January
20, 2004 was 305, as shown in the records of our transfer agent.
(c) DIVIDENDS.
The Company has never paid cash dividends on its shares. The Company
does not anticipate paying cash dividends in the foreseeable future.
Page 9 of 61
(d) Securities authorized for issuance under equity compensation plans.
- --------------------------------------------------------------------------------
NUMBER OF
SECURITIES
REMAINING
AVAILABLE
FOR FUTURE
ISSUANCE
UNDER EQUITY
NUMBER OF COMPENSATION
SECURITIES TO WEIGHTED- PLANS
BE ISSUED AVERAGE (EXCLUDING
UPON EXERCISE EXERCISE PRICE SECURITIES
PLAN CATEGORY OF OUTSTANDING OF OUTSTANDING REFLECTED IN
OPTIONS OPTIONS COLUMN (A))
(a) (b) (c)
- --------------------------------------------------------------------------------
EQUITY COMPENSATION PLAN
APPROVED BY SECURITY HOLDERS 1,043,000 $.58 432,000
- --------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS
NOT APPROVED BY SECURITY HOLDERS -- -- --
- --------------------------------------------------------------------------------
TOTAL 1,043,000 $.58 432,000
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated statements of operations data for the
fiscal years ended October 31, 2003, 2002 and 2001, and the consolidated balance
sheet data as of October 31, 2003 and 2002, have been derived from the Company's
audited financial statements included elsewhere in this Annual Report on Form
10-K. The selected consolidated statement of operations data for the years ended
October 31, 2000 and 1999, and the selected consolidated balance sheet data as
of October 31, 2001, 2000 and 1999, are derived from the Company's audited
consolidated financial statements which are not included in this Annual Report
on Form 10-K.
Selected Statement of Operations Data:
YEARS ENDED OCTOBER 31,
- ------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Net
Revenues $ 2,136,914 $ 1,645,687 $ 940,637 $ 1,756,602 $ 1,100,641
Net
Loss $(2,486,122) $(2,110,212) $(1,629,490) $ (582,824) $ (322,812)
Net Loss Per
Common Share --
Basic and diluted (1) $ (.71) $ (.61) $ (.47) $ (.22) $ (.13)
Dividend Declared -- -- -- -- --
- --------------------------------------------------------------------------------------------------
Page 10 of 61
Selected Balance Sheet Data:
OCTOBER 31,
- ---------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Total Assets $4,533,279 $ 4,449,999 $ 3,356,343 $2,348,082 $1,572,865
Long-Term
Debt (2)(3)(4)(5)(6)(7) $8,466,465 $ 5,705,000 $3,090,000 $ 152,985 $ 337,945
Total Shareholders'
(Deficit) Equity $(5,540,408) $(3,077,786) $ (988,824) $ 604,216 $ (14,854)
- ---------------------------------------------------------------------------------------------
(1) Net loss per share of common stock was computed using the weighted average
number of shares of common stock outstanding during the period. Conversion
of the common equivalent shares was not assumed since the result would have
been antidilutive.
(2) The mortgage loan to Roslyn Savings Bank was paid in full upon the sale of
the Company's mortgaged property on October 22, 1999.
(3) Long-term debt for 1999 included $325,000 of notes payable and $12,945 of
installment notes payable, which were due after October 31, 2000.
(4) Long-term debt for 2000 included $150,000 of notes payable, and $2,985 of
installment notes payable, which are due after October 31, 2001.
(5) Long-term debt for 2001 consists of notes payable - Related party which is
due after October 31, 2002.
(6) Long-term debt for 2002 consists of notes payable - Related party which is
due after October 31, 2003.
(7) Long-term debt for 2003 consists of notes payable - Related party which is
due after October 31, 2004.
Page 11 of 61
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
REVENUES
The Company is a provider of information and decision support software supplied
primarily from its PASSUR Network. Revenues consist primarily of
subscription-based revenues, maintenance revenues from customer owned PASSUR
systems, system sales and system upgrades revenues and other revenues from
services and/or products provided which are not part of the subscription or
maintenance business line. Revenues during fiscal 2003 increased by
approximately $491,000, or 30%, to $2,137,000 in fiscal 2003 from $1,646,000 in
fiscal 2002. This increase was primarily due to the continued development and
deployment of new software applications, increased effectiveness of the
Company's marketing efforts, industry acceptance of the Company's applications,
the wide selection of products which address the customers' needs and ease of
delivery through web-based applications. These efforts resulted in an increased
number of new customers subscribing to our suite of software applications and
the increased subscriptions from our suite of applications to existing
customers.
Management continues to concentrate its efforts on the sale of information and
decision support product applications utilizing data primarily derived from the
Company-owned PASSUR Network. Such efforts include the continued development of
new product applications as well as enhancements and maintenance of existing
applications. As a result, subscription-based revenues increased approximately
$719,000, or 82%, for fiscal 2003, when compared to fiscal 2002. The Company's
business plan is to continue to focus on increasing subscription-based revenues
from the suite of software applications and development of new applications
designed to address the needs of the aviation industry. However, the Company,
from time to time, will sell a PASSUR system at a customer's specific request.
In fiscal 2002, the Company sold one system and one system upgrade, which
resulted in system sales revenues of approximately $293,000.
Revenues during fiscal 2002 increased by approximately $705,000, or 75%, to
$1,646,000 from $941,000 in fiscal 2001. This increase was primarily due to the
increase in system sales and increased focus on the subscription based revenue
business model. The Company's subscription-based sales for fiscal 2002 and 2001
were $874,000 and $448,000, respectively.
The Company shipped five and installed nine Company-owned PASSUR systems during
fiscal 2003 (installations include systems shipped in current and previous
fiscal years), which were capitalized as part of the "PASSUR Network". The
Company will continue to expand the PASSUR Network by shipping and installing
additional PASSUR systems throughout fiscal 2004. Management anticipates that
these future PASSUR sites will provide increased coverage of the PASSUR Network
and increase the Company's potential for new customers at such locations as well
as provide existing customers with additional data solutions. The Company will
continue to market the data generated from the PASSUR Network directly to
airlines, airports and aviation related companies and anticipates that the data
derived from the network will ultimately be sold to multiple users at each
specific network site. There were 38 Company owned PASSUR's located at various
airports throughout the continental United States at the end of fiscal 2003.
Management has decided to discontinue marketing various non-PASSUR product
offerings; however, these products continue to contribute slightly to the
revenue base from the sale of existing inventory, along with minor service and
repair revenues. The Company recorded non-
Page 12 of 61
PASSUR revenues of approximately $29,000 for fiscal 2003 as compared to
approximately $23,000 in fiscal 2002.
COST OF SALES
Costs associated with system sales consist primarily of purchased materials,
direct labor and overhead costs. Costs associated with subscription and
maintenance revenues consists primarily of direct labor, depreciation of PASSUR
Network assets, amortization of software development costs, communication costs
and allocated overhead costs. Also included in cost of sales are costs
associated with the upgrades of PASSUR systems necessary to make such systems
compatible with new software applications, as well as the ordinary repair and
maintenance of existing network systems. Additionally, cost of sales in each
reporting period are impacted by: (1) the number of PASSUR Network units added
to the asset account which include the production, shipments and installations
of these assets; and (2) capitalized costs associated with software development
programs, collectively referred to as "Capitalized Assets". After the positive
impact of the Capitalized Assets are recognized in cost of sales, these
Capitalized Asset costs are then depreciated and/or amortized over their
respective useful lives and charged to cost of sales.
The Company has not segregated its cost of sales between cost of system sales
and cost of subscription and maintenance services, as it is not practical to
segregate such costs. During fiscal 2003, cost of sales increased by
approximately $807,000, or 99%, as compared to fiscal 2002. This increase was
primarily due to the increases in depreciation and amortization of PASSUR
Network and software development assets, the one-time disposal of certain PASSUR
Network and software development assets, communication costs, certain allocated
overhead costs and the decrease in the impact of Capitalized Assets charged to
cost of sales in fiscal 2003 as compared to fiscal 2002.
During fiscal 2003, costs associated with subscription and maintenance revenues
including labor, communication costs and allocated overhead costs totaled
approximately $1,400,000 or 86% of gross cost of sales (before impact of
Capitalized Assets), an increase of approximately 12% from fiscal 2002. The
Company does not deem it practical to bifurcate these costs between subscription
revenues and maintenance revenues. In addition, during fiscal 2003, costs
directly associated with subscription revenues include: (1) depreciation and
amortization of the PASSUR network assets and software development costs,
totaling approximately $602,000 or 37% of gross cost of sales (before impact of
Capitalized Assets); and (2) the impact of Capitalized Assets totaling
approximately $642,000, a decrease of approximately 40% from fiscal 2002.
Finally, during fiscal 2003, the Company charged to cost of sales approximately
$150,000 and $24,000 for the disposal of certain PASSUR Network and software
development assets as well as the write-off of inventory associated with
non-PASSUR product lines, respectively.
During mid-fiscal 2003, the Company initiated certain cost reduction initiatives
specifically to address the increased costs associated with communication and
allocated overhead costs within cost of sales. Management expects to continue to
address these costs and anticipates that the results of such cost reduction
initiatives will be recognized throughout fiscal 2004.
Page 13 of 61
RESEARCH AND DEVELOPMENT
During fiscal 2003, research and development expenses remained consistent with
fiscal 2002. The Company's research and development efforts include activities
associated with the enhancement, maintenance and improvement of the Company's
existing hardware, software and information products. However, commencing
mid-fiscal 2002, personnel who had been utilized on such research and
development activities were either redeployed from research and development
activities or were replaced by outside software contractors at a more cost
effective rate. The costs associated with outside contractors are charged
directly to cost of sales as these costs impact the amount of labor associated
with capitalized software programs which also impacts cost of sales.
The Company anticipates that it will continue to invest in research and
development to develop, maintain and support the existing and newly developed
applications for its PASSUR customers. There were no customer sponsored research
and development activities during fiscal 2003 or fiscal 2002. Research and
development expenses are funded through current operations.
SELLING, GENERAL AND ADMINISTRATIVE
During fiscal 2003, selling, general and administrative expenses decreased by
approximately $184,000, or 9%, as compared to fiscal 2002. The decrease was
primarily due to cost reduction initiatives enacted throughout fiscal 2003. Such
initiatives resulted in decreased costs associated with outside consultants,
certain allocated overhead costs as well as the reduction of selected general
and administrative employees throughout fiscal 2003, including, certain company
executives, which resulted in a decrease of approximately $187,000 or 34% in
officers' payroll in fiscal 2003 as compared to fiscal 2002. All of these cost
reduction initiatives were partially offset by increases in severance payments
(relating to the termination of employees during fiscal 2003) as well as
professional fees and insurance expenses.
The Company anticipates continued increases in its sales and marketing efforts
in order to market new and existing products from the PASSUR suite of software
applications. The Company anticipates that its sales and marketing expenses may
increase in fiscal 2004 resulting from these efforts, while efforts to maintain
and expand cost reduction initiatives are identified and implemented.
OTHER INCOME (EXPENSE)
Interest income and interest expense to unrelated parties were not significant
in fiscal 2003 and fiscal 2002.
Interest expense-related party increased by approximately $246,000, or 60%, in
fiscal 2003, as compared to fiscal 2002. The increase is due to additional
borrowings the Company incurred during fiscal 2003 in the amount of $2,761,000
from its significant shareholder. These borrowings resulted from the Company's
inability to generate cash flows from operations to meet existing working
capital requirements and capital expenditures.
Page 14 of 61
INCOME TAXES
The provisions for income taxes for each year relate to state and local minimum
taxes. The Company has available approximately $13,750,000 in federal tax loss
carryforwards to offset possible future income. The Company also has available
$25,000 in general state business tax credit carryforwards. These carryforwards
expire in various tax years through 2023. The Company has provided a full
valuation allowance on the net deferred tax asset of approximately $5,363,000,
which primarily consists of the net operating loss carry-forwards and available
tax credits.
NET LOSS
The Company incurred a net loss of $2,486,000, or $.71 per diluted share, during
fiscal 2003, as compared to a net loss of $2,110,000, or $.61 per diluted share,
in fiscal 2002.
During fiscal 2003, total costs and expenses of $3,966,000 were higher than
total revenues and resulted in a loss from operations of $1,829,000. Total costs
and expenses increased by $621,000, or 19%, as compared to such costs in fiscal
2002. Despite the increase in revenues of approximately 30% in fiscal 2003,
increased costs associated with communication costs, depreciation and
amortization, interest expense from outstanding debt and expenses associated
with the placement, operation, development and marketing of the Company-owned
PASSUR Network contributed to the additional loss.
During fiscal 2002, total costs and expenses of $3,345,000 were higher than
total revenues and resulted in a loss from operations of $1,699,000. Total costs
and expenses increased by $951,000, or 40%, as compared to fiscal 2001.
Page 15 of 61
QUARTERLY RESULTS OF OPERATIONS
The following table provides unaudited quarterly consolidated results of
operations for each quarter of fiscal years 2003 and 2002. The Company believes
this unaudited information has been prepared substantially on the same basis as
the annual audited financial statements and all necessary adjustments,
consisting of any normal recurring adjustments, have been included in the
amounts stated below to present fairly the Company's results of operations. The
operating results for any quarter are not necessarily indicative of the
operating results for any future period. Certain balances have been reclassified
to conform to the presentation of balances as stated in this Annual Report on
Form 10-K.
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
OCT. 31, JULY 31, APRIL 30, JANUARY 31, OCT. 31, JULY 31, APRIL 30, JANUARY 31,
2003 2003 2003 2003 2002 2002 2002 2002
-----------------------------------------------------------------------------------------
TOTAL NET REVENUES $558,082 $524,797 $556,295 $497,740 $496,704 $580,415 $272,769 $295,799
LOSS FROM OPERATIONS (682,098) (430,891) (266,226) (450,103) (411,116) (279,060) (585,596) (423,727)
NET LOSS (866,455) (604,318) (420,221) (595,128) (532,910) (392,321) (680,694) (504,287)
BASIC AND DILUTED
NET LOSS PER SHARE $(0.25) $(0.17) $(0.12) $(0.17) $(0.15) $(0.11) $(0.20) $(0.15)
- --------------------------------------------------------------------------------------------------------------------
IMPACT OF INFLATION
In the opinion of management, inflation has not had a material effect on the
operations of the Company including selling prices, capital expenditures and
operating expenses.
Page 16 of 61
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2003, the Company's current liabilities exceeded current assets
by $793,000. At October 31, 2003, the Company's stockholders' deficit was
$5,540,000. For fiscal 2003, the Company incurred a net loss of $2,486,000.
Management is addressing the working capital and stockholders' deficiencies and
operating losses by aggressively marketing its PASSUR information capabilities
in its existing product lines, as well as in new products, which are continually
being developed and deployed. The Company intends to increase the size and
related airspace coverage of its owned "PASSUR Network," by continuing to
install PASSUR Systems throughout the United States and certain foreign
countries. In addition, management believes that expanding its existing software
suite of products, which addresses the wide array of needs of the aviation
industry, through the continued development of new product offerings, will
continue to lead to increased growth in the Company's customer base and
subscription-based revenues. Additionally, if the Company's business plan does
not generate sufficient cash-flows from operations to meet the Company's
operating cash requirements, the Company will attempt to obtain external
financing, and if such external financing is not consummated, the Company has a
commitment to receive additional financial support from its significant
shareholder and Chairman through the end of fiscal 2004. Such commitment for
financial support may be in the form of additional advances or loans to the
Company in addition to the deferral of principal and interest payments due on
the existing loans, if deemed necessary.
Net cash used from operating activities for fiscal 2003 was approximately
$2,038,000. Cash flows used in investing activities for fiscal 2003 was
approximately $763,000 and consisted primarily of investments in the Company's
PASSUR network as well as capitalized software development costs. Cash flows
provided by financing activities for fiscal 2003 were approximately $2,764,000
of which approximately $2,761,000 was in notes payable - related party. No
principal payments on notes payable - related party were made during fiscal
2003.
The Company was unprofitable in fiscal 2003. To date, the Company has
experienced increased revenues as a result of its subscription-based revenue
model. The Company is actively addressing the increasing costs associated with
supporting the business, and plans to identify and reduce any unnecessary costs
as part of its cost reduction initiatives. Additionally, the aviation market has
been impacted by budgetary constraints and airline bankruptcies due to the
downturn in the current economy, the terrorist events of September 11, 2001 and
the continued war on terrorism. The aviation market is extensively regulated by
government agencies, particularly the Federal Aviation Administration and The
National Transportation Safety Board, and management anticipates that new
regulations relating to air travel may continue to be issued. Substantially all
of the Company's revenues are derived from either airports or airlines. It is
premature to evaluate the impact, if any, that any new regulations or changes in
the economic situation of the aviation industry could have on the future
operations of the Company, either positively or negatively.
Interest by potential customers in the information and decision support software
products obtained from the PASSUR Network remains strong and the Company
anticipates an increase in future revenues. However, the Company cannot predict
if such revenues will materialize. If sales do not increase, additional losses
may occur. The extent of such profits or losses will be dependent on sales
volume achieved and Company cost reduction initiatives.
Page 17 of 61
CONTRACTUAL OBLIGATIONS
As of October 31, 2003, the Company had contractual obligations as follows:
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
LESS THAN MORE THAN
TOTAL 1 YEAR 1 - 3 YEARS 3 YEARS
------------ ----------- ------------- -----------
Operating Leases $ 169,428 $ 83,460 $ 85,968 --
Promissory Notes $ 8,466,465 -- $ 8,466,465 --
Other Long-Term Obligations $ 750,000 $ 75,000 $ 225,000 $ 450,000
------------ ----------- ------------- -----------
Total contractual cash
obligations $ 9,385,893 $ 158,460 $ 8,777,433 $ 450,000
============ =========== ============= ===========
o Obligations under "Operating Leases" relate to the manufacturing and
research facility located in Bohemia, New York ($83,460 - fiscal 2004,
$85,968 - fiscal 2005). All other operating leases are under a
month-to-month arrangement, therefore, obligations have been excluded from
above calculation.
o Obligations under "Other Long-Term Obligations" relate to the minimum
royalty payments due to a third party for exclusive licensing rights of
certain patents relating to the PASSUR System. The annual minimum royalty
payments total $75,000 and are effective until the last licensed patent
expires in 2013. The Company's annual royalty payment may exceed the
minimum royalty amount of $75,000 based upon certain sales thresholds
exceeded in any given year; however, the minimum annual royalty obligation
will never be less than $75,000. Historically, the Company has not exceeded
such thresholds to date.
CERTAIN RELATED PARTY TRANSACTIONS
In fiscal 2003, G.S. Beckwith Gilbert, Chairman and significant shareholder of
the Company, loaned the Company $2,761,000 under promissory notes bearing
interest at 9% per annum and maturing at December 31, 2003. As of October 31,
2003, the total notes payable due to Mr. Gilbert totaled $8,466,465 and are
secured by the Company's assets.
Effective November 1, 2003, the Company and Mr. Gilbert modified certain terms
and conditions of the outstanding notes as of October 31, 2003. The modified
terms included a maturity date of November 1, 2004 as well as issuance of
600,000 shares of Megadata common stock as payment of annual interest on such
note. Prior to aforementioned modifications, the outstanding promissory notes
had a maturity date of December 31, 2003 and bore interest at 9% per annum.
Effective November 15, 2003, the Company and Mr. Gilbert entered into a
subsequent debt agreement whereby any additional promissory notes issued to Mr.
Gilbert will mature on November 1, 2004 and bear interest at 4.5% per annum,
payable in cash.
During fiscal 2003, the Company paid approximately $16,000 to Surf-Tech
Manufacturing, Inc. (a non-public corporation) for materials and labor in
connection with the production of various replacement and upgrade equipment of
PASSUR systems. A Company Executive Vice President and Director is a 50%
shareholder of the aforementioned company, and the Company believes that these
rates are competitive and are at or below market rates.
Page 18 of 61
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities based upon accounting policies management has
implemented. The Company has identified the policies and estimates below as
critical to its business operations and the understanding of its results of
operations. The impact and any associated risks related to these policies on the
Company's business operations is discussed throughout Management's Discussion
and Analysis of Financial Condition and Results of Operations where such
policies affect its reported financial results. Actual results may differ from
these judgments under different assumptions or conditions. The Company's
accounting policies that require management to apply significant judgment and
estimates include:
REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS" ("SAB 101"), as amended.
SAB 101 requires that four basic criteria must be met before revenues can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the fee is fixed and determinable;
and (4) collectibility is reasonably assured. The Company also recognizes
revenue in accordance with Statement of Position 97-2, "SOFTWARE REVENUE
RECOGNITION" ("SOP 97-2"), as amended, when applicable.
The Company's revenues are generated from the following: (1) subscription and
maintenance agreements; (2) system sales, including system upgrade sales; and
(3) one-time license fees. The Company recognizes revenues from system sales
when the system is shipped in accordance with SAB 101 and SOP 97-2.
Revenues generated from subscription and maintenance agreements are recognized
over the term of such executed agreements and/or customer's receipt of such data
or services. In accordance with SOP 97-2, we recognize revenue from the
licensing of our software products or performance of maintenance when all of the
following criteria are met: (1) we have entered into a legally binding agreement
with a customer; (2) we deliver the products / services; (3) license /
maintenance agreement terms are deemed fixed or determinable and free of
contingencies or uncertainties that may alter the agreement such that it may not
be complete and final; and (4) collection is probable. The Company records
revenues pursuant to individual contracts on a month-by-month basis, as outlined
by the applicable agreement(s). In many cases, the Company may invoice
respective customers in advance of specified period(s), either quarterly or
annually, which coincides with the terms of the agreement. In such cases, the
Company will defer at the close of each month and/or reporting period any
subscription or maintenance revenues invoiced for which services have yet to be
rendered, in accordance with SOP 97-2.
Page 19 of 61
Our software licenses generally do not include acceptance provisions. An
acceptance provision generally allows a customer to test the software for a
defined period of time before they commit to a binding agreement to license the
software. If a subscription agreement includes an acceptance provision, the
company will not recognize revenue until the earlier of the receipt of a written
customer acceptance or, if not notified by the customer to cancel the
subscription agreement, the expiration of the acceptance period.
From time to time, the Company will receive one-time payments from customers for
rights, including but not limited to the rights to use certain data at an agreed
upon location(s) for a specific use and/or for an unlimited number of users.
Such one-time payments are in the form of license fees. These fees are
recognized as revenue ratably over the term of the license agreement or expected
useful life of such license arrangement, whichever is longer, but typically five
years.
Any deferred revenue is classified on the Company's balance sheet as a liability
in the deferred income account until such time as revenue from services is
properly recognized as revenue in accordance with SAB 101 and/or SOP 97-2 and
the corresponding agreement.
CAPITALIZED SOFTWARE COSTS
The Company follows the provisions of Statement of Financial Accounting
Standards No. 86, "ACCOUNTING FOR THE COSTS OF SOFTWARE TO BE SOLD, LEASED, OR
OTHERWISE MARKETED" ("SFAS 86"). Costs incurred to develop computer hardware and
software products as well as significant enhancements to software features of
the existing products to be sold or otherwise marketed are capitalized after
technological feasibility is established. Once the software products become
available for general release to the public, the Company will begin to amortize
such costs to cost of sales.
The Company's policy on capitalized software costs determines whether the costs
incurred are classified as capitalized costs (in accordance with SFAS 86) or as
research and development expenses. In cases whereby the Company capitalizes
costs incurred with development of new hardware/software products, a product
specification is designed and/or a working model of the respective project is
developed as the guideline for the criteria to capitalize costs associated with
such project in accordance with SFAS 86.
Once a product has been made available for sale and/or released for sale to the
general public, the development costs of that product are no longer capitalized
and amortization commences over a five year period and any additional costs
incurred to maintain or support such product are expensed as incurred. In some
cases, the Company may capitalize costs incurred in the development of enhanced
versions of already existing products, but will immediately expense any costs
incurred on products which were completed and released to the general public in
the form of continued maintenance of such products, in accordance with SFAS 86.
Management uses judgment in determining and evaluating whether development costs
meet the criteria for immediate expense or capitalization.
The Company's net capitalized software costs at October 31, 2003 totaled
$679,000. The carrying value of the capitalized software costs is dependent on
the forecasted and actual performance of future cash flows generated from such
assets as determined and evaluated by management.
Page 20 of 61
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS" ("SFAS 144"). The Company reviews long-lived assets for impairment when
circumstances indicate the carrying amount of an asset may not be recoverable or
at each reporting period. An impairment is recognized when the sum of the
undiscounted estimated future cash flows expected to result from the use of the
asset is less than the carrying value. The Company evaluates the periods of
amortization continually in determining whether any events or circumstances
warrant revised estimates of useful lives.
The Company's long-lived assets include long-term fixed assets of the PASSUR
Network and software development costs that at October 31, 2003 approximated
$2,924,000 and $679,000, respectively. Long-term fixed assets accounted for 79%
of the Company's total assets. The carrying value of the long-term assets is
dependent on the forecasted and actual financial performance and future cash
flows of such assets as determined by management.
On November 1, 2002, the Company changed the estimated useful lives of certain
assets within the capitalized PASSUR Network from seven to five years to reflect
the revised expected useful life of such assets.
At each reporting period, management evaluates the carrying values of the
Company's assets. The evaluation represents the undiscounted cash flows
generated from current contractual revenue sources and the anticipated forecast
revenue derived from each asset. It then evaluates these revenues on an overall
basis to determine if any impairment issues exist. As of October 31, 2003, based
upon management's evaluation of the above asset groups, no impairments exist of
these asset groups. If these forecasts are not met the Company may have to
record impairment charges not previously recorded. However, during the fourth
quarter of fiscal 2003, the Company disposed of certain PASSUR Network assets
totaling approximately $105,000, which represented the remaining carrying value
of such assets. These disposals were due to network assets which were returned
to the Company and deemed damaged and/or obsolete. In addition, the Company also
determined during the fourth quarter of fiscal 2003, to dispose of one
in-process capitalized software project of approximately $46,000 based upon the
assumption that the project is no longer viable. The project commenced in fiscal
2001 and at such time was considered a viable project and properly capitalized
under SFAS 86, but recent determinations by the Company has resulted in the
abandonment of the project.
DEPRECIATION AND AMORTIZATION
The Company's total net capitalized assets at October 31, 2003 were $3,702,000,
representing 82% of the Company's consolidated net assets as of October 31,
2003. The total net property, plant and equipment approximated $99,000, the
total net PASSUR Network approximated $2,924,000 and the total net software
development costs approximated $679,000. The total depreciation and amortization
expense related to capitalized assets at October 31, 2003 approximated $652,000.
Management judgment is required in the determination of the estimated
depreciable lives that are used to calculate the annual depreciation and
amortization expense.
Page 21 of 61
Depreciation and amortization are provided on the straight-line basis over the
estimated useful lives of the assets, as follows:
Property, plant and equipment 3 to 10 Years
PASSUR Network 5 to 7 Years
Software development costs 5 Years
The PASSUR Network reflected on the Company's Consolidated Balance Sheets
represents PASSUR Systems and the related software workstations used from the
data derived from the PASSUR Systems. The PASSUR Network is comprised of PASSUR
Systems installed and supplying data to the company network, related
workstations with software and/or PASSUR Systems built but not yet installed
into the company network. PASSUR Network assets which are not installed into the
network are carried at cost and no depreciation is recorded. Once installed, the
PASSUR Systems are depreciated over seven years and the related workstations are
depreciated over five years.
All of the Company's capitalized assets are recorded at cost (which may also
include salaries and related overhead costs incurred during the period of
development) and depreciated and/or amortized over the asset's estimated useful
life for financial statement purposes. The estimated useful life represents the
projected period of time that the asset will be productively employed by the
Company and is determined by management based on many factors, including
historical experience with similar assets, technological life cycles and
industry standards for similar assets. Circumstances and events relating to
these assets are monitored to ensure that changes in asset lives or impairments
(see "Impairment of Long-Lived Assets" above) are identified and prospective
depreciation expense or impairment expense is adjusted accordingly.
The total depreciation and/or amortization for the year ended October 31, 2003
for property, plant and equipment approximated $50,000, the PASSUR Network
approximated $537,000 and software development costs approximated $65,000.
STOCK-BASED COMPENSATION
The Company currently measures compensation expense for stock option grants
using the intrinsic value method prescribed for in APB No. 25 "ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES". Under this method, the company does not record
compensation expense when stock options are granted provided that the exercise
price is not less than the fair market value of the stock when the option is
granted. In accordance with SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" and SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE", the Company discloses its pro-forma net loss and
pro-forma net loss per common share as if the fair value-based method has been
applied in measuring compensation expense for stock option grants.
Page 22 of 61
RISK FACTORS
THE COMPANY HAS A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOWS FROM
OPERATIONS AND EXPECTS ITS LOSSES AND NEGATIVE CASH FLOWS TO CONTINUE FOR THE
NEXT SEVERAL REPORTING PERIODS.
The Company has incurred significant losses during the last six fiscal years.
The Company incurred net losses of $2,486,000 for the fiscal year ended October
31, 2003, $2,110,000 during the fiscal year ended October 31, 2002 and
$1,629,000 during the fiscal year ended October 31, 2001. As of October 31,
2003, the Company's accumulated deficit was approximately $7,699,000. The
Company anticipates that it will continue to incur net losses and negative cash
flows for the next several reporting periods. The Company's ability to achieve
and maintain profitability will depend upon its ability to generate significant
increased revenues through new and existing customer agreements, additional
services and/or products offered to existing customers and to control the costs
associated with the business operations. There is no guarantee that the Company
will be able to execute on these requirements. If the Company becomes profitable
for a specific reporting period, it still may not be able to sustain or increase
its profits on a quarterly or annual basis in the future.
THE COMPANY'S SUCCESS IS DEPENDENT ON THE AVIATION INDUSTRY. IF THE COMPANY DOES
NOT EXECUTE ITS BUSINESS PLAN OR IF THE MARKET FOR ITS SERVICES FAILS TO DEVELOP
DUE TO THE DEPRESSED AVIATION INDUSTRY MARKET, ITS RESULTS OF OPERATIONS AND
FINANCIAL RESULTS COULD CONTINUE TO BE ADVERSELY AFFECTED.
The Company's revenues are solely derived from the aviation industry. The
Company's future revenues and results of operations are dependent on its
continued execution of its subscription-based revenue strategy and development
of new software solutions and applications for the aviation industry. Due to the
depressed aviation industry market, it is not assured that the Company will be
able to continue to report growth in its subscription-based business or sustain
its current subscription business. If the Company is unable to sustain and/or
increase its levels of revenues, and it is not successful in reducing costs, its
cash requirements may increase and the results of operations will continue to be
adversely affected.
Additionally, the aviation market has been impacted by budgetary constraints and
airline bankruptcies due to the downturn in the current economy, the terrorist
events of September 11, 2001 and the war on terrorism. The aviation market is
extensively regulated by government agencies, particularly the Federal Aviation
Administration and The National Transportation Safety Board. New air travel
regulations have been, and management anticipates will continue to be,
implemented that could have a negative impact on airline and airport revenues.
Since substantially all of the Company's revenues are derived from either
airports or airlines, continued increased regulations of the aviation industry
or continued downturn in the economic situation of the aviation industry could
have a material adverse effect on the Company.
RELIANCE ON THE COMPANY'S QUARTERLY OPERATING RESULTS AS AN INDICATION OF FUTURE
RESULTS IS INAPPROPRIATE DUE TO POTENTIAL SIGNIFICANT FLUCTUATIONS.
The Company's future revenues and results of operations may fluctuate
significantly due to a combination of factors, including:
o Delays and/or decreases in the signing and invoicing of new contracts;
o The length of time needed to initiate and complete customer contracts;
o Revenues recognized from one-time sales events (selling or upgrading
systems) versus subscription based sales;
o The introduction and market acceptance of new and enhanced products
and services;
o The costs associated with providing existing and new products and
services;
Page 23 of 61
o Economic conditions in the United States and the impact on the
aviation industry from the terrorist events of September 11, 2001 and
continued war or terrorism; and
o The potential of future terrorist acts against the aviation industry.
Accordingly, quarter-to-quarter comparisons of its results of
operations should not be relied on as an indication of performance. It
is possible that in future periods results of operations may be below
those expected based upon previous performance.
THE COMPANY MAY BE UNABLE TO RAISE ADDITIONAL FUNDS TO MEET OPERATING CAPITAL
REQUIREMENTS IN THE FUTURE.
The Company has incurred significant negative cash flows from operations over
the past several fiscal years. It has obtained a commitment from its significant
shareholder and Chairman to provide the resources necessary to meet working
capital and liquidity requirements through October 31, 2004. However, future
liquidity and capital requirements are difficult to predict, as they depend on
numerous factors, including the maintenance and growth of existing product lines
and service offerings, as well as the ability to develop, provide and sell new
products in an industry for which liquidity and resources are already adversely
affected. The Company has significant cost requirements, which are expected to
continue in the future. The Company may need to raise additional funds in order
to support discretionary capital expenditures and execute its business plan.
These funds in some cases may be beyond the scope and normal operating
requirements, for which the Company has a commitment from its significant
shareholder and Chairman and therefore, may not be approved and/or funded. In
such case, the Company may be required to seek alternate sources of financing
(which may not be available on favorable terms or at all) or abandon such
activities by either: terminating or eliminating certain operating activities;
terminating personnel; eliminating marketing activities; and/or eliminating
research and development programs. If any of the aforementioned occurs, the
Company's ability to expand and continued growth could become adversely
affected.
A LIMITED NUMBER OF CUSTOMER CONTRACTS ACCOUNT FOR A HIGH PERCENTAGE OF THE
COMPANY'S REVENUES, AND THE INABILITY TO REPLACE A KEY CUSTOMER CONTRACT COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, BUSINESS AND FINANCIAL CONDITION.
The Company relies on a small number of customer contracts for a large
percentage of its revenues and expects that a significant percentage of its
revenues will continue to be derived from a limited number of customer
contracts. The Company's business plan is to obtain additional customers, but
anticipates that near term revenues and operating results will continue to
depend on large contracts from a small number of customers. Additionally, the
aviation industry, particularly the airline sector, has experienced several
Chapter 11 bankruptcy filings recently. Any Chapter 11 filings by our existing
customers may adversely affect our ability to continue such services and collect
revenue generated by such customers. As a result of this concentration of our
customer base, an inability to replace one or more of these large customer
contracts could materially adversely affect our business, financial condition,
operating results and cash flow.
Page 24 of 61
THE SOFTWARE BUSINESS FOR THE AVIATION INDUSTRY IS HIGHLY COMPETITIVE, AND
FAILURE TO ADAPT TO THE CHANGING INDUSTRY NEEDS COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS, BUSINESS AND FINANCIAL CONDITION.
The industry in which we compete is marked by rapid and substantial technology
change, the steady emergence of new companies and products, as well as evolving
industry standards and changing customer needs. We compete with many established
companies in the industry we serve, and some of these companies may have
substantially greater financial, marketing and technology resources, larger
distribution capabilities, earlier access to potential customers and greater
opportunities to address customers' various information technology requirements.
As the aviation industry seeks to be more cost effective due to the continued
economic downturn, product pricing becomes increasingly important for our
customers. As a result we may experience increased competition from certain,
low-price competitors. To remain competitive, we continue to develop new
products and continue to enhance existing products. We may be unsuccessful in
our ability to sell new products and/or product releases that meet the needs of
our industry in light of low-cost, less functional alternatives available in the
market. In addition, the pricing of new products or releases of existing
products may be above that required by the market place. Our inability to bring
such new products or enhancements to existing products to the market in a timely
manner or the failure for these products to achieve industry acceptance could
adversely affect our business, financial condition, operating results and cash
flow.
THE COMPANY DEPENDS UPON CERTAIN KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN
THESE EMPLOYEES.
The Company's future performance depends on the continued services of its key
technical and engineering personnel. Significant improvements have been made in
the past year to address such issues, in particular, technical redundancy, but
the Company continues to depend on the efforts of a limited number of key
personnel. The employment of any of the Company's key personnel could cease at
any time which could have an adverse affect on our business.
THE PASSUR NETWORK COULD EXPERIENCE DISRUPTIONS, WHICH COULD AFFECT THE DELIVERY
OF DATA.
The Company's network infrastructure is maintained and hosted by AT&T through an
existing frame-relay network. If AT&T experiences system failures or fails to
adequately maintain the frame-relay network, the Company may experience
interruption of delivery of data / software services and customers may terminate
or elect not continue to subscribe to these services in the future. The
Company's network infrastructure may be vulnerable to computer viruses,
break-ins, denial of service attacks and similar disruptive problems. Computer
viruses, break-ins, denial of service attacks or other problems caused by third
parties could lead to interruptions, delays or cessation in service to
customers. There is currently no existing technology that provides absolute
security. Such incidents could deter potential customers and adversely affect
existing customer relationships.
THE COMPANY MAY BE SUBJECT TO EXISTING AND NEWLY ISSUED GOVERNMENT REGULATIONS
RELATING TO THE DISTRIBUTION OF FLIGHT-TRACKING DATA.
The Company currently maintains strict safety regulations for its data in order
to comply with current government regulations. Due to the continued growing
safety needs and concerns of the aviation industry, new government regulations
may be implemented. Such new regulations may, in some cases, hinder the
Company's ability to provide current and/or additional services.
UNAUTHORIZED USE OF THE COMPANY'S INTELLECTUAL PROPERTIES BY THIRD PARTIES MAY
DAMAGE AND/OR ADVERSELY AFFECT OUR BUSINESS.
We regard our trademarks, trade secrets and all other intellectual property as
critical to our future success. Unauthorized use of our intellectual property by
third parties may damage and/or impair
Page 25 of 61
our business. Our intellectual property includes exclusive licenses to use
patents held by third parties, as well as Company-owned patents. We rely on
trademarks, trade secrets, patent protection and contracts, including
confidentiality and non-exclusive license agreements with our customers,
employees, consultants, strategic partners and others to protect our
intellectual property rights. Despite our precautions, it may be possible for
third parties to obtain and use our intellectual property without our prior
knowledge and/or authorization.
The Company currently has the exclusive license rights to use fifteen patents in
the United States and various foreign countries, relating to the Company's
PASSUR System and related technologies. The licensed patents expire in various
years through 2013. We currently have five additional patents pending with the
United States Patent Office, some of which relate to newly developed internet
based software applications, derived in large part from the data generated from
the Company's PASSUR Systems. We also intend to seek further patents on our
products and technological advances and/or software applications, when
appropriate. There can be no assurance that the patents will be issued for any
of our pending or future patent applications or that any claims allowed from
such applications will be of sufficient scope, or provide adequate protection or
any commercial advantage to the Company. Additionally, our competitors may be
able to design around our patents and possibly affect our commercial interests.
The Company has filed applications for trademark registration of PASSUR in the
Untied States. We cannot be assured that the registration will be granted from
our pending or future applications, or that any registrations that are granted
will prevent others from using similar trademarks in connection with related
services.
DEFENDING AGAINST INTELLECTUAL PROPERTY CLAIMS COULD POSE SIGNIFICANT LEGAL AND
PROFESSIONAL COSTS, AND IF UNSUCCESSFUL, COULD ADVERSELY AFFECT THE COMPANY.
We cannot guarantee that our future products, technologies and software
applications will not inadvertently infringe valid patents or other intellectual
property rights held by third parties. We may be subject to legal proceedings
and claims from time to time relating to the intellectual property of others.
Prosecuting infringers and defending against intellectual property infringement
claims could be time consuming and costly, and irrespective of whether or not
the Company is successful, could disrupt our business. We may incur substantial
expenses in defending against these third party claims, regardless of their
merit. Successful infringement claims against the Company may result in
significant monetary liability and could adversely affect our business,
financial condition, operating results and cash flow.
THIRD PARTIES COULD CLAIM THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL PROPERTY
RIGHTS, AND DEFENDING SUCH CLAIMS COULD ADVERSELY AFFECT THE COMPANY.
Investigation of any claims from third parties alleging infringement of their
intellectual property, whether with or without merit, can be expensive and could
affect development, marketing, selling or delivery of our products. As the
number of software patents issued increases, additional claims, with or without
merit, could be asserted. Defending against such claims is time consuming and
might result in significant legal expenses or settlement with unfavorable terms
that could adversely affect our business, financial condition, operating results
and cash flow.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the information provided elsewhere in this Annual Report on Form
10-K (including, without limitation, "Liquidity and Capital Resources" and "Risk
Factors" above) contain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995
Page 26 of 61
regarding the Company's future plans, objectives and expected performance. The
words "believe," "may," "will," "could," "should," "would," "anticipate,"
"estimate," "expect," "project," "intend," "objective," "seek," "strive,"
"might," "likely result," "build," "grow," "plan," "goal," "expand," "position,"
or similar words, or the negatives of these words, or similar terminology
identify forward-looking statements. These statements are based on assumptions
that the Company believes are reasonable, but are subject to a wide range of
risks and uncertainties, and a number of factors could cause the Company's
actual results to differ materially from those expressed in the forward-looking
statements referred to above. These factors include, among others, the
uncertainties related to the ability of the Company to sell data subscriptions
from its PASSUR network and to make new sales of its PASSUR and other product
lines due to potential competitive pressure from other companies or other
products as well as the current uncertainty in the aviation industry due to
terrorist events, the war on terror and airline bankruptcies. Other
uncertainties which could impact the Company are uncertainties with respect to
future changes in governmental regulation affecting the products and their use
in flight dispatch information services and the impact of those uncertainties on
the Company's business and the significant shareholder's continued support.
Additional uncertainties are related to the Company's ability to find and
maintain the personnel necessary to sell, manufacture and service its products,
our ability to adequately protect our intellectual property and our ability to
secure future financing. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis,
judgments, belief or expectation only as of the date hereof. The forward-looking
statements made in this Annual Report on Form 10-K relates only to events as of
the date on which the statements are made. The Company undertakes no obligation
to publicly update any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from potential changes in
interest rates. The Company regularly evaluates these risks. The Company
believes the amount of risk relating to changes in interest rates is not
material to the Company's financial condition or results of operations. The
Company has not and does not anticipate entering into derivative financial
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Part IV, Item 15(a)(1) of this Annual Report on Form 10-K for the Company's
annual financial statements.
See Part II, Item 7 of this Annual Report on Form 10-K for selected quarterly
financial data.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Page 27 of 61
For purposes of Rules 13a-14 and 15d-14 of the Exchange Act 1934
("Exchange Act") the term "disclosure controls and procedures" refers to the
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods. The Company's management including the Company's Chief
Executive Officer and Chief Financial Officer has evaluated the effectiveness of
its disclosure controls and procedures as of the end of period covered by this
report. Based on that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, the Company's disclosure controls
and procedures were effective at ensuring that required information will be
disclosed on a timely basis in the Company's reports filed under the Exchange
Act.
(b) CHANGES IN INTERNAL CONTROLS
The Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the Company's internal
control over financial reporting (as defined by Rule 13a-15(f) under the
Exchange Act) to determine whether any changes occurred during the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting. Based on
that evaluation, there has been no such change during the period covered by this
report.
Page 28 of 61
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of Directors.
The following table sets forth the names and ages of the Company's directors, as
well as the year each individual became a director and the position(s) with the
Company, if any, held by each individual.
Director Director Position and Offices
Name Age Since With Company
- ---------------------- --- ---- -----------------------------
G.S. Beckwith Gilbert 61 1997 Chairman of the Board and a
Director *
Richard R. Schilling, Jr. 78 1974 Director
John R. Keller 63 1997 Executive Vice President, and
a Director
Bruce N. Whitman 70 1997 Director
Paul L. Graziani 46 1997 Director
James T. Barry 42 2000 President, Chief Executive
Officer and a Director **
Each director is elected to serve until the succeeding annual meeting of
shareholders and until his successor is duly elected and qualifies.
*Effective February 1, 2003, G.S. Beckwith Gilbert retired as Chief Executive
Officer of the Company.
** Effective February 1, 2003, James T. Barry was appointed Chief Executive
Officer of the Company. Effective April 14, 2003, Mr. Barry was appointed
President of the Company.
Page 29 of 61
(b) Identification of Executive Officers.
The following table sets forth the names and ages of the Company's executive
officers, as well as the office(s) held by each individual and the year in which
he or she began to serve in such capacity.
Officer Officer Position and Offices
Name Age Since With Company
- --------------------------------------------------------------------------------
James T. Barry 42 1998 President, Chief Executive Officer
and a Director *
Louis J. Petrucelly 29 2001 Chief Financial Officer, Treasurer,
and Secretary **
John R. Keller 63 1970 Executive Vice President and a
Director
Dr. James A. Cole 63 1988 Senior Vice President of Research &
Development
Matthew H. Marcella 46 2003 Vice President of Software
Development
Ron Dunsky 41 2003 Vice President of Marketing ***
Each officer is elected to serve at the discretion of the Board of Directors.
* Effective February 1, 2003, James T. Barry was appointed Chief Executive
Officer of the Company. Effective April 14, 2003, Mr. Barry was appointed
President of the Company.
** Effective February 1, 2003, Louis J. Petrucelly was appointed Chief Financial
Officer and Secretary of the Company.
*** Effective May 21, 2003, Ron Dunsky was appointed as Vice President of
Marketing.
(c) Identification of Certain Significant Employees.
None.
(d) Family Relationship.
None.
Page 30 of 61
(e) Business Experience.
The following sets forth the business experience during the past five years of
each director and executive officer:
G.S. Beckwith Gilbert Mr. Gilbert continues to serve as the Company's
Chairman of the Board since his election in 1997.
Mr. Gilbert was appointed Chief Executive Officer in
October of 1998 and served as such until his
retirement from that post on February 1, 2003. In
addition, Mr. Gilbert has been President and Chief
Executive Officer of Field Point Capital Management
Company, a merchant-banking firm, since 1988. He is
a partner of Wolsey & Co., a merchant-banking firm.
Mr. Gilbert is a Director of Davidson Hubeny Brands
and a trustee of the Rockefeller University.
Richard R. Schilling, Jr. Mr. Schilling has been a Director of the Company
since 1974. Mr. Schilling is a member of the law
firm of Burns, Kennedy, Schilling & O'Shea, New
York, New York.
Bruce N. Whitman Mr. Whitman has been a Director of the Company
since 1997. Mr. Whitman is the President and a
Director of FlightSafety International and held
other posts such as Executive Vice President since
1961. He is also a Director of Aviall, Inc., The
Congressional Medal of Honor Foundation and The
Smithsonian National Air & Space Museum. Mr. Whitman
is also a member of the Board of Governors of the
Civil Air Patrol, a trustee of Kent School and The
National D-Day Museum.
Paul L. Graziani Mr. Grazianai has been a Director of the Company
since 1997. Mr. Graziani is the President and Chief
Executive Officer of Analytical Graphics, Inc.
(AGI), a leading producer of commercially available,
analysis and visualization software for the
aerospace, defense and intelligence communities. Mr.
Graziani has been recently recognized as "CEO of the
Year" by the Philadelphia region's Eastern
Technology Council and "Businessman of the Year" by
the local Great Valley Regional Chamber of Commerce.
He is also a Director of The Space Foundation, The
Board of Governors of the Aerospace Industries
Association (AIA); and the advisory boards of the
Galaxy Explorers and Penn State Great Valley.
Page 31 of 61
Dr. James A. Cole Dr. Cole currently serves as Senior Vice
President and the Director of Research and
Development of the Company. Dr. Cole earned a Ph.D.
in physics from Johns Hopkins University in 1966. He
is a current member of the American Association for
the Advancement of Science, American Physics
Society, Association for Computing Machinery,
Institute of Electrical and Electronic Engineers and
IEEE Computer Society. Dr. Cole has been with the
Company since 1974.
John R. Keller Mr. Keller has been with the Company since its
inception in 1967 as one of the co-founders. Mr.
Keller received his bachelors and master degrees in
engineering from New York University in 1960 and
1962, respectively. Mr. Keller currently serves as
Executive Vice President of the Company.
James T. Barry Mr. Barry was named President of the Company on
April 14, 2003 and Chief Executive Officer on
February 1, 2003. Since Mr. Barry joined the Company
in 1998, he has held the positions of Chief
Operating Officer, Chief Financial Officer,
Secretary and Executive Vice President. He is also a
Senior Vice President of Field Point Capital
Management Company. From 1989 to 1998, he was with
Dianon Systems, Inc., most recently as Vice
President of Marketing. Prior to Dianon, Mr. Barry
was an officer in the United States Marine Corps.
Louis J. Petrucelly Mr. Petrucelly was named Chief Financial Officer
and Secretary of the Company on February 1, 2003.
Since Mr. Petrucelly joined the Company in 2001, he
has held the positions of Chief Accounting Officer,
Treasurer, Controller and Assistant Secretary. Mr.
Petrucelly joined the Company from Ernst & Young
LLP, where he was from 1998 to 2001.
Matthew H. Marcella Mr. Marcella was named Vice President - Software
Development on January 15, 2003. Mr. Marcella joined
the Company in 2001 from Cityspree Inc., where he
served as lead software architect from 2000 to 2001.
From 1999 to 2000, he was a Vice President at
Deutsche Bank and Nomura Securities. From 1996 to
1999, he was a technical officer at UBS Securities.
Ron Dunsky Mr. Dunsky was named Vice President of
Marketing on May 21, 2003. Since Mr. Dunsky joined
the Company in 2001, he served as Director of
Marketing and New Product Development. Prior to
joining the Company, Mr. Dunsky was a senior
aviation producer with the New York bureau of
ABCNews.com from 2000 to 2001. Prior to ABCNews.com,
he was a senior aviation producer with the New York
bureau of CNN from 1995 to 2000.
Page 32 of 61
(f) Involvement in Certain Legal Proceedings.
The Company knows of no event which occurred during the past five
years and which is described in Item 401(f) of Regulation S-K relating to any
director or executive officer of the Company.
(g) Audit Committee Financial Expert.
The Company hereby incorporates by reference into this Item the
information contained under the heading "Audit Committee Financial Expert" in
the Company's definitive proxy statement that will be filed with the Securities
and Exchange Commission within 120 days of October 31, 2003 (the "2004 Proxy
Statement.")
(h) Identification of Audit Committee.
The Company hereby incorporates by reference into this Item the
information contained under the heading "Identification of Audit Committee" in
the Company's definitive proxy statement that will be filed with the Securities
and Exchange Commission within 120 days of October 31, 2003 (the "2004 Proxy
Statement.")
(i) Compliance with Section 16(a) of the Securities Exchange Act of
1934.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, executive officers and 10%
stockholders to file reports of ownership and reports of change in ownership of
the Company's Common Stock and other equity securities with the Securities and
Exchange Commission. Directors, executive officers and 10% stockholders are
required to furnish the Company with copies of all Section 16(a) forms they
file. Based on a review of the copies of such reports furnished to it, the
Company believes that during the fiscal year ended October 31, 2003, the
Company's directors, executive officers and 10% stockholders complied with all
Section 16(a) filing requirements applicable to them.
(j) Code of Ethics.
The Company hereby incorporates by reference into this Item the
information contained under the heading "Code of Ethics" in the Company's
definitive proxy statement that will be filed with the Securities and Exchange
Commission within 120 days of October 31, 2003 (the "2004 Proxy Statement.")
Page 33 of 61
ITEM 11. EXECUTIVE COMPENSATION.
The Company hereby incorporates by reference into this Item the
information contained under the heading "Executive Compensation" in the
Company's definitive proxy statement that will be filed with the Securities and
Exchange Commission within 120 days of October 31, 2003 (the "2004 Proxy
Statement.")
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company hereby incorporates by reference into this Item the
information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the 2004 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) Transactions with management and others.
In fiscal 2003, Mr. Gilbert loaned the Company $2,761,000 in the
aggregate under promissory notes bearing interest at 9% per annum and with
original maturity dates of December 31, 2003. Subsequent to October 31, 2003,
all promissory notes maturity dates were extended to November 1, 2004, with
interest payable in the form of 600,000 shares of Megadata common stock.
Subsequent to November 15, 2003, the Company and Mr. Gilbert entered into an
additional debt agreement, whereby, any additional promissory notes issued to
Mr. Gilbert will mature on November 1, 2004 and bear interest at 4.5% per annum.
As of October 31, 2003, the total notes payable due to Mr. Gilbert totaled
$8,466,465 and were secured by the Company's assets. Maturities of these notes
payable for the fiscal years ended October 31 are as follows: 2004- none, and
2005- $8,466,465.
(b) Certain Business Relationships.
None.
(c) Indebtedness of Management.
None.
(d) Transactions with Promoters.
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The Company hereby incorporates by reference into this Item the
information contained under the heading "Principal Accounting Fees and Services"
in the 2004 Proxy Statement.
Page 34 of 61
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) List of documents filed as a part
of this Annual Report on Form 10-K: Page
(1) Index to consolidated financial statements
included in Part II of this Report:
Report of Independent Auditors F-1
Consolidated balance sheets as of
October 31, 2003 and 2002 F-2
Consolidated statements of
operations for the years ended
October 31, 2003, 2002 and 2001 F-3
Consolidated statements of
stockholders' deficit for the years ended
October 31, 2003, 2002 and 2001 F-4
Consolidated statements of cash
flows for the years ended
October 31, 2003, 2002 and 2001 F-5
Notes to consolidated financial
Statements F-6
(2) Index to Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts S-1
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
On February 3, 2003, the Company filed Form 8-K announcing the
retirement of G.S. Beckwith Gilbert as Chief Executive Officer and
the appointments of James T. Barry as Chief Executive Officer and
Louis J. Petrucelly as Chief Financial Officer, effective February 1,
2003.
On March 18, 2003, the Company filed Form 8-K announcing the
resignation of Delon Dotson, as President, Chief Technology Officer
and Director effective March 14, 2003.
Page 35 of 61
(c) Index to Exhibits
The following exhibits are required to be filed with this Annual Report on Form
10-K by Item 15(a) (3) and (c).
EXHIBITS
3.1 The Company's composite Certificate of Incorporation,
dated as of January 24, 1990, is incorporated by
reference from our Annual Report on Form 10-K for the
fiscal year ended October 31, 1989.
3.2 The Company's By-laws, dated as of May 16, 1988, are
incorporated by reference from our Annual Report on
Form 10-K for the fiscal year ended October 31, 1998.
10.1 The Company's 1988 Bonus Pool Plan is incorporated by
reference from our Annual Report on Form 10-K for the
fiscal year ended October 31, 1998.
10.2 The Company's 1988 Stock Option Plan is incorporated
by reference from our Annual Report on Form 10-K for
the fiscal year ended October 31, 1998.
10.3 The Company's 1999 Stock Incentive Plan is
incorporated by reference from our Proxy Statement on
Schedule 14A dated June 23, 1999.
10.4 Severance Agreement with Yitzhak N. Bachana effective
October 2, 1998 is incorporated by reference from our
Form 8-K, dated October 6, 1998.
10.5 Letter of Agreement for employment services, dated
December 28, 1999, between the Company and Ken J.
McNamara is incorporated by reference to Exhibit 10.5
to our Annual Report on Form 10-K for the fiscal year
ended October 31, 1999.
10.6 The Company's amendment to the 1999 Stock Incentive
Plan is incorporated by reference from our Proxy
Statement on Schedule 14A, dated March 12, 2002.
10.7 Letter of Agreement for employment services, dated
September 5, 2002, between the Company and Delon
Dotson is incorporated by reference from our Form 8-K
, dated September 12, 2002.
10.8 The Company's amendment to the 1999 Stock Incentive
Plan is incorporated by reference from our Proxy
Statement on Schedule 14A, dated March 12, 2003.
10.9 Debt Agreement, dated November 1, 2003, between the
Company and G.S. Beckwith Gilbert is incorporated by
reference from our Form 8-K, dated January 23, 2004.
16 Change in Certifying Accountant is incorporated by
reference from our Form 8-K/A, dated October 28,
1998.
21 List of Subsidiaries is incorporated by reference
from our Annual Report on Form 10-K report for the
fiscal year ended October 31, 1981.
31.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Page 36 of 61
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Page 37 of 61
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, thereunto duly authorized.
MEGADATA CORPORATION
DATED: JANUARY 28, 2004 By: /s/ James T. Barry
------------------------------
James T. Barry, President and
Chief Executive 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 date indicated:
DATED: JANUARY 28, 2004 /s/ James T. Barry
------------------------------
James T. Barry, President,
Chief Executive Officer
and Director
(Principal Executive Officer)
DATED: JANUARY 28, 2004 /s/ Louis J. Petrucelly
------------------------------
Louis J. Petrucelly,
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
Page 38 of 61
SIGNATURES (CONTINUED)
DATED: JANUARY 28, 2004 /s/ G.S. Beckwith Gilbert
--------------------------
G.S. Beckwith
Gilbert, Chairman
and Director
DATED: JANUARY 28, 2004 /s/ John R. Keller
--------------------------
John R. Keller, Executive
Vice President and Director
DATED: JANUARY 28, 2004 /s/ Richard R. Schilling, Jr.
-----------------------------
Richard R. Schilling, Jr.
Director
DATED: JANUARY 28, 2004 /s/ Bruce N. Whitman
--------------------------
Bruce N. Whitman
Director
DATED: JANUARY 28, 2004 /s/ Paul L. Graziani
--------------------------
Paul L. Graziani
Director
Page 39 of 61
Report of Independent Auditors
Board of Directors and Stockholders
Megadata Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Megadata
Corporation and Subsidiaries as of October 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the three years in the period ended October 31, 2003. Our audits also
include the financial statement schedule listed in the index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Megadata Corporation and Subsidiaries at October 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 2003, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
---------------------
Melville, New York
January 16, 2004
F - 1
Page 40 of 61
Megadata Corporation and Subsidiaries
Consolidated Balance Sheets
OCTOBER 31,
2003 2002
------------- ------------
ASSETS
Current assets:
Cash $ 48,980 $ 86,334
Accounts receivable, net 485,693 230,676
Inventories 195,254 303,633
Prepaid expenses and other current assets 83,922 72,197
------------ ------------
Total current assets 813,849 692,840
Property, plant and equipment, net 98,919 133,233
PASSUR network, net 2,924,155 3,070,784
Software development costs, net 679,041 537,057
Other assets 17,315 16,085
------------ ------------
Total Assets $ 4,533,279 $ 4,449,999
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 209,293 $ 456,755
Accrued expenses and other current liabilities 409,405 418,775
Accrued expenses--related parties 145,837 162,881
Deferred income 842,687 784,374
------------ ------------
Total current liabilities 1,607,222 1,822,785
Notes payable--related party 8,466,465 5,705,000
------------ ------------
10,073,687 7,527,785
Commitment and contingencies
Stockholders' deficit:
Preferred shares - authorized 5,000,000 shares, par value $.01 per
share; none issued or outstanding -- --
Common shares--authorized 10,000,000 shares, par value
$.01 per share; issued 4,184,615 in 2003 and 4,169,615 in 2002, 41,846 41,696
respectively
Additional paid-in capital 3,740,182 3,716,832
Accumulated deficit (7,698,961) (5,212,839)
------------ ------------
(3,916,933) (1,454,311)
Treasury Stock, at cost, 696,500 shares in 2003
and 2002 (1,623,475) (1,623,475)
------------ ------------
Total stockholders' deficit (5,540,408) (3,077,786)
------------ ------------
Total liabilities and stockholders' deficit $ 4,533,279 $ 4,449,999
============ ============
SEE ACCOMPANYING NOTES.
F -2
Page 41 of 61
Megadata Corporation and Subsidiaries
Consolidated Statements of Operations
YEARS ENDED OCTOBER 31,
2003 2002 2001
----------- ----------- -----------
Revenues:
Subscription $ 1,593,344 $ 874,148 $ 447,777
Maintenance 514,550 456,001 437,440
Systems -- 292,963 23,650
Other 29,020 22,575 31,770
----------- ----------- -----------
Net revenues 2,136,914 1,645,687 940,637
----------- ----------- -----------
Cost and expenses:
Cost of sales 1,622,191 815,538 462,424
Research and development 403,080 404,608 287,938
Selling, general and administrative expenses 1,940,961 2,125,040 1,643,899
----------- ----------- -----------
3,966,232 3,345,186 2,394,261
----------- ----------- -----------
Loss from operations (1,829,318) (1,699,499) (1,453,624)
Other income (expense):
Interest income 566 1,118 3,343
Interest expense -- (887) (3,278)
Interest expense--related party (654,385) (408,008) (173,651)
----------- ----------- -----------
Loss before income taxes (2,483,137) (2,107,277) (1,627,210)
Provision for income taxes 2,985 2,935 2,280
----------- ----------- -----------
Net loss $(2,486,122) $(2,110,212) $(1,629,490)
=========== =========== ===========
Basic and diluted loss per common share $ (.71) $ (.61) $ (.47)
=========== =========== ===========
Weighted-average shares used in the calculation of basic
and diluted net loss per common share 3,484,365 3,473,115 3,473,115
=========== =========== ===========
SEE ACCOMPANYING NOTES.
F -3
Page 42 of 61
Megadata Corporation and Subsidiaries
Consolidated Statements of Stockholders' (Deficit) Equity
Years Ended October 31, 2003, 2002, and 2001
COMMON
SHARES AFTER
DEDUCTING TOTAL
TREASURY COMMON ADDITIONAL STOCKHOLDERS'
STOCK SHARES PAID-IN ACCUMULATED TREASURY (DEFICIT)
AMOUNT CAPITAL DEFICIT STOCK EQUITY
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2000 3,473,115 $ 41,696 $ 3,659,132 $(1,473,137) $(1,623,475) $ 604,216
Common stock options granted
for services performed -- -- 36,450 -- -- 36,450
Total comprehensive loss -- -- -- (1,629,490) -- (1,629,490)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2001 3,473,115 41,696 3,695,582 (3,102,627) (1,623,475) (988,824)
Common stock options granted
for services performed -- -- 21,250 -- -- 21,250
Total comprehensive loss -- -- -- (2,110,212) -- (2,110,212)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2002 3,473,115 41,696 3,716,832 (5,212,839) (1,623,475) (3,077,786)
Exercise of common stock
options 15,000 150 2,100 -- -- 2,250
Common stock options granted
for services performed -- -- 21,250 -- -- 21,250
TOTAL COMPREHENSIVE LOSS -- -- -- (2,486,122) -- (2,486,122)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT OCTOBER 31, 2003 3,488,115 $ 41,846 $ 3,740,182 $(7,698,961) $(1,623,475) $(5,540,408)
=========== =========== =========== =========== =========== ===========
SEE ACCOMPANYING NOTES.
F - 4
Page 43 of 61
Megadata Corporation and Subsidiaries
Consolidated Statements of Cash Flows
YEARS ENDED OCTOBER 31,
2003 2002 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,486,122) $(2,110,212) $(1,629,490)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 651,660 406,163 278,153
Provision for bad debts 2,488 4,350 --
Loss on Disposal 150,492 42,271 --
Common stock options granted for services performed 21,250 21,250 36,450
Changes in operating assets and liabilities:
Accounts receivable (257,505) (156,053) 96,215
Inventories 108,379 (56,732) 6,148
Prepaid expenses and other current assets (11,725) (56,626) (2,036)
Other assets (1,230) -- --
Accounts payable (247,462) (29,327) 243,517
Deferred income 58,313 550,066 95,399
Accrued expenses and other current liabilities (26,414) 51,283 131,772
----------- ----------- -----------
Total adjustments 448,246 776,645 885,618
----------- ----------- -----------
Net cash used in operating activities (2,037,876) (1,333,567) (743,872)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to PASSUR network (495,525) (964,574) (1,080,886)
Capital expenditures (15,321) (14,202) (34,205)
Additions to Software development costs (252,347) (220,880) (331,779)
----------- ----------- -----------
Net cash used in investing activities (763,193) (1,199,656) (1,446,870)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock options exercised 2,250 -- --
Proceeds from notes payable--related party 2,761,465 2,615,000 2,140,000
Payments of installment notes -- (4,404) (9,387)
----------- ----------- -----------
Net cash provided by financing activities 2,763,715 2,610,596 2,130,613
----------- ----------- -----------
(Decrease) Increase in cash (37,354) 77,373 (60,129)
Cash--beginning of year 86,334 8,961 69,090
----------- ----------- -----------
Cash--end of year $ 48,980 $ 86,334 $ 8,961
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 632,934 $ 387,545 $ 163,401
Income taxes $ 2,985 $ 2,935 $ 2,280
SEE ACCOMPANYING NOTES
F - 5
Page 44 of 61
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2003
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Megadata Corporation, (the "Company") is a supplier of information and decision
support software serving the needs of the aviation industry, primarily airlines,
airports and other aviation related companies. Its principal business is the
delivery of information and decision support software by subscription from a
database of flight and travel-related information, of which a primary data
component is its PASSUR(TM) (Passive Secondary Surveillance Radar) Network of
flight tracking systems. The Company also sells PASSUR Systems only at specific
customer requests. The Company operates in one business segment: as a supplier
of information, data services, software, and communication products for the
aviation industry.
BASIS OF PRESENTATION
At October 31, 2003, the Company's current liabilities exceeded current assets
by $793,000, it had a stockholder's deficit of $5,540,000, and it incurred a net
loss of $2,486,000 for the year ended October 31, 2003.
Management is addressing the working capital and stockholders' deficiencies and
operating losses by aggressively marketing the Company's PASSUR information
capabilities in its existing product lines, enhancements to existing products as
well as in new products, which are currently being developed and in some cases
have been deployed. The Company is continuing to increase the size of the
Company-owned PASSUR network, which management believes will lead to continued
growth in subscription-based revenues. In addition, the Company will attempt to
obtain external financing, and if such external financing is not consummated,
the Company has a commitment to receive additional financial support from a
significant shareholder through the end of fiscal 2004. Such commitment for
financial support may be in the form of additional advances or loans to the
Company in addition to the deferral of principal and interest payments due on
existing loans, if deemed necessary.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Megadata
Corporation and its wholly-owned subsidiary. All significant inter-company
transactions and balances have been eliminated in consolidation.
F - 6
Page 45 of 61
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION POLICY
The Company follows the provisions of the American Institute of Certified Public
Accountants Statement of Position 97-2, or SOP 97-2, SOFTWARE REVENUE
RECOGNITION, as amended. SOP 97-2 delineates the accounting practices for
software products, maintenance and support services and consulting revenue.
Under SOP 97-2, the Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is determinable and
collection of the resulting receivable is probable. For arrangements involving
multiple elements (e.g. maintenance, support and other services), the Company
allocates revenue to each element of the arrangement based on vendor-specific
objective evidence of its fair value, or for products not being sold separately,
the objective and verifiable fair value established by management.
The Company recognizes revenue on the sale of products and systems when the
products or systems have been shipped and in accordance with Staff Accounting
Bulletin 101 and SOP 97-2. Installation charges, if any, are not material and
are recognized when installation services are completed.
The Company recognizes services and maintenance revenues on a straight-line
basis over the service contract period. Revenues for data subscription services
are recognized on a monthly basis upon the execution of an agreement and the
customer's receipt of the data.
The Company recognizes license fee revenues on a straight-line basis over either
the term of the license agreement or the expected useful life of such license
arrangement, whichever is longer, which typically does not exceed five years.
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 reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVENTORIES
Inventories are valued at the lower of cost or market with cost being determined
using the first-in, first-out (FIFO) method. Costs included in inventories
consist of materials, labor, and manufacturing overhead, which is related to the
purchase and manufacturing of inventories.
F-7
Page 46 of 61
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE
The Company uses installment license and/ or maintenance agreements as standard
business practice. The Company has a history of successfully collecting
primarily all amounts due under the original payment terms, without making
concessions on payments, software products, maintenance or other services. Net
account receivable is composed of either the monthly, quarterly or annual
committed amounts due from customers pursuant to the terms of each respective
customer's agreement. These account receivable balances include unearned revenue
attributable to deferred subscription revenues, deferred maintenance revenues
and unamortized license fee revenues. Deferred revenue amounts represent fees
billed prior to actual performance of services, which will be amortized into
revenue over either the respective license agreement term or the estimated
useful life of such revenue, which ever is longer.
The Company typically does not record a provision for doubtful accounts due to
its history of successful collections. However, if a customer's financial
condition deteriorates, specifically due to Chapter 11 Bankruptcy filings,
resulting in an impairment of its ability to make payments, allowances are then
recorded against such accounts. For the fiscal years ended October 31, 2003,
2002 and 2001, the provision for doubtful accounts approximated $ 6,800, $ 4,400
and none, respectively, which were all related to Chapter 11 filings by existing
customers.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and is depreciated on a
straight-line basis over the estimated useful lives of the related assets.
Amortization of leasehold improvements is calculated on a straight-line basis
over the estimated useful life of the improvements or the term of the lease,
including renewal options expected to be exercised, whichever is shorter.
Routine repair and maintenance are expensed when incurred.
PASSUR NETWORK
The PASSUR network installations, which include the direct and indirect
production and installation costs incurred for each of the Company-owned PASSUR
systems (the "PASSUR Network"), are recorded at cost, net of accumulated
depreciation of $1,096,000 and $680,000 as of October 31, 2003 and 2002,
respectively. Depreciation is charged to cost of sales and is calculated using
the straight-line method over the estimated useful life of the asset, which is
estimated at seven years for PASSUR Systems and five years for related
workstations. Units that are not placed into service (at October 31, 2003 total
of five units) are not depreciated until such time. During fiscal 2003, 2002 and
2001, the Company capitalized $612,000, $960,000 and $1,081,000 of costs related
to the PASSUR Network, respectively. During fiscal 2003, the amount capitalized
to the PASSUR Network includes transfers from inventory of approximately
$116,000.
F-8
Page 47 of 61
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PASSUR NETWORK (CONTINUED)
During fiscal 2003, the Company disposed of certain PASSUR Network assets and
recorded a loss on disposal of approximately $105,000, which represented the net
book value of these assets. Such loss on disposal was recorded in cost of sales.
CAPITALIZED SOFTWARE COSTS
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 86, "ACCOUNTING FOR THE COSTS OF SOFTWARE TO BE SOLD,
LEASED, OR OTHERWISE MARKETED." Costs incurred to develop computer software
products as well as significant enhancements to software features of the
existing products to be sold or otherwise marketed are capitalized, after
technological feasibility is established and ending when the product is
available for release to customers. Once the software products become available
for general release to the public, the Company will begin to amortize such costs
to cost of sales.
Amortization of capitalized software costs is provided on a product-by-product
basis based on the greater of the ratio of current gross revenues to the total
of current and anticipated future gross revenues or the straight-line method
over the estimated economic life of the product beginning at the point the
product becomes available for general release, typically over five years. Costs
incurred to improve and support products after they become available for general
release are charged to expense as incurred. The assessment of recoverability of
capitalized software development costs requires the exercise of judgment by
management. In the opinion of management, all such costs capitalized as of
October 31, 2003 are recoverable through anticipated future sales of such
applicable products. During fiscal 2003, the Company capitalized approximately
$252,000 and recorded approximately $65,000 of amortization related to software
development projects, of which certain projects were completed and released for
sale and certain projects were still in development as of October 31, 2003.
During fiscal 2003, the Company wrote off costs incurred to date for one
in-process capitalized software project totaling approximately $46,000, which
was charged to Cost of Sales. The capitalized software project commenced in
fiscal 2001 and was deemed by the Company to be no longer viable. The project
was never completed nor made available for sale.
F-9
Page 48 of 61
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment when circumstances indicate
the carrying amount of an asset may not be recoverable. An impairment is
recognized to the extent the sum of undiscounted estimated future cash flows
expected to result from the use of the asset is less than the carrying value.
Assets to be disposed of are carried at the lower of their carrying value or
fair value, less costs to sell.
The Company evaluates the periods of amortization continually in determining
whether later events and circumstances warrant revised estimates of useful
lives. If estimates are changed, the unamortized costs will be allocated to the
increased or decreased number of remaining periods in the revised life.
COST OF SALES
The Company has not segregated its cost of sales between cost of system sales
and cost of subscription and maintenance revenues, as it is not practicable to
segregate such costs. Costs associated with system sales consist primarily of
purchased materials, direct labor and overhead costs.
Costs associated with subscription and maintenance revenues consists primarily
of direct labor, communication costs, depreciation of PASSUR Network assets,
amortization of software development costs and overhead costs allocations. Also
included in costs of sales are costs associated with the upgrades of PASSUR
systems necessary to make such systems compatible with new software applications
as well as the ordinary repair and maintenance of existing network systems.
Additionally, cost of sales in each reporting period are impacted by: (1) the
number of PASSUR Network units added which include the production, shipments and
installations of these assets which are capitalized to the PASSUR Network; and
(2) capitalized costs associated with software development programs are expensed
in cost of sales.
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax return.
The Company uses the liability method in accounting for income taxes in
accordance with SFAS No. 109, "ACCOUNTING FOR INCOME TAXES." 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 that will be in effect when the differences
are expected to reverse.
F - 10
Page 49 of 61
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
NET LOSS PER COMMON SHARE INFORMATION
The Company reports basic and diluted net loss per common share in accordance
with the Financial Accounting Standards Board Statement No. 128, "EARNINGS PER
SHARE." Net loss per common share was computed using the weighted-average number
of common shares outstanding during the period. Conversion of the common
equivalent shares relating to outstanding stock options and warrants is not
assumed since the results would have been antidilutive.
DEFERRED INCOME
Deferred income includes advances received on maintenance agreements and/or
subscription services which are derived from the Company's PASSUR Network and
which may be prepaid either annually or quarterly, as well as advanced one-time
payments received for license fees relating to Company software applications.
Revenues from maintenance and subscription services are recognized as income
ratably over the maintenance and/or subscription period that coincides with the
respective agreement. Revenues from license fees are recognized as income on a
straight-line basis over either the term of the license agreement or expected
useful life of such license arrangement, whichever is longer, which typically
does not exceed five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts of the Company's cash, receivables, accounts payable and
accrued liabilities approximate their fair values principally because of the
short-term nature of these items. The fair values of the Company's long-term
obligations are estimated based on the current rates offered to the Company for
obligations of similar source, terms and maturities. Under this method, the
Company's fair value of long-term obligations was not significantly different
than the carrying values at October 31, 2003.
F - 11
Page 50 of 61
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE."
SFAS No. 148 amends SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," to
provide alternative methods of transition to SFAS No. 123's fair value method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the
disclosure provisions of SFAS No. 123 and Accounting Principles Board ("APB")
No. 28, "INTERIM FINANCIAL REPORTING," to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income/loss
and earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of SFAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of SFAS No. 123 or the intrinsic value method of APB
No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." The Company has adopted SFAS
No. 148 effective December 31, 2002.
The Company grants options for a fixed number of shares to employees, directors
and consultants with an exercise price equal to the fair value of the shares at
the date of grant. The Company accounts for stock option grants under the
recognition and measurement principles of APB No. 25 and related Interpretations
because the Company believes the alternative fair value accounting provided for
under SFAS No. 123 requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB No. 25, because
the exercise price of the Company's employee stock options equals the market
price (fair value) of the underlying stock on the date of grant, no compensation
expense is recorded.
F - 12
Page 51 of 61
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS No. 123 as
amended by SFAS No. 148 to stock-based compensation (see Note 8. Stock Options):
FISCAL YEARS ENDED
---------------------------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31,
2003 2002 2001
------------ ----------- ------------
Reported net loss $(2,486,000) $(2,110,000) $(1,629,000)
Pro-forma stock compensation
expense (33,000) (47,000) (37,000)
----------- ----------- ------------
Pro-forma net loss $(2,519,000) $(2,157,000) $(1,666,000)
=========== =========== ===========
Reported basic and diluted net
loss per common share $ (.71) $ (.61) $ (.47)
=========== =========== ===========
Pro-forma basic and diluted net
loss per common share $ (.72) $ (.62) $ (.48)
=========== =========== ===========
COMPREHENSIVE LOSS
For the fiscal years ended October 31, 2003, 2002 and 2001, the Company's
comprehensive loss is equivalent to that of the Company's total net loss for
those respective periods.
RECLASSIFICATION
Certain balances in the prior fiscal years have been reclassified to conform to
the presentation in the current fiscal year.
2. INVENTORIES
Inventories are summarized as follows:
OCTOBER 31,
2003 2002
----------------- ----------------
Parts and raw materials $ 69,000 $ 75,000
Work-in-process 6,000 7,000
Finished goods 120,000 222,000
----------------- ----------------
$ 195,000 $ 304,000
================= ================
F - 13
Page 52 of 61
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
ESTIMATED
USEFUL OCTOBER 31,
LIVES 2003 2002
------------- ----------------- ----------------
Leasehold improvements 3-5 years $ 105,000 $ 105,000
Factory equipment 5-10 years 2,286,000 2,277,000
Furniture and fixtures 5-10 years 409,000 402,000
----------------- ----------------
2,800,000 2,784,000
Less accumulated depreciation
and amortization 2,701,000 2,651,000
----------------- ----------------
$ 99,000 $ 133,000
================= ================
The Company recorded depreciation and amortization expense on the assets
included in property, plant and equipment of $50,000, $58,000, and $54,000 for
the years ended October 31, 2003, 2002, and 2001, respectively.
4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
OCTOBER 31,
2003 2002
----------------- ----------------
Accrued payroll, payroll taxes and benefits $ 145,000 $ 179,000
Accrued professional fees 143,000 120,000
Accrued license fees 75,000 75,000
Other accrued liabilities 46,000 45,000
----------------- ----------------
$ 409,000 $ 419,000
================= ================
5. NOTES PAYABLE--RELATED PARTY
During fiscal 2003, Mr. Gilbert loaned the Company $2,761,000 in the aggregate
under certain promissory notes bearing interest at 9% per annum and maturing on
December 31, 2003. As of October 31, 2003, the notes payable due to Mr. Gilbert
totaled approximately $8,466,000 with interest at 9% per annum and secured by
the Company's assets.
Effective November 1, 2003, the Company and Mr. Gilbert modified certain terms
and conditions of the outstanding notes as of October 31, 2003. The modified
terms included a maturity date of November 1, 2004 as well as the issuance of
600,000 shares of Megadata common stock as payment of annual interest on such
note. The Company issued 600,000 shares of common stock on January 15, 2004
representing the payment of interest on such note for fiscal 2004.
F - 14
Page 53 of 61
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. NOTES PAYABLE--RELATED PARTY (CONTINUED)
Effective November 15, 2003, the Company and Mr. Gilbert entered into a
subsequent debt agreement whereby any additional promissory notes issued to Mr.
Gilbert will mature on November 1, 2004 and bear interest at 4.5% per annum,
payable in cash.
6. LEASES
The Company's manufacturing and research and development facility is located in
Bohemia, New York, under a lease that was extended for an additional three years
commencing November 1, 2002 through October 31, 2005. Minimum rent under this
agreement for the period ended October 31, 2003 approximates $83,000 per year.
This lease provides for additional payments of real estate taxes and other
operating expenses over the minimum rental amount. See also Note 10. Related
Parties.
7. INCOME TAXES
The Company's provision for income taxes in each year consists of current state
and local minimum taxes.
At October 31, 2003, the Company has available a federal net operating loss
carry-forward of approximately $13,750,000 for income tax purposes which will
expire in various tax years from 2004 through 2023. The Company has
approximately $25,000 of general business tax credit carry-forwards available
which expire in various years through 2008. The Company has provided a full
valuation allowance on the net deferred tax asset of approximately $5,363,000,
which primarily consists of the net operating loss carry-forwards and available
tax credits.
8. STOCK OPTIONS
The Company's stock option plans provide for the granting of stock options for
up to 1,490,000 shares of the Company's common stock. The option price per share
is the fair market value at date of grant, except on the issuance of
non-qualified options in which the option price is not less than 85% of the fair
market value of the common stock. Options granted may be exercised up to a
maximum of ten years from the date of grant; however, individuals who own more
than 10% of the Company's common stock must exercise their options within five
years of the date of the grant and these options are exercisable at 110% of the
fair market value of the common stock at the date of grant.
SFAS No. 123 and SFAS No. 148 define a fair value method of accounting for the
issuance of stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. Pursuant to SFAS No. 123 and SFAS No. 148, companies are
encouraged, but are not required, to adopt the fair value method of accounting
for employee stock-based transactions.
F - 15
Page 54 of 61
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTIONS (CONTINUED)
Companies are also permitted to continue to account for such transactions under
APB No. 25, but are required to disclose in a note to the consolidated financial
statements pro forma net loss and per share amounts as if the Company had
applied the new method of accounting. SFAS No. 123 and SFAS No. 148 also require
increased disclosures for stock based compensation arrangements.
The Company has elected to comply with APB Opinion No. 25 and related
interpretations in accounting for its stock options because the alternate fair
value accounting provided for under SFAS No. 123 requires use of option
valuation models which were not developed for use in valuing employee stock
options. Under APB Opinion No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
In accordance with SFAS No. 123, pro forma information regarding net loss and
net loss per common share has been determined as if the Company had accounted
for its employee stock options under the fair value method of that statement.
The fair value for these stock options was estimated at the date of grant, using
a Black-Scholes option pricing model with the following weighted average
assumptions for 2003, 2002, and 2001, respectively: risk-free interest rates of
3.92% for fiscal 2003, 3.52% to 4.99% for fiscal 2002 and 4.5% for fiscal 2001,
no dividend yield, volatility factors of the expected market price of the
Company's common stock of 1.133 in fiscal 2003, 1.169 in fiscal 2002 and 1.198
in fiscal 2001, and an 8 year weighted-average expected life of the options.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including expected stock price volatility.
In management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options due to
changes in subjective input assumptions which may materially affect the fair
value estimate and because the Company's employee stock options have
characteristics significantly different from those of traded options. For
purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period.
F - 16
Page 55 of 61
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTIONS (CONTINUED)
Information with respect to options during the years ended October 31, 2003,
2002 and 2001 are as follows:
2003 2002 2001
-------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------------------------------------------------------------------
Options outstanding--beginning of
year 1,093,000 $ .65 720,000 $ .69 617,500 $ .85
Incentive options granted 319,000 .32 378,000(1) .56 210,000 .51
Options canceled and expired (354,000) .58 (5,000) .15 (107,500) 1.24
Options exercised (15,000) .15 -- --
-------------------------------------------------------------------
Options outstanding--
end of year 1,043,000 $ .58 1,093,000 $ .65 720,000 $ .69
===================================================================
Options exercisable at
end of year 596,331 $ .73 420,329 $ .71 190,075 $ .73
===================================================================
Weighted average fair value per
share of options granted
during the year $ .29 $ .51 $ .48
========== ========== ==========
(1) Amount includes 75,000 shares of non-qualified stock options awarded outside
of the approved 1999 Stock Incentive Plan.
The following table summarizes information about stock options outstanding at
October 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
---------------------------------------------------------------------------------------
$.15 147,500 5.7 years $.15 147,500 $.15
$ .25 - $ .38 344,000 8.9 years .30 48,333 .36
$ .40 - $ .55 209,000 8.4 years .49 81,332 .47
$ .63 - $ .84 285,000 6.9 years .79 261,666 .80
$1.63 - $ 2.75 57,500 6.4 years 2.60 57,500 2.60
------------ --------------
1,043,000 596,331
============ ==============
As of October 31, 2003, there were 1,490,000 shares of common stock reserved for
future issuance under the Company's stock option plan.
F - 17
Page 56 of 61
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. MAJOR CUSTOMERS
The Company is a supplier of information and decision support software serving
the needs of the aviation industry, primarily airlines, airports and other
aviation related companies. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral. Credit losses
historically have been immaterial.
During the year ended October 31, 2003, two customers accounted for
approximately 24% and 13% of total revenues. During the year ended October 31,
2002, two customers accounted for approximately 19% and 15% of total revenues.
During the year ended October 31, 2001, one customer accounted for 15% of total
revenues. The Company had export sales of approximately $74,000, $83,000 and
$32,000 in fiscal 2003, 2002, and 2001, respectively. All sales, including
export sales, are denominated in U.S. dollars.
10. RELATED PARTY TRANSACTIONS
Effective October 1998, the Company began leasing space from Field Point Capital
Management Company at $1,000 per month rent. For the years ended October 31,
2003 and 2002, the Company reimbursed Field Point Capital Management Company, a
company 100% owned by the Company's Chairman, for services rendered, of
approximately $12,000 in each year.
For the years ended October 31, 2003 and 2002, the Company paid approximately
$16,000 and $26,000, respectively, to Surf-Tech Manufacturing, Inc. (a
non-public corporation) for materials and labor in connection with either the
production of various replacement components, systems production or upgrade
equipment of PASSUR systems. A Company Executive Vice President and Director is
a 50% shareholder of the aforementioned company, and the Company believes that
these rates are competitive and are at or below market rates.
11. ROYALTY AGREEMENT
The Company is a party to a license agreement, as amended in fiscal 2001,
whereby the Company is granted the exclusive right and license worldwide to
manufacture and sell PASSUR systems for use with airline dispatch arrangements
and in other aircraft flight tracking systems. The Company is also granted an
exclusive worldwide license to sell PASSUR systems and/or data subscriptions for
noise applications. The Company pays a royalty based on the number of PASSUR
systems sold and/or installed and generating subscription revenues subject to a
minimum annual royalty of $75,000. This license agreement is in effect until the
date of expiration of the last PASSUR patent to expire, which occurs in 2013.
During October 1999, the license agreement was amended primarily with respect to
when additional royalties would be payable by the Company for new installations
of Company-owned systems assuming the minimum annual royalty payment requirement
had been earned. Under the amended agreement, these additional royalties are
payable based only upon a percentage of the revenue received from each
Company-owned installation.
F - 18
Page 57 of 61
Megadata Corporation and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER ACCOUNTS - DEDUCTIONS BALANCE AT END
DESCRIPTION PERIOD EXPENSES DESCRIBE - DESCRIBE OF PERIOD
- --------------------------------------------------------------------------------------------------
Year Ended
October 31, 2003;
Reserves and
allowances
deducted from
asset
accounts:
Reserve for
estimated
doubtful
accounts -
accounts
receivable.
$ 4,350 $ 2,488 $ 6,838
Valuation
allowance on
deferred
tax asset $ 4,300,000 $ 1,062,500(a) $ 5,362,500
-------------------------------------------------------------------------------
$ 4,304,350 $ 2,488 $ 1,062,500 $ 5,369,338
===============================================================================
Year Ended
October 31, 2002;
Reserves and
allowances
deducted from
asset
accounts:
Reserve for
estimated
doubtful
accounts -
accounts
receivable.
-- $ 4,350 $ 4,350
Valuation
allowance on
deferred
tax asset $ 3,300,000 $ 1,000,000(a) $ 4,300,000
-------------------------------------------------------------------------------
$ 3,300,000 $ 4,350 $ 1,000,000 $ 4,304,350
===============================================================================
Year Ended
October 31, 2001;
Reserves and
allowances
deducted
from asset
accounts:
Reserve for
estimated
doubtful
accounts -
accounts
receivable. --
Valuation
allowance on
deferred
tax asset $ 2,652,000 $ 648,000(a) $ 3,300,000
-------------------------------------------------------------------------------
$ 2,652,000 $ 648,000 $ 3,300,000
===============================================================================
(a) Valuation allowance for deferred tax assets.
S-1
Page 58 of 61