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, 2004
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 Identification No.)
Incorporation or Organization)
47 ARCH STREET, GREENWICH, CT 06830
- --------------------------------------- ----------
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: 203-622-4086
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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, 2004 was $ 315,000
The number of shares of common stock, $0.01 par value,
outstanding as of January 28, 2005 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, 2004, are incorporated by reference into Part III
of this Form 10-K.
Page 1 of 66
PART I
ITEM 1. BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS.
COMPANY BACKGROUND AND OVERVIEW
Megadata Corporation is a New York corporation founded in 1967. We conduct our
business in the United States, Canada, Europe, and Japan. Our offices are
located at 47 Arch Street, Greenwich, CT, 06830 and 35 Orville Drive, Bohemia,
New York, 11716.
Our principal business is the delivery of flight information, application
software, and web-delivered collaborative decision tools to the aviation
industry and organizations that serve, or are served, by the aviation industry.
We have what we believe is a unique database of flight information, powered by a
network of company-owned passive radars and several other data sources, that
when combined with our suite of data products, web-based software, and web-based
collaborative decision tools, provide airlines and airports services that are,
in most cases, we believe, otherwise unavailable. We now provide services to
over 40 airports and over 30 airlines and continue to expand services to each,
in this traditional, "industrial", market. Concurrently, we are taking this
specialized content and software, the credibility of which has been established
by our large customer base of airports and airlines, and marketing it to the
"non-industrial" market, corporate aviation and its ancillary industries, and to
the online travel services market. This market includes thousands of
organizations, which appear to have a need for more accurate flight information
and software tools. In addition, we have created and implemented collaborative
web-based software that allow our customers, both industrial and non-industrial,
to instantly share information to improve individual and joint decision making,
creating additional value for both our traditional and our new customers. We
continue to market with an expanding sales and marketing organization as well as
through premier distributors.
Revenues during Fiscal Year 2004 increased by approximately 36%, or $780,000, to
$2,917,000 from $2,137,000 in FY 2003, while total costs and expenses in FY 2004
remained approximately at the same level as the preceding year.
GENERAL
We believe our business opportunities come from providing solutions in the
following areas:
1. PROVIDING STANDARDIZED, TIMELY, ACCESSIBLE, AND ACCURATE
INFORMATION. The market has come to expect a sophisticated delivery
of information in pace-setting industries like banking, news, and
health care. In aviation, valuable information exists, but is
compartmentalized among its various constituencies, such as
government air traffic regulators, airlines, airports, fixed based
operators, corporate aviation departments, and passengers.
Aviation-related organizations must contend with multiple
conflicting sources of information (often within the same
organization), and often a lack of access to the information. We
provide a unique integrated database of otherwise hard-to-access or
compartmentalized information -- which we call the PASSUR
Information Network.
2. PROVIDING A STANDARDIZED INFORMATION TECHNOLOGY PLATFORM FOR
ACCESSING INFORMATION. Our Web "dashboard" technology creates a
single, "one-source" platform for accessing valuable information
from our PASSUR Information Network. We provide standardized access
to the PASSUR database through data feeds, web application software,
and collaborative decision making tools.
Page 2 of 66
BUSINESS STRATEGY
Over the past several years, we have been developing and selling information and
software from our unique flight database, powered by the PASSUR(R) passive radar
network, to airlines and airports, while simultaneously investing in growing the
radar network and continuously integrating additional information sets into the
database. Because of our investments in this database and web-dashboard
technologies, and the "vetting" of both by our traditional "industrial" airline
and airport customers, we are now taking new versions of the information and
software products to the "non-industrial" segment of the aviation market:
corporate aviation and its ancillary industries and online travel services. We
have created and continue to create collaborative web-based software that allows
all of our customers, both industrial and non-industrial, to instantly share
information to improve individual and joint decision making, creating additional
value for both our traditional and our new customers. Our business strategy is
to:
1. LEAD AND CONTINUE TO DEVELOP THE INDUSTRY STANDARD FOR ACCURATE,
TIMELY FLIGHT INFORMATION WITH, WHAT WE CONSIDER TO BE, A
ONE-OF-A-KIND PREMIUM DATABASE - THE PASSUR INFORMATION NETWORK(TM).
Our flight information is a combination of multiple data sets to
include information derived from the network of passive radars,
PASSUR, located throughout the country and in different parts of the
world. Currently, PASSUR coverage is available for 34 of the top 40
airports in the United States, including 9 of the top 10. In
addition, 5 of the top 6 airlines utilize the information and
software products derived from the PASSUR network. For example,
leading airlines use our estimated times of arrival (ETAs) to power
their internal flight, gate, and reservations systems to improve the
overall operational efficiency of the airline and to provide more
reliable customer service. More than 55 PASSUR system installations
exist worldwide.
2. LEAD THE DEVELOPMENT OF WEB-BASED APPLICATIONS,
POWERED BY THE PASSUR INFORMATION NETWORK, TO OUR TRADITIONAL
INDUSTRIAL AVIATION CUSTOMERS - AIRLINES, AIRPORTS, AND THE
GOVERNMENT. These organizations set the standard for how flight
information should be used throughout both the industrial and
non-industrial markets. These organizations, for whom we have
developed Web-delivered software services, utilize the PASSUR
database as their source of information, both live and archived, and
as a communications and collaborative decision-making platform
within the industrial sector. For example, airports use our web
tools to manage landing fee revenue.
3. LEAD THE DEVELOPMENT OF WEB-BASED APPLICATIONS TO THE MUCH LARGER,
NON-INDUSTRIAL AVIATION MARKETPLACE. These organizations include
corporate security and corporate travel departments, corporate
flight aviation departments, fixed-based operators (FBO's), online
travel management companies, limousine operators, and other
ancillary or support organizations that require accurate status of
flight information, whether real-time or through historic analysis,
to improve their decision making. For example, fixed-based operators
are using our web reports to refine their marketing efforts related
to fuel sales to corporate aircraft.
4. LEAD THE AVIATION MARKET IN THE DEVELOPMENT AND DELIVERY OF
COLLABORATIVE WEB SERVICES THAT ORGANIZE WHAT IS CURRENTLY
FRAGMENTED DECISION MAKING WITHIN AND BETWEEN THE INDUSTRIAL AND
NON-INDUSTRIAL MARKETS. We are creating PASSUR Customer Networks
that bridge industrial and non-industrial aviation players, allowing
airport, airlines, air traffic organizations, and other airport
tenants to access live, relevant information that helps to improve
the overall efficiency of the aviation sector. For example,
currently at John F. Kennedy International, LaGuardia, and Dulles
International Airports, the airlines, FAA, airport operations, and
FBOs use our award-winning OPSnet(TM) Internet Communicator to
consolidatE, organize, and disseminate information, and manage
collaborative tasks like aircraft deicing during regular--and
particularly during irregular--operations.
Page 3 of 66
5. DISTRIBUTE OUR SERVICES THROUGH THE PASSUR DISTRIBUTION NETWORK OF
LEADING AVIATION ORGANIZATIONS AND SYSTEM INTEGRATORS. As we expand
into new markets, it is important to sell both through our internal
sales and marketing organization and through premium distributors -
those organizations that can provide added value to our customers.
This licensing strategy reduces our costs and increases customer
value.
PRODUCTS AND SERVICES
1. Flight data products feed directly to customers' information systems
and to PASSUR distributors. These data feeds, which segment
different portions of the PASSUR Information Network depending on
customer needs, link directly to customer systems or to customers
through third-party data integration systems. These feeds are
segmented into:
a. RightETA(TM) which provides ETA and flight status feeds for
real-time schedule management, landing fee feeds, and activity
reports for operational analysis.
b. FlightSure(TM), which received additional patents in 2004,
provides information and software for integrated aircraft
Noise Operations Monitoring (NOMS) systems.
2. Application software services (most web-delivered and web-hosted):
a. PASSUR Pulse(TM) Revenue, patent pending, provides a web-based
live and archived detailed, accurate landing report for
airlines, airports and FBOs to account for landing fees,
creating maximum revenue efficiency as well as transparency
and equity in the distribution of landing fees among airport
users.
b. PASSUR Pulse(TM) Operations, patent pending, provides
web-based access to the PASSUR database of operational
information for activity reporting and analysis.
c. PASSUR inSight(TM), patent pending and developed in FY 2004,
is a takeoff-to-landing, web-based tool that provides the
accuracy of PASSUR terminal area information on a national
flight tracking platform. PASSUR inSight is packaged with
other PASSUR web-based applications to provide a premium
flight tracking "visual" capability.
d. AirportMonitor(TM), patent pending, is a web-based application
that provides the communities surrounding the airport with
live flight tracking and information as part of the airport's
public relations, community outreach and noise mitigation
programs.
e. FlightPerform(TM) is a live airspace analysis and awareness
system using more traditional air traffic-style displays and
tools, used by airports and airlines for real-time dispatch,
arrivals and facilities management. FlightPerform is the
industry "gold standard" for those customers needing the most
dependable, reliable capability to guide their operations in
real time.
f. RapidResponse(TM) provides the ability to immediately replay
flight events with a high level of precision, specificity and
detail, thereby enabling airlines and airports to improve the
efficiency and safety of operations. Real-time situational
awareness and immediate replay capability enable customers to
be fully informed and proactive in responding to emergencies.
We believe this product has Homeland Security, Defense and
other government applications, and it is being marketed
primarily through premier government system integrators.
3. Megadata's collaborative Web "portal" tools provide instant access
to critical information within organizations, and the ability to
share and receive information between organizations. (These
organizations form the foundation of our PASSUR Customer Network.)
a. PASSUR Portal(TM), patent pending and developed in FY 2004,
provides a dashboard of real-time vital information on the
status of the airport operations, instant two-way
communications, and direct access to all other PASSUR
web-based software tools.
b. PASSUR FlightLink(TM), patent pending and developed in FY
2004, is a web-based, wireless, flight information display
system linking the airport, airline, and the traveler, in the
terminal and on the Web. This system can be accompanied by our
PASSUR Kiosks(TM) and LCDs powered by our software
applications, such as PASSUR FlightLink.
Page 4 of 66
c. OPSnet(TM), patent pending and received major enhancements in
FY 2004, is an internet-based application designed to improve
airport/airline/FAA coordination through instant
communications, information sharing and collaborative decision
making between all parties during costly disruptions caused by
weather, security, and emergencies.
d. FlightNewsLive(TM), patented in 2004, is the first passenger
information display system (FIDS) with live graphics showing
terminal and en-route airspace traffic, national weather, and
automated explanations for delays.
HOW WE GENERATE REVENUE
We sell subscription-based information and software products as well as the
PASSUR radar system (included in a sale is an annual maintenance contract and an
additional charge for installation), PASSUR Kiosks or LCDs, and consulting
services. Under the subscription model, the customer signs a minimum one-year
contract for access to the information services. The agreement also provides
that the information from the PASSUR Information Network cannot be resold or
used for unauthorized purposes.
When systems are sold, we retain both proprietary and distribution rights to the
data generated from such systems and can distribute such data at the Company's
sole discretion, with few exceptions. The sale of consulting services are only
made in conjunction with the sale of our collaborative decision tools.
EMPHASIS ON INFORMATION SECURITY
The Company has incorporated the strictest levels of security over both the
information generated by the PASSUR Information Network and the resulting end
users.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Not applicable.
(C) NARRATIVE DESCRIPTION OF BUSINESS.
Our principal business is the delivery of flight information,
web-delivered software, and web-delivered collaborative decision tools to the
aviation industry and organizations which serve, or are served, by the aviation
industry.
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. These PASSUR systems
receive and process aircraft identification from aircraft transponder
transmissions interrogated by existing secondary surveillance radars.
Under the exclusive license agreement, as amended in fiscal 2001, 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
Page 5 of 66
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.
(II) CUSTOM HARDWARE AND SOFTWARE ACTIVITIES
The Company is not involved in specialized research and development
projects sponsored and paid for by customers.
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 information services 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, 2004, one customer (Continental
Airlines) accounted for approximately 23% of revenues. 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.
Page 6 of 66
5. BACKLOG FOR SUBSCRIPTION REVENUE AGREEMENTS.
The Company's committed backlog for subscription and maintenance services
at October 31, 2004 amounted to approximately $3,768,000. Of this amount,
$2,198,000 is scheduled for delivery or performance before October 31, 2005 and
the balance of $ 1,570,000 is scheduled for delivery or performance in
subsequent years. The backlog at October 31, 2003 and 2002 amounted to
approximately $1,781,000 and $3,346,000 respectively. Backlog consists of
written purchase orders or contracts.
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 other forms of flight
tracking products are becoming more 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 these integrators 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 continued software and hardware enhancements, as well as, maintenance
to the existing PASSUR systems and related suite of software applications, and
developing and maintaining the new software applications plus decision support
products, which will eventually expand the Company's software suite of products.
During the fiscal year ended October 31, 2004, the Company incurred
approximately $393,000 in expenditures for R&D, none of which was customer
sponsored. In fiscal year ended October 31, 2003, approximately $403,000 was
expended on R&D and in fiscal year 2002 approximately $405,000 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, 2004, the Company employed 12 full time employees,
including 6 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 2004 2003 2002
- ------------ ------------------- ------------------- -------------------
Domestic $2,853,000 98% $2,063,000 96.5% $1,563,000 94.9%
Exports 64,000 2% 74,000 3.5% 83,000 5.1%
Total
Revenues: $2,917,000 100.0% $2,137,000 100.0% $1,646,000 100.0%
Page 7 of 66
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 as soon as reasonably practical, subsequent to
electronic filing with and/or furnishing such information to the Securities
Exchange Commission. All such filings on our website are available free of
charge. Unless we are required to do so by law 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. 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 software development facility is located in part of 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 $84,000.
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 (FPCM),
a company 100% owned by the Company's Chairman of the Board, at $1,000 per month
rent. Effective November 1, 2003, the Company's monthly rent for space subleased
from FPCM was reduced to $500 per month and its obligation for such lease was on
a month-to-month basis. Effective July 1, 2004, the Company terminated its month
to month sublease with FPCM and signed a direct lease for additional space
directly with the building owner for $2,500 per month. The Company believes
these rates are competitive and are at or below market rates.
Page 8 of 66
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 2004.
Page 9 of 66
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, 2004
FIRST QUARTER $.60 $.30
SECOND QUARTER .52 .28
THIRD QUARTER .56 .27
FOURTH QUARTER .35 .25
Fiscal Year Ended October 31, 2003
First Quarter $.75 $.25
Second Quarter .51 .25
Third Quarter .66 .25
Fourth Quarter .60 .30
* 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 26, 2005
was 303, 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 10 of 66
(D) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
UNDER EQUITY
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE COMPENSATION PLANS
BE ISSUED UPON EXERCISE EXERCISE PRICE OF EXCLUDING SECURITIES
PLAN CATEGORY OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (A))
- ----------------------------------------------------------------------------------------------------------------------
(A) (B) (C)
- ----------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLAN APPROVED BY
SECURITY HOLDERS 1,210,000 $.56 265,000
- ----------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS NOT APPROVED
BY SECURITY HOLDERS -- -- --
- ----------------------------------------------------------------------------------------------------------------------
TOTAL 1,210,000 $.56 265,000
- ----------------------------------------------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated statements of operations data for the fiscal
years ended October 31, 2004, 2003 and 2002, and the consolidated balance sheet
data as of October 31, 2004 and 2003, 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, 2001 and 2000, and the selected consolidated balance sheet data as
of October 31, 2002, 2001 and 2000, 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,
- ------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net Revenues $ 2,916,928 $ 2,136,914 $ 1,645,687 $ 940,637 $ 1,756,602
Net Loss $(1,389,536) $(2,486,122) $(2,110,212) $(1,629,490) $ (582,824)
Net Loss Per Common Share --
Basic and diluted (1) $ (.35) $ (.71) $ (.61) $ (.47) $ (.22)
Dividend Declared -- -- -- -- --
- ------------------------------------------------------------------------------------------------------
Page 11 of 66
SELECTED BALANCE SHEET DATA:
OCTOBER 31,
- ----------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Total Assets $ 4,084,581 $ 4,533,279 $ 4,449,999 $ 3,356,343 $ 2,348,082
Long-Term
Debt (2)(3)(4)(5)(6) $ 8,866,465 $ 8,466,465 $ 5,705,000 $ 3,090,000 $ 152,985
Total Shareholders'
(Deficit) Equity $(6,569,944) $(5,540,408) $(3,077,786) $ (988,824) $ 604,216
- ----------------------------------------------------------------------------------------------
(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) Long-term debt for 2000 included $150,000 of notes payable, and $2,985 of
installment notes payable, which were due after October 31, 2001.
(3) Long-term debt for 2001 consists of notes payable - Related party which
was due after October, 2002.
(4) Long-term debt for 2002 consists of notes payable - Related party which
was due after October 31, 2003.
(5) Long-term debt for 2003 consists of notes payable - Related party which
was due after October 31, 2004.
(6) Long-term debt for 2004 consists of notes payable - Related party which
was due after October 31, 2005.
Page 12 of 66
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
REVENUES
The Company is a provider of flight information, web-delivered software, and
web-delivered collaborative decision tools to the aviation industry and
organizations which serve, or are served, by the aviation industry.
Revenues consist primarily of subscription-based revenues, maintenance revenues
from customer owned PASSUR systems, kiosks, 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 2004 increased by approximately $780,000, or 36%, to
$2,917,000 from $2,137,000 in fiscal 2003. 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. Revenues during fiscal 2003 increased by
approximately $491,000, or 30%, to $2,137,000 from $1,646,000 in fiscal 2002.
This increase was primarily due to the increased focus on the subscription based
revenue business model.
Management continues to concentrate its efforts on the sale of information and
decision support product applications utilizing data primarily derived from
PASSUR Information 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 of $2,362,000 in 2004,
compared to $1,593,000 in 2003 increased approximately $769,000, or 48%, for
fiscal 2004, when compared to fiscal 2003. The Company's subscription-based
sales for fiscal 2003 and 2002 were $1,593,000 and $874,000, respectively.
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.
The Company shipped 2 and installed 6 Company-owned PASSUR systems during fiscal
2004 (installations include systems shipped in current and previous fiscal
years), which were capitalized as part of the "PASSUR Information Network". The
Company will continue to expand the PASSUR Information Network by shipping and
installing additional PASSUR systems throughout fiscal 2005. Management
anticipates that these future PASSUR sites will provide increased coverage of
the PASSUR Information 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 Information Network directly to the aviation industry.
There were 39 Company owned PASSURs located at various airports throughout the
continental United States at the end of fiscal 2004.
Page 13 of 66
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-PASSUR revenues of approximately
$6,000 for fiscal 2004 as compared to approximately $29,000 in fiscal 2003.
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 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" which are 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 2004, cost of sales increased by
approximately $217,000, or 13%, as compared to fiscal 2003. This increase was
primarily due to an increase in labor costs as a result of a reduction in the
capitalization of labor costs associated with the manufacture and installation
of PASSUR systems and an increase in outside software consulting costs. The
increase in costs were partially offset by a reduction of communication costs
primarily resulting from product enhancements for example, further use of
web-delivered products that do not require expensive communications lines, and
vendor price reductions. Costs associated with subscription and maintenance
revenues include labor, communication costs and allocated overhead costs.
During fiscal 2004, costs associated with subscription and maintenance revenues
including labor, communication costs and allocated overhead costs totaled
approximately $1,365,000 or 74% of gross cost of sales (before impact of
Capitalized Assets), a decrease of approximately 12% from fiscal 2003. The
Company does not deem it practical to separate these costs between subscription
revenues and maintenance revenues. In addition, during fiscal 2004, costs
directly associated with subscription revenues include: (1) depreciation and
amortization of the PASSUR network assets and software development costs,
totaling approximately $676,000 or 37% of gross cost of sales (before impact of
Capitalized Assets): and (2) the impact of Capitalized Assets totaling
approximately $433,000, a decrease of approximately 48% from fiscal 2003.
Finally, during fiscal 2004, the Company charged to cost of sales approximately
$111,000 and $41,000 for the disposal of certain PASSUR Network and software
development assets.
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 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. For fiscal year 2004 the Company
benefited from these cost reduction initiatives. Management expects to continue
to address these costs and anticipates that the results of such cost reduction
initiatives will be recognized throughout fiscal 2005.
Page 14 of 66
RESEARCH AND DEVELOPMENT
During fiscal 2004, research and development expenses remained at approximately
the same level as in fiscal 2003. 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.
During fiscal 2003, research and development expenses remained at approximately
the same level as those in 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 2004 or fiscal 2003. Research and
development expenses are funded through current operations.
SELLING, GENERAL AND ADMINISTRATIVE
During fiscal 2004, selling, general and administrative expenses decreased by
approximately $246,000, or 13%, as compared to fiscal 2003. The decrease was
primarily due to cost reduction initiatives enacted throughout fiscal 2003, for
which the Company is recognizing a full year benefit during the current fiscal
year. Such initiatives resulted in decreased costs associated with compensation,
outside consultants, and allocated overhead costs. Severance payments relating
to the termination of employees during fiscal 2003 were expensed in fiscal year
2003. These cost reduction initiatives were partially offset by increases in
recruiting fees for new administrative and sales personnel.
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.
Page 15 of 66
The Company anticipates 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 2005 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 2004, 2003 and 2002.
Interest expense-related party decreased by approximately $279,000, or 43%, in
fiscal 2004, as compared to fiscal 2003. The decrease is due to the payment of
interest on outstanding debt in Company common stock, at an effective interest
rate lower than that charged for the same period of fiscal 2003, pursuant to the
Debt Agreement entered into by the Company and its significant shareholder dated
November 1, 2003.
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.
INCOME TAXES
The provisions for income taxes for each year relate to state and local minimum
taxes. The Company has available approximately $15,350,000 in federal tax loss
carryforwards to offset possible future income. 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 $5,988,000, which
primarily consists of the net operating loss carry-forwards and available tax
credits.
NET LOSS
The Company incurred a net loss of $1,390,000, or $.35 per diluted share, during
fiscal 2004, as compared to a net loss of $2,486,000, or $.71 per diluted share,
in fiscal 2003.
During fiscal 2004, total costs and expenses of $3,927,000 were higher than
total revenues and resulted in a loss from operations of $1,010,000. Total costs
and expenses decreased by $39,000, or 1%, as compared to such costs in fiscal
2003.
Although revenues increased approximately 36% in fiscal 2004, total costs and
expenses remained approximately at the same level as fiscal 2003.
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.
Page 16 of 66
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.
QUARTERLY RESULTS OF OPERATIONS
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
OCT. 31, JULY 31, APRIL 30, JANUARY 31, OCT. 31, JULY 31, APRIL 30, JANUARY 31,
2004 2004 2004 2004 2003 2003 2003 2003
------------------------------------------------------------------------------------------------------
TOTAL NET REVENUES $ 825,889 $ 716,999 $ 687,829 $ 686,211 $ 558,082 $ 524,797 $ 556,295 $ 497,740
WRITE DOWN OF NETWORK ASSETS (110,980) (150,492)
LOSS FROM OPERATIONS (448,894) (205,264) (194,048) (161,701) (682,098) (430,891) (266,226) (450,103)
NET LOSS (543,629) (300,209) (288,433) (257,265) (866,455) (604,318) (420,221) (595,128)
BASIC AND DILUTED NET LOSS
PER SHARE $ (.13) $ (.07) $ (.08) $ (.07) $ (.25) $ (.17) $ (.12) $ (.17)
- ------------------------------------------------------------------------------------------------------------------------------------
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.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2004, the Company's current liabilities exceeded current assets
by $1,069,000. The notes payable to a related party of $8,866,000 are due
November 1, 2005, thus are included in long-term liabilities at October 31,
2004. At October 31, 2004, the Company's stockholders' deficit was $6,570,000.
For fiscal 2004, the Company incurred a net loss of $1,390,000.
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 address 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 January 3, 2006. 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.
Page 17 of 66
Net cash from operating activities for fiscal 2004 was approximately $146,000.
Cash flows used in investing activities for fiscal 2004 was approximately
$472,000 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 2004 were approximately $400,000 from notes
payables - related party. No principal payments on notes payable - related party
were made during fiscal 2004.
The Company was unprofitable in fiscal 2004. 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 18 of 66
CONTRACTUAL OBLIGATIONS
As of October 31, 2004, the Company had contractual obligations as follows:
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
LESS THAN 1 MORE THAN
TOTAL YEAR 1 - 3 YEARS 3 YEARS
---------------------------------------------------
Operating Leases $ 235,971 $ 115,971 $ 90,000 $ 30,000
Promissory Notes $8,866,465 -- $8,866,465 --
Other Long-Term Obligations $ 600,000 $ 75,000 $ 225,000 $ 300,000
---------------------------------------------------
Total contractual cash obligations $9,702,436 $ 190,971 $9,181,465 $ 330,000
===================================================
o Obligations under "Operating Leases" relate to the manufacturing and
research facility located in Bohemia, New York ($85,971 - fiscal
2005) and the Company's headquarters located in Greenwich, CT
($30,000 per year for five years). All other operating leases are
under a month-to-month arrangement, therefore, such obligations have
been excluded from the above calculation (total monthly obligations
total $500 per month).
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
threshold.
CERTAIN RELATED PARTY TRANSACTIONS
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.
In fiscal 2004, G.S. Beckwith Gilbert, Chairman and a significant shareholder of
the Company, loaned the Company $400,000 under promissory notes bearing interest
at 4.5% per annum and maturing at November 1, 2004. As of October 31, 2004, the
total notes payable due to Mr. Gilbert totaled $8,866,465 and are secured by the
Company's assets.
On January 28, 2005, the Company and Mr. Gilbert entered into a subsequent
extended debt agreement effective November 1, 2004. Principal and accrued
interest as of October 31, 2004, aggregate into a principal amount of
$8,939,880, with a maturity date of November 1, 2005 bearing an interest rate of
4.5%.
Page 19 of 66
Effective October 1998, the Company began leasing space from Field Point Capital
Management Company (FPCM) at $1,000 per month rent. For the year ended October
31, 2004, the Company's monthly rent for space subleased from FPCM was reduced
to $500 per month and its obligation for such lease was on a month-to-month
basis. Effective July 1, 2004, the Company terminated its month to month
sublease with FPCM. The Company paid FPCM, a company 100% owned by the Company's
Chairman, for rent, of approximately $4,000. For the year ended October 31,
2003, the Company reimbursed FPCM Company, for rent, of approximately $12,000.
During fiscal 2004, the Company paid approximately $23,000 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.
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. 104, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS" ("SAB 104"), as codified.
SAB 104 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) Kiosks, 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 104 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.
Page 20 of 66
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.
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, 2004 totaled
approximately $780,000. 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 21 of 66
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, 2004 approximated
$2,481,000 and $780,000, respectively, which accounted for 80% 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, 2004, 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 2004, the Company disposed of certain PASSUR Network assets
totaling approximately $111,000, which represented the remaining carrying value
of such assets. These disposals were due to network assets which were deemed
obsolete. In addition, the Company also determined during the fourth quarter of
fiscal 2004, to dispose of one in-process capitalized software project of
approximately $41,000 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, 2004 were $3,353,000,
representing 82% of the Company's consolidated net assets as of October 31,
2004. The total net property, plant and equipment approximated $92,000, the
total net PASSUR Network approximated $2,481,000 and the total net software
development costs approximated $780,000. The total depreciation and amortization
expense related to capitalized assets at October 31, 2004 approximated $710,000.
Management's judgment is required in the determination of the estimated
depreciable lives that are used to calculate the annual depreciation and
amortization expense.
Page 22 of 66
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 for 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, 2004
for property, plant and equipment approximated $34,000, the PASSUR Network
approximated $531,000 and software development costs approximated $145,000.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
"Shared-Based Payment." Statement 123(R) addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the grant-date fair-value of
stock options and other equity-based compensation issued to employees in the
income statement. The revised Statement generally requires that an entity
account for those transactions using the fair-value-based method, and eliminates
the intrinsic value method of accounting in APB Opinion No. 25, "Accounting for
Stock Issued to Employees", which was permitted under Statement 123, as
originally issued.
Page 23 of 66
The revised Statement requires entities to disclose information about the nature
of the share-based payment transactions and the effects of those transactions on
the financial statements.
Statement 123(R) is effective for public companies that do not file as small
business issuers as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005 (i.e., fourth quarter 2005 for the
Company). All public companies must use either the modified prospective or the
modified retrospective transition method. Early adoption of this Statement for
interim or annual periods for which financial statements or interim reports have
not been issued is encouraged. The Company has not yet evaluated the impact of
adoption of this pronouncement which must be adopted in the fourth quarter of
fiscal year 2005.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" (" SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures three
classes of freestanding financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability. SFAS 150 was effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company has not entered into any financial instruments within the
scope of SFAS 150 since May 31, 2003, nor does it currently hold any significant
financial instruments within its scope.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN46"),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 requires a variable interest entity to be
consolidated by a company, if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN 46 also requires
disclosures about variable interest entities that a company is not required to
consolidate but in which it has a significant variable interest. In December
2003, the FASB issued FIN 46R. It changed the effective date for interests in
special-purpose entities for periods ending after December 15, 2003, and for all
other types of entities for periods ending after March 15, 2004. The adoption of
FIN 46R did not have a material impact on our consolidated financial statements.
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 seven fiscal years.
The Company incurred net losses of approximately $1,390,000 for the fiscal year
ended October 31, 2004, $2,486,000 during the fiscal year ended October 31, 2003
and $2,110,000 during the fiscal year ended October 31, 2002. As of October 31,
2004, the Company's accumulated deficit was approximately $9,088,000. 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.
Page 24 of 66
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 continued 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 current 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;
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 on 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 January 3, 2006. 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.
Page 25 of 66
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.
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-priced 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.
Page 26 of 66
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 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. The Company also owns one issued patent and ten additional
patents pending with the United States Patent and Trademark 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.
Page 27 of 66
The Company has filed applications for trademark registration of PASSUR in the
United 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 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.
Page 28 of 66
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
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 fourth
quarter of the fiscal year ended October 31, 2004 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.
ITEM 9B. OTHER INFORMATION
None.
Page 29 of 66
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 62 1997 Chairman of the Board and a
Director *
Richard R. Schilling, Jr. 79 1974 Director
John R. Keller 64 1997 Executive Vice President, and a
Director
Bruce N. Whitman 71 1997 Director
Paul L. Graziani 47 1997 Director
James T. Barry 43 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 30 of 66
(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 43 1998 President, Chief Executive Officer
and a Director *
Jeffrey P. Devaney 45 2004 Chief Financial Officer,
Treasurer, and Secretary **
John R. Keller 64 1970 Executive Vice President and a
Director
Dr. James A. Cole 64 1988 Senior Vice President of Research
& Development
Matthew H. Marcella 47 2003 Vice President of Software
Development
Ron Dunsky 42 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 November 16, 2004, Jeffrey P. Devaney was appointed Chief Financial
Officer, Treasurer 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 31 of 66
(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 has continued 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
General Aviation Manufacturers Association, 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 America's National World War II Museum.
Paul L. Graziani Mr. Graziani 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 32 of 66
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 bachelor's 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.
Jeffrey P. Devaney Mr. Devaney joined the Company as Chief Financial
Officer and Secretary on June 14, 2004. Prior to
joining the company, Mr. Devaney was the Chief
Financial Officer at Cierant Corporation from 2002
to 2004. From 2000 to 2001, he was a controller at
SageMaker, Inc. From 1995 to 2000 he was the
controller at Information Management Associates,
Inc.
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.
(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.
Page 33 of 66
(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, 2004 (the "2005 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, 2004 (the "2005 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, 2004, 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, 2004 (the "2005 Proxy Statement.")
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, 2004 (the "2005 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 2005 Proxy Statement.
Page 34 of 66
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(A) TRANSACTIONS WITH MANAGEMENT AND OTHERS.
In fiscal 2004, Mr. Gilbert loaned the Company $400,000 in aggregate
promissory notes bearing 4.5 % per annum. 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, 2004, the total notes payable due
to Mr. Gilbert totaled $8,866,465 and were secured by the Company's assets.
On January 28, 2005, the Company and Mr. Gilbert entered into a subsequent
extended debt agreement effective November 1, 2004. Principal and accrued
interest as of October 31, 2004, aggregate into a principal amount of
$8,939,880, with a maturity date of November 1, 2005 bearing an interest rate of
4.5%. The notes payable are classified as long-term as of October 31, 2004
Maturities of these notes payable for the fiscal years ended October 31 are as
follows: 2004- none, and 2005- none, and 2006- $8,939,880
Effective October 1998, the Company began leasing space from Field Point
Capital Management Company (FPCM) at $1,000 per month rent. For the year ended
October 31, 2004, the Company's monthly rent for space subleased from FPCM was
reduced to $500 per month and its obligation for such lease was on a
month-to-month basis. Effective July 1, 2004, the Company terminated its month
to month sublease with FPCM. The Company paid FPCM, a company 100% owned by the
Company's Chairman, for rent, of approximately $4,000. For the year ended
October 31, 2003, the Company reimbursed FPCM Company, for rent, of
approximately $12,000.
(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 2005 Proxy Statement.
Page 35 of 66
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(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 Registered Public
Accounting Firm - BDO Seidman, LLP F-1
Report of Independent Registered Public
Accounting Firm - Ernst & Young LLP F-2
Consolidated balance sheets as of
October 31, 2004 and 2003 F-3
Consolidated statements of
operations for the years ended
October 31, 2004, 2003 and 2002 F-4
Consolidated statements of
stockholders' deficit for the years ended
October 31, 2004, 2003 and 2002 F-5
Consolidated statements of cash
flows for the years ended
October 31, 2004, 2003 and 2002 F-6
Notes to consolidated financial
Statements F-7
(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.
Page 36 of 66
(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.
10.10 Debt Extension Agreement, dated as of, November 1, 2004, between the
Company and G.S. Beckwith Gilbert.
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
Page 37 of 66
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
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 38 of 66
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, 2005 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, 2005 /s/ James T. Barry
---------------------------------------
James T. Barry, President, Chief
Executive Officer and Director
(Principal Executive Officer)
DATED: JANUARY 28, 2005 /s/ Jeffrey P. Devaney
---------------------------------------
Jeffrey P. Devaney,
Chief Financial Officer, Treasurer and
Secretary (Principal Financial and
Accounting Officer)
Page 39 of 66
SIGNATURES (CONTINUED)
DATED: JANUARY 28, 2005 /s/ G.S. Beckwith Gilbert
---------------------------------------
G.S. Beckwith
Gilbert, Chairman
and Director
DATED: JANUARY 28, 2005 /s/ John R. Keller
---------------------------------------
John R. Keller, Executive Vice
President and Director
DATED: JANUARY 28, 2005 /s/ Richard R. Schilling, Jr.
---------------------------------------
Richard R. Schilling, Jr.
Director
DATED: JANUARY 28, 2005 /s/ Bruce N. Whitman
---------------------------------------
Bruce N. Whitman
Director
DATED: JANUARY 28, 2005 /s/ Paul L. Graziani
---------------------------------------
Paul L. Graziani
Director
Page 40 of 66
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Megadata Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Megadata
Corporation and Subsidiaries as of October 31, 2004 and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the year
then ended. We have also audited the schedule as listed in Part IV, Item
15(a)(2) for the year ended October 31, 2004. 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
audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation and schedule. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Megadata Corporation
and Subsidiaries at October 31, 2004, and the results of its operations and its
cash flows for the year then ended October 31, 2004, in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
Melville, New York
January 3, 2005, except for
footnote 6, which is January 28, 2005
F - 1
Page 41 of 66
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Megadata Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Megadata
Corporation and Subsidiaries as of October 31, 2003, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the two 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 the standards of the Public Company
Accounting Oversight Board (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 the consolidated
results of their operations and their cash flows for each of the two years in
the period ended October 31, 2003, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic 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 - 2
Page 42 of 66
Megadata Corporation and Subsidiaries
Consolidated Balance Sheets
OCTOBER 31,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash $ 122,849 $ 48,980
Accounts receivable, net 422,641 485,693
Inventories 138,648 195,254
Prepaid expenses and other current assets 34,456 83,922
------------ ------------
Total current assets 718,594 813,849
Property, plant and equipment, net 92,111 98,919
PASSUR network, net 2,481,375 2,924,155
Software development costs, net 779,926 679,041
Other assets 12,575 17,315
------------ ------------
Total Assets $ 4,084,581 $ 4,533,279
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 292,974 $ 209,293
Accrued expenses and other current liabilities 369,106 409,405
Accrued expenses--related parties 135,604 145,837
Deferred income 990,376 842,687
------------ ------------
Total current liabilities 1,788,060 1,607,222
Notes payable--related party 8,866,465 8,466,465
------------ ------------
10,654,525 10,073,687
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 4,784,615 in 2004 and 4,184,615
in 2003, respectively 47,846 41,846
Additional paid-in capital 4,094,182 3,740,182
Accumulated deficit (9,088,497) (7,698,961)
------------ ------------
(4,946,469) (3,916,933)
Treasury Stock, at cost, 696,500 shares in 2004
and 2003 (1,623,475) (1,623,475)
------------ ------------
Total stockholders' deficit (6,569,944) (5,540,408)
------------ ------------
Total liabilities and stockholders' deficit $ 4,084,581 $ 4,533,279
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 3
Page 43 of 66
Megadata Corporation and Subsidiaries
Consolidated Statements of Operations
YEARS ENDED OCTOBER 31,
2004 2003 2002
------------ ------------ ------------
Revenues:
Subscription $ 2,362,398 $ 1,593,344 $ 874,148
Maintenance 429,650 514,550 456,001
Systems -- -- 292,963
Other 124,880 29,020 22,575
------------ ------------ ------------
Total revenues 2,916,928 2,136,914 1,645,687
------------ ------------ ------------
Cost and expenses:
Cost of sales 1,839,502 1,622,191 815,538
Research and development 392,766 403,080 404,608
Selling, general and administrative expenses 1,694,567 1,940,961 2,125,040
------------ ------------ ------------
3,926,835 3,966,232 3,345,186
------------ ------------ ------------
Loss from operations (1,009,907) (1,829,318) (1,699,499)
Other income (expense):
Interest income 473 566 1,118
Interest expense -- -- (887)
Interest expense--related party (375,675) (654,385) (408,008)
------------ ------------ ------------
Loss before income taxes (1,385,109) (2,483,137) (2,107,276)
Provision for income taxes 4,427 2,985 2,935
------------ ------------ ------------
Net loss $ (1,389,536) $ (2,486,122) $ (2,110,211)
============ ============ ============
Basic and diluted loss per common share $ (.35) $ (.71) $ (.61)
============ ============ ============
Weighted-average shares used in the calculation of basic
and diluted net loss per common share 3,961,885 3,484,365 3,473,115
============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 4
Page 44 of 66
Megadata Corporation and Subsidiaries
Consolidated Statements of Stockholders' Deficit
Years Ended October 31, 2004, 2003, and 2002
COMMON
SHARES AFTER
DEDUCTING COMMON ADDITIONAL TOTAL
TREASURY SHARES PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
STOCK AMOUNT CAPITAL DEFICIT STOCK DEFICIT
---------------------------------------------------------------------------------------
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
Net 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 21,250
for services performed -- 21,250 -- --
Net 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)
Issued as interest on notes payable 600,000 6,000 354,000 -- -- 360,000
NET LOSS -- -- (1,389,536) -- (1,389,536)
---------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 2004 4,088,115 $ 47,846 $ 4,094,182 $(9,088,497) $(1,623,475) $ (6,569,944)
=======================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 5
Page 45 of 66
Megadata Corporation and Subsidiaries
Consolidated Statements of Cash Flows
YEARS ENDED OCTOBER 31,
2004 2003 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,389,536) $ (2,486,122) $ (2,110,212)
Adjustments to reconcile net loss to net cash used in
(provided by) operating activities:
Depreciation and amortization 709,787 651,660 406,163
Provision for bad debts -- 2,488 4,350
Loss on disposal of network assets 110,980 150,492 42,271
Common stock issued for interest 360,000
Common stock options granted for services performed
-- 21,250 21,250
Changes in operating assets and liabilities:
Accounts receivable 63,052 (257,505) (156,053)
Inventories 56,606 108,379 (56,732)
Prepaid expenses and other current assets 49,469 (11,725) (56,626)
Other assets 4,740 (1,230) --
Accounts payable 83,681 (247,462) (29,327)
Deferred income 147,688 58,313 550,066
Accrued expenses and other current liabilities (50,533) (26,414) 51,283
------------ ------------ ------------
Total adjustments 1,535,470 448,246 776,645
------------ ------------ ------------
Net cash provided by (used in) operating activities 145,934 (2,037,876) (1,333,567)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to PASSUR network (198,897) (495,525) (964,574)
Capital expenditures (27,484) (15,321) (14,202)
Additions to Software development costs, net (245,684) (252,347) (220,880)
------------ ------------ ------------
Net cash used in investing activities (472,065) (763,193) (1,199,656)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock options exercised -- 2,250 --
Proceeds from notes payable--related party 400,000 2,761,465 2,615,000
Payments of installment notes -- -- (4,404)
------------ ------------ ------------
Net cash provided by financing activities 400,000 2,763,715 2,610,596
------------ ------------ ------------
Increase (Decrease) in cash 73,869 (37,354) 77,373
Cash--beginning of year 48,980 86,334 8,961
------------ ------------ ------------
Cash--end of year $ 122,849 $ 48,980 $ 86,334
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 6,475 $ 632,934 $ 387,545
Income taxes $ 4,426 $ 2,985 $ 2,935
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 6
Page 46 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2004
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Megadata Corporations, (the "Company") principal business is the delivery of
unique flight information, application software, and web-delivered collaborative
decision tools to the aviation industry and organizations that serve, or are
served, by the aviation industry.
BASIS OF PRESENTATION
At October 31, 2004, the Company's current liabilities exceeded current assets
by $1,069,000, it had a stockholder's deficit of $6,570,000, and it incurred a
net loss of $1,390,000 for the year ended October 31, 2004.
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 January 3, 2006. 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.
Footnotes have been rounded to the nearest thousand for presentation purposes.
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 - 7
Page 47 of 66
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 104 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 - 8
Page 48 of 66
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, whichever 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, 2004,
2003 and 2002, the provision for doubtful accounts approximated $0, $6,800 and
$4,400, 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 $1,441,000 and $1,096,000 as of October 31, 2004 and 2003,
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, 2004 total
of 4 units) are not depreciated until they are placed in service. During fiscal
2004, 2003 and 2002, the Company capitalized $353,000, $612,000 and $960,000 of
costs related to the PASSUR Network, respectively. During fiscal 2004, the
amount capitalized to the PASSUR Network includes transfers from inventory of
approximately $20,000.
F - 9
Page 49 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PASSUR NETWORK (CONTINUED)
During fiscal 2004, the Company disposed of certain PASSUR Network assets and
recorded a loss on disposal of approximately $111,000, 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, 2004 are recoverable through anticipated future sales of such
applicable products. During fiscal 2004 and 2003, the Company capitalized
approximately $287,000 and $252,000, respectively. During fiscal year 2004, 2003
and 2002, the Company recorded approximately $145,000, $65,000 and $16,000 of
amortization related to software development projects, respectively, of which
certain projects were completed and released for sale and certain projects were
still in development as each year end.
During fiscal 2004, the Company wrote off costs incurred to date for one
in-process capitalized software project totaling approximately $41,000, 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 - 10
Page 50 of 66
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
amortized 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 - 11
Page 51 of 66
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 value of related party debt is not
practical to determine.
F - 12
Page 52 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
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 to employees
under the recognition and measurement principles of Accounting Principles Board
("APB") No 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" and related
interpretations because the Company believes the alternative fair value
accounting provided for under SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION," 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.
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,
2004 2003 2002
-----------------------------------------
Reported net loss $(1,390,000) $(2,486,000) $(2,110,000)
Pro-forma stock compensation expense (22,000) (33,000) (47,000)
-----------------------------------------
Pro-forma net loss $(1,412,000) $(2,519,000) $(2,157,000)
=========================================
Reported basic and diluted net
loss per common share $ (.35) $ (.71) $ (.61)
=========================================
Pro-forma basic and diluted net
loss per common share $ (.36) $ (.72) $ (.62)
=========================================
F - 13
Page 53 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE LOSS
For the fiscal years ended October 31, 2004, 2003 and 2002, the Company's
comprehensive loss is equivalent to that of the Company's total net loss for
those respective periods.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
"Shared-Based Payment." Statement 123(R) addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the grant-date fair-value of
stock options and other equity-based compensation issued to employees in the
income statement. The revised Statement generally requires that an entity
account for those transactions using the fair-value-based method, and eliminates
the intrinsic value method of accounting in APB Opinion No. 25, "Accounting for
Stock Issued to Employees", which was permitted under Statement 123, as
originally issued.
The revised Statement requires entities to disclose information about the nature
of the share-based payment transactions and the effects of those transactions on
the financial statements.
Statement 123(R) is effective for public companies that do not file as small
business issuers as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005 (i.e., fourth quarter 2005 for the
Company). All public companies must use either the modified prospective or the
modified retrospective transition method. Early adoption of this Statement for
interim or annual periods for which financial statements or interim reports have
not been issued is encouraged. The Company has not yet evaluated the impact of
adoption of this pronouncement, which must be adopted in the fourth quarter of
fiscal year 2005.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" (" SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures three
classes of freestanding financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability. SFAS 150 was effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company has not entered into any financial instruments within the
scope of SFAS 150 since May 31, 2003, nor does it currently hold any significant
financial instruments within its scope.
F - 14
Page 54 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN46"),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 requires a variable interest entity to be
consolidated by a company, if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN 46 also requires
disclosures about variable interest entities that a company is not required to
consolidate but in which it has a significant variable interest. In December
2003, the FASB issued FIN 46R. It changed the effective date for interests in
special-purpose entities for periods ending after December 15, 2003, and for all
other types of entities for periods ending after March 15, 2004. The adoption of
FIN 46R did not have a material impact on our consolidated financial statements.
2. INVENTORIES
Inventories are summarized as follows:
OCTOBER 31,
2004 2003
-----------------------
Parts and raw materials $ 63,000 $ 69,000
Work-in-process -- 6,000
Finished goods 76,000 120,000
-----------------------
$139,000 $195,000
=======================
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
ESTIMATED
USEFUL OCTOBER 31,
LIVES 2004 2003
------------------------------------
Leasehold improvements 3-5 years $ 109,000 $ 105,000
Factory equipment 5-10 years 2,303,000 2,286,000
Furniture and fixtures 5-10 years 415,000 409,000
-----------------------
2,827,000 2,800,000
Less accumulated depreciation
and amortization
2,735,000 2,701,000
-----------------------
$ 92,000 $ 99,000
=======================
The Company recorded depreciation and amortization expense on the assets
included in property, plant and equipment of $34,000, $50,000, and $58,000 for
the years ended October 31, 2004, 2003, and 2002, respectively.
F - 15
Page 55 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. SOFTWARE DEVELOPMENT COSTS
Software development costs are comprised of 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, after technological
feasibility is established and ending when the product is available for release
to customers. As of October 31, 2004 and 2003, the Company had approximately $
1,005,000, and $ 759,000 of such costs capitalized, and $ 225,000 and $ 80,000
of accumulated amortization, respectively. The weighted average amortization
period of the Company's software development costs as of October 31, 2004 is
approximately 3.9 years.
Amortization expense on these assets for the fiscal years ended October 31,
2004, 2003 and 2002 was approximately $145,000, $65,000, and $16,000,
respectively. Amortization expense for the years ended October 31, 2005, 2006,
2007, 2008 and 2009 will approximate $182,000, $182,000, $169,000, $125,000 and
$40,000, respectively.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
OCTOBER 31,
2004 2003
--------------------
Accrued payroll, payroll taxes and benefits $149,000 $145,000
Accrued professional fees 103,000 143,000
Accrued license fees 75,000 75,000
Other accrued liabilities 42,000 46,000
--------------------
$369,000 $409,000
====================
6. 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.
During fiscal 2004, the Chairman of the Company, Mr. Gilbert loaned the Company
$400,000 in the aggregate under certain promissory notes bearing interest of
4.5% per annum and maturing on November 1, 2004.
On January 28, 2005, the Company and Mr. Gilbert entered into a subsequent
extended debt agreement effective November 1, 2004. Principal and accrued
interest as of October 31, 2004, aggregate into a principal amount of
$8,939,880, with a maturity date of November 1, 2005 bearing an interest rate of
4.5%. The notes payable are classified as long-term as of October 31, 2004
F - 16
Page 56 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LEASES
The Company's software 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, 2004 approximates $84,000 per year. This lease
provides for additional payments of real estate taxes and other operating
expenses over the minimum rental amount. The Company's headquarters located in
Greenwich, CT are rented for a five year period ending June 30, 2009 at an
amount of $30,000 per year. All other operating leases are under a
month-to-month arrangement. See also Note 10. Related Parties.
Fiscal Year Ended October 31,: Operating Leases
- ------------------------------ ----------------
2005 $ 116,000
2006 30,000
2007 30,000
2008 30,000
2009 30,000
Thereafter --
Total minimum lease payments $ 236,000
8. INCOME TAXES
The Company's provision for income taxes in each year consists of current state
and local minimum taxes.
At October 31, 2004, the Company has available a federal net operating loss
carry-forward of approximately $15,350,000 for income tax purposes which will
expire in various tax years from 2005 through 2024. The Company has provided a
full valuation allowance on the net deferred tax asset of approximately
$5,988,000, which primarily consists of the net operating loss carry-forwards
and available tax credits.
F - 17
Page 57 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. 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.
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 2004, 2003, and 2002, respectively: risk-free interest rates of
3.92% for fiscal 2004, 3.92% for fiscal 2003, and 3.52% to 4.99% for fiscal
2002; no dividend yield; volatility factors of the expected market price of the
Company's common stock of 1.113 in fiscal 2004; 1.133 in fiscal 2003, and 1.169
in fiscal 2002; and an 8 year weighted-average expected life of the options.
F - 18
Page 58 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS (CONTINUED)
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.
Information with respect to options during the years ended October 31, 2004,
2003 and 2002 are as follows:
2004 2003 2002
---------------------- --------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-----------------------------------------------------------------------------
Options outstanding--
beginning of year 1,043,000 $.58 1,093,000 $.65 720,000 $.69
Incentive options granted 342,000 .42 319,000 .32 378,000(1) .56
Options forified and expired (175,000) .40 (354,000) .58 (5,000) .15
Options exercised (15,000) .15 --
-----------------------------------------------------------------------------
Options outstanding--
end of year 1,210,000 $.56 1,043,000 $.58 1,093,000 $.65
=============================================================================
Options exercisable at
end of year 680,710 $.69 596,331 $.73 420,329 $.71
=============================================================================
Weighted average fair value per
share of options granted
during the year $.42 $.29 $.51
==== ==== ====
(1) Amount includes 75,000 shares of non-qualified stock options awarded
outside of the approved 1999 Stock Incentive Plan.
F - 19
Page 59 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding at
October 31, 2004:
Options Outstanding Options Exercisable
-------------------------------------------------------------
Weighted-
Average Weighted-
Range of Remaining Weighted- Average
Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
------ ------ ---- ----- ------ -----
$.15 147,500 4.7 years $.15 147,500 $.15
$ .25 - $ .38 404,000 8.2 years .29 85,470 .28
$ .40 - $ .55 316,000 8.5 years .50 105,240 .49
$ .63 - $ .84 285,000 5.9 years .79 285,000 .79
$1.63 - $ 2.75 57,500 5.4 years 2.60 57,500 2.60
--------- -------
1,210,000 680,710
========= =======
As of October 31, 2004, there were 1,490,000 shares of common stock reserved for
future issuance under the Company's stock option plan.
10. 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, 2004, one customer accounted for approximately
23% of total revenues. 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%,
respectively of total revenues. The Company had export sales of approximately
$64,000, $74,000 and $83,000 in fiscal 2004, 2003, and 2002, respectively. All
sales, including export sales, are denominated in U.S. dollars.
11. RELATED PARTY TRANSACTIONS
Effective October 1998, the Company began leasing space from Field Point Capital
Management Company (FPCM) at $1,000 per month rent. For the year ended October
31, 2004, the Company's monthly rent for space subleased from FPCM was reduced
to $500 per month and its obligation for such lease was on a month-to-month
basis. Effective July 1, 2004, the Company terminated its month to month
sublease with FPCM. The Company paid FPCM, a company 100% owned by the Company's
Chairman, for rent, of approximately $4,000. For the year ended October 31,
2003, the Company reimbursed FPCM Company, for rent, of approximately $12,000.
F - 20
Page 60 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
For the years ended October 31, 2004, 2003, and 2002 the Company paid
approximately $23,000, $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.
Accrued expenses - related parties consist of the following:
OCTOBER 31,
2004 2003
-------- --------
Interest on notes payable (note 6) $ 73,000 $ 64,000
Accounts payable employee reimbursements 33,000 23,000
Accrued travel expenses 20,000 33,000
Due to FPCM 10,000 6,000
Accrued consulting and commission -- 20,000
-------- --------
$136,000 $146,000
======== ========
12. 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.
13. QUARTERLY RESULTS OF OPERATIONS
The following table provides unaudited quarterly consolidated results of
operations for each quarter of fiscal years 2004 and 2003. 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.
F - 21
Page 61 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. QUARTERLY RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
OCT. 31, JULY 31, APRIL 30, JANUARY 31, OCT. 31, JULY 31, APRIL 30, JANUARY 31,
2004 2004 2004 2004 2003 2003 2003 2003
------------------------------------------------------------------------------------------------------
TOTAL NET REVENUES $ 825,889 $ 716,999 $ 687,829 $ 686,211 $ 558,082 $ 524,797 $ 556,295 $ 497,740
WRITE DOWN OF NETWORK ASSETS (110,980) (150,492)
LOSS FROM OPERATIONS (448,894) (205,264) (194,048) (161,701) (682,098) (430,891) (266,226) (450,103)
NET LOSS (543,629) (300,209) (288,433) (257,265) (866,455) (604,318) (420,221) (595,128)
BASIC AND DILUTED NET LOSS
PER SHARE $ (.13) $ (.07) $ (.08) $ (.07) $ (.25) $ (.17) $ (.12) $ (.17)
------------------------------------------------------------------------------------------------------
F - 22
Page 62 of 66
Megadata Corporation and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
ADDITIONS
CHARGED
BALANCE AT CHARGED TO TO OTHER BALANCE
BEGINNING COSTS AND ACCOUNTS - DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE - DESCRIBE PERIOD
- ------------------------------------------------------------------------------------------------------------
Year Ended October 31,
2004; Reserves
and allowances
deducted from asset
accounts:
Reserve for
estimated doubtful
accounts - accounts
receivable. $ 6,838 -- ($6,838) --
Valuation allowance on
deferred tax asset $5,362,500 $626,000(a) $5,988,500
-----------------------------------------------------------------------------
$5,369,338 -- $626,000 ($6,838) $5,988,500
=============================================================================
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
=============================================================================
(a) Valuation allowance for deferred tax assets.
S-1
Page 63 of 66