Back to GetFilings.com
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, 1998
OR
| _ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No fee required)
for the transition period from ___ to ___
Commission file number 0-7642
MEGADATA CORPORATION
- - --------------------------------------------------------------------------------
(Exact name of Company as specified in its charter)
NEW YORK 11-2208938
- - -------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
66 FIELD POINT ROAD, GREENWICH, CT 06830
- - --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Company's telephone number, including area code: 203-629-8757
--------------
SECURITIES OF THE COMPANY REGISTERED PURSUANT TO
SECTION 12(b) OF THE ACT: NONE
----
SECURITIES OF THE COMPANY REGISTERED PURSUANT TO
SECTION 12(g) OF THE ACT:
COMMON SHARES, PAR VALUE $0.01 PER SHARE
----------------------------------------
INDICATE BY CHECK MARK WHETHER THE COMPANY (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 COMPANY 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 COMPANY'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
The aggregate market value of the voting shares of the Company held by
non-affiliates as at January 20, 1999 was $468,034.
The number of common shares, $0.01 par value,
outstanding as at January 20, 1999 was 2,511,600
PART I
ITEM 1. BUSINESS.
- - -----------------------
(A) GENERAL DEVELOPMENT OF BUSINESS.
- - ---------------------------------------------------
The Company sells, manufactures, and is continuing to develop
hardware and software enhancements for its aircraft flight tracking systems.
The Company's product line includes the PASSUR (Passive
Secondary Surveillance Radar) systems. These systems receive aircraft
identification and altitude information from aircraft transponder transmissions
which are interrogated by existing secondary surveillance radars without
emitting any active signals. Received signals are processed in a standard
workstation and displayed on a high resolution color graphics data display to
provide real-time identification and tracking of aircraft in flight. The display
presentation is similar to that provided to Air Traffic Controllers. The
presentation of flight tracks can be in real time or can be switched to a mode
that permits observance of historical data for selected time periods. A PASSUR
system may be integrated to work with noise monitoring and measuring equipment
in a configuration that will supply a correlation between aircraft location and
noise levels generated by it. With this real-time information, an airport noise
abatement officer can enforce the law regarding noise levels emitted by an
aircraft. When used as part of an airport noise monitoring system, airport
managers and noise control officers can correlate noise events in the local
community with specific airline flight tracks.
Another variation of the PASSUR system is called ATMS (Air
Traffic Monitoring System) using the Company's proprietary Pastrack software.
The ATMS was developed to address a request by a major U.S. airline for use in
its flight and airport operations management. The ATMS provides tracks of all
airborne aircraft within a 150 mile radius around the airport. It performs ETA
(Estimated Time of Arrival) calculations that predict accurately when arriving
aircraft are expected to land. It also detects any holding patterns, assessing
the impact of Air Traffic Control on an airport operation complex. By using the
information provided by the ATMS, an airline's Air Traffic Dispatcher can more
accurately predict arrival times, enhancing customer service and gate
management. Added benefits include more efficient scheduling of ground support
operations, such as food, baggage, cleaning and refueling services.
Continued R&D efforts conducted during the past several years
led to the enhancement of the software that correlates real-time ASD (Aircraft
Situation Display) data supplied by the Department of Transportation with flight
tracks identified by the PASSUR. This correlation allows the PASSUR to identify
the carrier and the flight number of each aircraft displayed.
The Company also sells radio modems. To enhance the SA-9600
radio modem, the Company has implemented a new design for a faster modem
increasing the speed of data communication to 28.8Kbps. The SA-9600 is part of
the AGILE DATA product line for wireless communication of voice and data. The
SA-9600 operates synchronously or asynchronously, half or full duplex, with any
host computer with an RS-232C serial port. An optional data compression feature
supports host system baud rates of 38,400 bps when in the asynchronous mode. (A
data compression feature installed on an SA-9600 with the new 28.8 Kbps modem
can support higher baud rates than 38,400 bps.) No software modification of the
2
host system is necessary. As a reliable means of both voice and data transfer,
AGILE DATA is mainly being marketed in third-world countries, where existing
telephone data services are either poor or non-existent. The new DC-powered
SA-9600 enhances its suitability for mobile applications where 12/24/48vdc power
is commonly available. The Company has received FCC approval for the marketing
and sale of these products in the 450-470 Mhz business band. In order to appeal
to a wider group of potential users who, due to government restrictions or
unavailable frequencies, wish to utilize other radios transmitting on
frequencies outside the standard SA-9600's range, the Company has developed the
SA-9600/E. The SA-9600/E is a modem-only version of the SA-9600 which provides
radio data transmission capability using commonly available, off-the-shelf,
external radios of the customer's choice.
The Company's experience with airline communication protocols such as SABRE,
APOLLO, PARS, SITA, SYSTEM ONE, IPARS, DATAS II, PEGASUS, WORLDSPAN, GEMINI, and
other airline network protocols led to the development of various reservation
network access products for the airline industry. These include communication
controllers and multiplexers which support multiple Interchange and Terminal
Addresses (IAs & TAs) on a single host communication line, reducing CRS
(Computerized Reservation System) host polling overhead and providing
significant savings on telephone line charges and installation. Other
communication products allow the use of public or private X.25 networks to
transport reservation data to a computer reservation system. The Company has
received certification for these products from the major airline reservation
networks.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
- - -------------------------------------------------------------------
Not applicable.
(C) NARRATIVE DESCRIPTION OF BUSINESS.
- - ------------------------------------------------
The Company is a supplier of communication products intended
to satisfy the needs of airports, airlines, and travel agents. Its principal
business is the design, manufacture, sale and service of its product line
consisting of a real time aircraft monitoring system, as well as wireless
modems, and access equipment to airline reservation systems.
In addition to the standard line of equipment, the Company
provides its customers with customized software and hardware which provide
passive detection of aircraft in flight.
1. PRODUCTS.
---------------
The Company's software and hardware are utilized in the
following applications:
(i) Air Traffic Monitoring Systems
--------------------------------------------
The Company, under a sublicense for patented technology owned
by a third party, has implemented its proprietary hardware and software to
develop an enhanced line of air traffic monitoring systems. These PASSUR
(Passive Secondary Surveillance Radar) systems receive and process aircraft
identification from aircraft transponder transmissions interrogated by existing
secondary surveillance radars. With this information available in real time, the
airport manager or an individual airline's Air Traffic Dispatcher can more
accurately predict arrival times, enhancing customer service and gate
management. Added benefits include more efficient scheduling of ground support
operations, such as food, baggage, cleaning, and refueling services. When used
as part of airport noise monitoring systems, airport managers and noise
abatement officers can correlate noise events in the local community with
specific airline flight tracks for appropriate action.
3
(ii) Wireless Modem Communications
------------------------------------------------
The SA-9600 is part of the AGILE DATA product line of wireless radio modems,
which communicate voice and data at speeds up to 28.8K bps. The SA-9600 operates
synchronously or asynchronously, half or full duplex, with any host computer
with an RS-232C serial port. Compatibility with the "AT" command set is built
in. No software modification of the host system is necessary for any of the
operating modes. Encryption of transmitted data is available for security
purposes. A data compression feature increases throughput up to four times
(38,400 bps) depending on the type of data transmitted. The new DC-powered
SA-9600 enhances its suitability for mobile applications where 12/24/48vdc power
is commonly available. A modem-only version is also available, allowing the
SA-9600 to be used with off-the-shelf radio equipment that meet existing local
regulatory or customer requirements.
The Company has received FCC approval for the marketing and sale of the SA-9600
in the 450-470Mhz business band.
(iii) Airline Reservation Access Systems
----------------------------------------------------
The Company's experience with ALC protocols, such as SABRE, SYSTEM ONE, PARS,
IPARS, GEMINI, APOLLO and other airline network protocols has led to the
development of various reservation access products for the airline reservation
industry. Offering multi-user workstations with dual-screen displays and pop-up
windows, MURS and RESNET controllers provide the lowest per-user-station cost in
the industry. They allow up to 32 workstations and 8 printers to be interfaced
to a single reservation system host communication line. MIAC (Multiple
Interchange Address Concentrator) supports many separate interchange addresses
on a single communication line. This increases an airline's CRS (Computerized
Reservation System) efficiency by reducing both host polling overhead and the
number of separate communication lines needed. ALCX.25 allows the use of public
or private X.25 networks to transport reservation data to a computer reservation
system. Configurable for either premise or host site operation, ALCX.25 converts
installed user sites to X.25 without modification to existing user equipment.
(iv) Custom Hardware and Software Activities
-----------------------------------------------------------
The Company is occasionally involved in specialized R&D projects sponsored and
paid for by customers. These projects involve the customization of the Company's
standard products to suit specific customer requirements.
2. 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
4. DEPENDENCE ON CERTAIN CUSTOMERS.
---------------------------------------------------
During the fiscal year ended October 31, 1998, three (3) customers accounted for
52% of revenue. The loss of any of these customers would have an adverse effect
on the Company's business. During the fiscal year ended October 31, 1998, those
three customers accounted for 28%, 14%, and 10%. During the fiscal year ended
October 31, 1997, three customers accounted for 63% of the Company's revenue.
Those three customers accounted for 27%, 22%, and 14%. During fiscal year 1996
only one customer accounted for more than 10% of the Company's revenue, with
that customer accounting for 25% of fiscal year 1996 revenues.
5. BACKLOG.
---------------
The Company's backlog for products and services at October 31, 1998 amounted to
approximately $211,000, all of which is scheduled for delivery or performance
before October 31, 1999. The backlog at October 31, 1997 and 1996 amounted to
approximately $286,000 and $278,000, respectively. Backlog consists of written
purchase orders or contracts.
6. COMPETITION.
---------------------
The Company is offering the PASSUR and ATMS systems for passive detection of
aircraft in flight. These products are, to the best of its knowledge, relatively
unique with little competition. Other products, such as the enhanced version of
the wireless radio modems and some airline communication products offered by the
Company fall into the category of highly competitive business. For these
products, although price is a factor, the Company believes that design,
technical and software capabilities in tailoring its products to customers'
individualized needs are more important competitive factors in the market to
which the Company directs its efforts. Depending on the end use of the products,
the Company's primary competitors include Data Radio, Cylink, Dimensions
International, Motorola, Memorex, and Videcom. The Company also sells to systems
integrators, including Tracor Applied Sciences, Sabre Technologies, and Harris,
Miller, Miller & Hanson, who also sell products which are competitive with those
offered by the Company. All of these companies are significantly larger than the
Company, and have larger sales forces and greater financial resources.
7. RESEARCH AND DEVELOPMENT.
---------------------------------------
The Company's Research and Development ("R&D") group continues to enhance the
Company's products primarily for software and hardware enhancements to PASSUR
and ATMS products.
During the fiscal year ended October 31, 1998 the Company incurred approximately
$122,000 in expenditures for R&D. In fiscal year ended October 31, 1997
approximately $147,000 was expended on R&D and in fiscal year 1996 approximately
$180,000 was expended on R&D.
8. EMPLOYEES.
------------------
The Company employs 13 full time employees including 5 officers.
5
(D)FINANCIAL INFORMATION ABOUT FOREIGN AND
DOMESTIC OPERATIONS AND EXPORT SALES
- - ---------------------------------------------------------
The following table sets forth the dollar amount and the percentages
attributable to the sale by the Company of its products during the past three
fiscal years in the United States and abroad:
Net
Revenues 1998 1997 1996
- - -------- ------ ------ ------
Domestic $ 960,408 91.2% $1,306,345 88.3% $ 878,364 79.0%
- - --------
Exports 92,835 8.8% 172,607 11.7% 233,597 21.0%
- - ------- ---------- ----- ---------- ----- ---------- -----
Total
Revenues: $1,053,243 100.0% $1,478,952 100.0% $1,111,961 100.0%
- - ---------- ========== ===== ========== ===== ========== =====
ITEM 2. PROPERTIES.
- - --------------------------
The Company's manufacturing, and research facility are located in a one-story
building at 35 Orville Drive, Bohemia, New York. The Company owns the entire
building which contains 36,000 square feet. The Company is currently utilizing
approximately 40% of this building for its activities.
The Company's executive offices are currently located in a modern four-story
office building at 66 Field Point Road, Greenwich, Connecticut. At October 31,
1998, those offices were located at 104 Field Point Road. The Company is leasing
space from Field Point Capital Management Company, a company 100% owned by the
Company's President. From October 2, 1998 through January 31, 1999 the Company
paid rental of $4,000 to Field Point Capital Management Company. Effective
February 1, 1999, the Company will pay Field Point Capital Management Company
$2,000 per month rent. The Company believes these rates are competitive and are
at or below market rates.
ITEM 3. LEGAL PROCEEDINGS.
- - -------------------------------------
There are no material pending legal proceedings, other than routine litigation
incidental to the Company's business, 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.
- - --------------------------------------------------------------------------------
None.
6
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
- - -----------------------------------------------------------------------------
(A) MARKET INFORMATION.
--------------------------------
The Company's common shares are traded in the over-the-counter market.
The following table sets forth the range of high and low bid and asked
quotations of the Company's common shares for each quarterly period during the
Company's last two fiscal years, as reported by the National Quotation Bureau,
Inc.:
Period Bid Prices* Asked Prices*
- - ------ ----------- -------------
High Low High Low
----- --- ---- ---
Fiscal Year Ended October 31, 1998
First Quarter .562 .187 .687 .51
Second Quarter .562 .38 .625 .51
Third Quarter .625 .562 .875 .625
Fourth Quarter .625 .375 .875 .50
Fiscal Year Ended October 31, 1997
First Quarter .75 .375 1.062 .75
Second Quarter .437 .375 .75 .625
Third Quarter .531 .312 .625 .5625
Fourth Quarter .312 .187 .625 .50
- - -----------------------
* The quotations represent prices in the over-the counter market between dealers
in securities, do not include retail markup, markdown, or commission, and do not
necessarily represent actual transactions.
(B) HOLDERS.
---------------
The number of equity security holders of record at January 20,
1999 was 354.
(C) DIVIDENDS.
-----------------
The Company has never paid cash dividends on its shares. The
Company does not anticipate paying cash dividends in the
foreseeable future.
7
ITEM 6. SELECTED FINANCIAL DATA.
- - ----------------------------------------
Selected income statement data:
Year Ended October 31
- - -----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net
Revenues $ 1,053,243 $ 1,478,952 $ 1,111,961 $ 1,684,525 $ 1,732,558
Net
(Loss) (880,749) (54,500) (584,750) (576,553) (267,507)
Net (Loss) Per
Common Share --
Basic and diluted (1) ($ .35) ($ .03) ($ .36) ($ .36) ($ .17)
Dividend
Declared -- -- -- -- --
Selected balance sheet data:
October 31
- - -----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total Assets $ 1,794,990 $ 2,595,296 $ 2,183,896 $ 2,303,722 $ 2,930,151
Long-Term
Debt (2)(3)(4) $ 625,548 $ 721,036 $ 674,278 $ 770,663 $ 823,009
Total Share-
holders'
Equity $ 307,958 $ 1,193,625 $ 657,285 $ 1,242,035 $ 1,818,588
- - -----------------------------------------------------------------------------------------------
(1) 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 was not assumed since the result would have been antidilutive.
(2) Company's mortgage loan from the Roosevelt Savings Bank was due to expire on
February 1, 1996 requiring a balloon payment of $756,000. As such, it was
classified as a current liability. The Company was granted an extension to
negotiate a refinancing of the balance due. On May 31, 1996, Roosevelt Savings
Bank, the holder of the mortgage, and the Company, signed a mortgage agreement
refinancing the mortgage for five additional years at an interest rate of
9.250%.
(3) Long Term Debt for 1997 includes a $100,000 note payable, which is due after
October 31, 1998.
(4) Long term Debt for 1998 includes a $25,000 note payable, and a $37,894
installment note payable, which is due after October 31, 1998.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
-------------------------------------------------------------------
RESULTS OF OPERATIONS
- - ---------------------
REVENUES
- - --------
Revenue during the fiscal year ended October 31, 1998 ("fiscal 1998")
decreased by approximately $426,000, or 29%, as compared to the fiscal year
ended October 31, 1997 ("fiscal 1997"). The decrease was due to a reduction in
revenue in most of the sales categories of the Company. Decreases in revenues
occurred in the following sales categories, PASSUR Systems, Radio Modems, and
Protocol Converters. Minor increases in revenue resulted from PASSUR System
maintenance contracts and repairs, as well as UNIX Systems.
Revenue during fiscal 1997 increased by approximately $367,000, or 33%,
as compared to revenue during the year ended October 31, 1996 ("fiscal 1996").
The increase was mainly due to an increase in sales of PASSUR related products
and services.
The Company's PASSUR sales were limited during fiscal 1998. Management
believes that with the increased sales and marketing effort for the PASSUR
product line, additional revenues can be realized in the coming fiscal year.
With the restructuring underway by the Company, and the move to a smaller, less
expensive facility, fixed costs will be reduced. Management is reviewing product
offerings and performance of product lines in which revenue has decreased over
the last two fiscal years.
Cost of Sales and Service
- - --------------------------------
During fiscal 1998, cost of sales increased by approximately $90,000,
or 12%, over fiscal 1997. The major component of that increase was an inventory
write-down of approximately $196,000 to reflect management's decision to focus
on the PASSUR Systems product line and eliminate inventory on hand from several
other slower moving product lines. Cost of sales decreased by approximately
$100,000 as a result of lower revenues during fiscal 1998 before giving effect
to the inventory write-down.
Cost of service was at about the same level for fiscal 1998 and fiscal
1997. These expenses were required in order to maintain key personnel.
Research and Development
- - -----------------------------------
The Company's research and development expenses decreased to
approximately $122,000 in fiscal 1998 as compared to $147,000 in fiscal 1997 and
$180,000 in fiscal 1996. The Company anticipates continuing to incur research
and development expenditures at current levels. Research and development efforts
include activities associated with maintenance, enhancement, and improvement of
the Company's existing hardware and software coupled with customer sponsored
research and development expenditures for new product development. No customer
sponsored research and development was conducted during fiscal 1998 and fiscal
1997. During fiscal 1996, $40,000 of research and development expenditures were
sponsored by a customer.
9
General and Administrative
- - -----------------------------------
General and administrative expenditures increased by $172,301, or 37%,
during fiscal 1998 as compared to fiscal 1997, as the Company significantly
increased the sales and marketing budget for its major PASSUR System product
line. Salaries, consulting, travel, and advertising expenses accounted for most
of the increase.
General and administrative expenses increased by $26,941 or 6.2% during
fiscal 1997 compared to fiscal 1996. The increase in these costs are primarily
attributable to changes in the level of expenditures for salaries and overhead
costs.
Restructuring Charge
- - ---------------------------
In October 1998, the Company announced a Restructuring Plan in which it
will focus its attention primarily on its PASSUR line of passive radar systems.
As part of this restructuring, the Company will move its corporate headquarters
and national sales office to Greenwich, Connecticut. The Company has offered for
sale its building in Bohemia, New York and will move its manufacturing and
research and development facility to a more modern location in the same area.
The Restructuring Charges include exit costs of $93,000 related to the
building, severance costs of $53,000, asset write-downs of $24,000 relating to
assets to be sold or abandoned, and inventory write-downs of $196,000 associated
with the elimination of certain nonstrategic inventory and product lines (which
costs are included in costs of sales).
Income Taxes
- - ------------------
The provisions for income taxes for each year relate to state and local
minimum taxes. The Company has available approximately $5,300,000 in tax loss
carryforwards to offset possible future income. The Company also has available
$25,000 in general business tax credit carryforwards. These carryforwards expire
in various amounts from 2006 through 2018.
Impact of Inflation
- - -----------------------
In the opinion of management, inflation has not had a material effect
on the operations of the Company.
Net Loss
- - ------------
The Company incurred a net loss of $880,749, or $.35 per common share,
during fiscal 1998. In fiscal 1997, the Company incurred a net loss of $54,500,
or $.03 per common share.
During the fiscal year ended October 31, 1998 ("fiscal 1998"), costs
and expenses were higher than total revenue and resulted in a loss from
operations of $802,947 after a restructuring charge of $170,140 and an inventory
write-down of approximately $196,000.
During fiscal 1997, costs and expenses other than interest related
items were lower than total revenue, yielding income from operations of $29,603.
After including finance related expenses, however, the Company had a net loss of
$54,500, or $.03 per share as compared to a net loss of $584,750 or $.36 per
share, in fiscal 1996. Total costs and expenses during fiscal 1997 decreased by
$186,522 or 11.4% as compared to such costs during fiscal 1996. Cost reductions
in fiscal 1997 were due to cutbacks in payroll expenses and reductions in some
overhead expenses.
10
Liquidity and Capital Resources
- - -----------------------------------------
At October 31, 1998, the Company's current liabilities exceeded current
assets by approximately $483,000. Management will address this working capital
deficiency by reducing operating expenses as outlined in its restructuring plan,
by utilizing cash proceeds from the proposed sale of the building for working
capital purposes and, if required, by obtaining external financing.
A turnaround in the Company's prospects could lead to profitability,
although no assurances can be provided in this regard. Since the increased sales
effort began in August 1998, the Company has seen many positive signs that its
PASSUR product line could provide additional revenue in fiscal 1999. However,
increased competition, and continued budget restraints among its clients, could
impact this potential revenue.
Interest by potential customers in the Company's PASSUR systems remains
strong and the Company anticipates an increase in future sales. However, the
Company cannot predict if such sales will materialize. If sales do not increase,
additional losses may occur and could continue. The extent of such profits or
losses will be dependent on sales volume achieved.
Private Investor
- - --------------------
During the period between September 18, 1996 and June 6, 1997, the
Company signed agreements with a private investor (the "Investor") that provided
for three loans of $100,000 each, of which $200,000 was received in 1996 and
$100,000 was received in 1997. The three notes bore interest at a rate of 9% per
annum, and were payable by July 30, 1997. In addition, stock warrants were
awarded for the purchase of up to 1,400,000 common shares. On June 6, 1997, the
Investor and his affiliate purchased 700,000 shares for the amount of $500,000,
paid by $400,000 in cash and cancellation of the first $100,000 note.
On October 31, 1997, the Investor and two other directors purchased
200,000 shares for the amount of $150,000. The purchase of these shares
validated the warrant that gives the Investor and his affiliates the right to
purchase 500,000 shares at $1.25 per share. This warrant expires October 31,
2001, and is exercisable during the year preceding expiration. On July 30, 1997,
the remaining notes totaling $200,000 were amended and restated by a new note
bearing interest at 9% per annum, with quarterly payments of $25,000 plus
accrued interest due on the last business day of each calendar quarter,
commencing December, 1997, with any remaining balance due July 30, 1999. The
note is secured by the Company's assets excluding its building.
During 1997, the Investor was elected a director of the Company and
Chairman of the Board, and on October 2, 1998, the Investor was elected to the
additional post of President and Chief Executive Officer.
In November, 1998, and on January 11, 1999, the Investor loaned the
Company an additional $300,000 in the aggregate under promissory notes which are
payable quarterly, bearing interest at 9% and maturing at various dates from
June 30, 2000 to June 30, 2001. As of January 11, 1999, the total notes payable
due to the Investor totaled $475,000.
The Year 2000 Issue
- - --------------------------
The Company has diligently studied the impact of the Year 2000 on the
hardware and software it sells as well as its own internal systems.
11
The Company's top technical and development personnel have carefully
reviewed the Company's PASSUR hardware product line and related software and are
satisfied that they are Year 2000 compliant.
A review of Year 2000 compliance for the other products sold by the
Company, radio modems and protocol converters, is continuing and should be
completed by the middle of 1999.
A thorough review of the Company's internal systems is continuing. The
Company is also working with suppliers and service providers with whom it does
business to determine their Year 2000 compliance and to minimize any impact
their noncompliance (if any) would have on the Company. These studies are also
scheduled for completion by the middle of 1999.
To date, the Company has not found any area where a Year 2000
compliance problem with either its internal systems or outside providers could
have a material adverse impact on any part of the Company's business operations.
Risk Factors; Forward Looking Statements
- - ------------------------------------------------------
The Management's Discussion and Analysis and the information provided
elsewhere in this Annual Report on Form 10-K (including, without limitation, in
"Item 1. Business" as well as "Liquidity and Capital Resources" above) contain
forward-looking statements regarding the Company's future plans, objectives, and
expected performance. 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 make new sales of its PASSUR and other
product lines due to potential competitive pressure from other companies or
other products. Other uncertainties which could impact the Company are
uncertainties with respect to future changes in governmental regulation
affecting the product and its use in flight dispatch. Additional uncertainties
are related to the Company's ability to find and maintain the personnel
necessary to sell, manufacture, and service its products.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
------------------------------------------------------------------------
The response to this item is submitted in a separate section of this report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
- - --------------------------------------------------------------------------------
None.
12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
- - ---------------------------------------------------------------------------
(a) Identification of Directors.
-------------------------------------
Director Position and Offices
Name Age Since With Company
- - ----------------------------- --- ----- ---------------------------
G.S. Beckwith Gilbert 56 1997 Chairman of the Board,
President, Chief Executive
Officer, and a Director
Richard R. Schilling, Jr. 73 1974 Director
Yitzhak N. Bachana 65 1976 Director
John R. Keller 59 1997 Executive Vice President,
and a Director
Bruce N. Whitman 65 1997 Director
Paul L. Graziani 41 1997 Director
Each director is elected to serve until the succeeding annual meeting of
shareholders and until his successor is duly elected and qualifies.
(b) Identification of Executive Officers.
---------------------------------------------------
Officer Position and Offices
Name Age Since With Company
- - ---------------------------- --- ----- -------------------------------------------
G. S. Beckwith Gilbert 56 1998 Chairman of the Board,
President, Chief Executive
Officer, and a Director
John R. Keller 59 1970 Executive Vice President,
Secretary,
Treasurer, and a Director
Dr. James A. Cole 58 1988 Senior Vice President of
Research & Development
James T. Barry 37 1998 Vice President, Marketing
Herbert E. Shaver 44 1993 Controller and Assistant
Secretary
13
Each officer is elected to serve at the pleasure of the Board of Directors.
(c) Identification of Certain Significant Employees.
--------------------------------------------------------------
None.
(d) Family Relationship.
--------------------------------
None.
(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 was elected Chairman of the Board in 1997 and
was elected to the additional posts of President and
Chief Executive Officer in October of 1998. 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
also a Director and Chairman of the Executive Committee
of DIANON Systems, Inc., as well as a Director of
Davidson Hubeny Brands and Kionix, Inc.
Richard R. Schilling, Mr. Schilling is a member of the law firm of Burns,
Jr. Kennedy, Schilling & O'Shea, New York, New York .
Yitzhak N. Bachana Mr. Bachana was President and Chief Executive Officer of
the Company from 1980 to October 2, 1998. Mr. Bachana is
the President, Chief Executive Officer and majority
shareholder of Data Probe, Inc., a New York based
computer service bureau. Mr. Bachana is also President
and a director of Datatab, Inc. since 1983. Data Probe,
Inc. and Datatab, Inc. are publicly-held corporations.
Pursuant to an agreement between Data Probe, Inc. and the
Company, dated May 7, 1976, the President of Data Probe,
Inc. is to be nominated as a management nominee for
director.
Bruce N. Whitman Mr.Whitman has been Executive Vice President and a
Director of FlightSafety International since 1962. He is
also a Director of FlightSafety Boeing Training
International, Petroleum Helicopters, Inc., and
Aviall, Inc.
14
Paul L. Graziani Mr. Graziani is the President and Chief Executive Officer
of Analytical Graphics, Inc., a leading producer of
commercial analysis software for the space industry.
Dr. James A. Cole Dr. Cole is a 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.
John R. Keller Mr. Keller has been with the Company since its inception
in 1967 and currently serves as Executive Vice President
of the Company.
James T. Barry Mr. Barry has been a Vice President since 1998. He is
also a 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.
Herbert E. Shaver Mr. Shaver has been Controller of the Company since 1993
and an employee since September 1998. From 1973 until
1998, Mr. Shaver was a Vice President and Controller of
Datatab, Inc. He has been a Director of Datatab, Inc.
since 1985, and from 1983 until 1998, was the Controller
of Data Probe, Inc.
(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.
15
ITEM 11. EXECUTIVE COMPENSATION.
- - ---------------------------------------------
(a) Cash and Deferred Compensation.
------------------------------------------------
The following table sets forth all cash compensation paid to
each of the Company's most highly compensated executive officers to whom cash
compensation during the fiscal year ended October 31, 1998 exceeded $100,000, as
well as the Company's President:
CASH AND DEFERRED COMPENSATION TABLE
- - --------------------------------------------------------------------------------
(A) (B) (C) (D) (E)
- - --------------------------------------------------------------------------------
Name and Principal Other
Position Year Salary Bonus Compensation
- - --------------------------------------------------------------------------------
G.S Beckwith Gilbert -
President 1998 $ -- - $ 12,173(1)
Yitzhak N. Bachana (7) 1998 $189,038(2) - $ 66,231(3)
1997 100,000(4) - $ 26,923(5)
1996 11,538(6) - --
John R. Keller -
Executive Vice Pres. 1998 $119,423 - --
1997 90,000 - --
1996 93,462 - --
Dr. James Cole -
Sr. Vice Pres. - R&D 1998 $120,000 - --
1997 96,346 - --
1996 93,462 - --
- - --------------------------------------------------------------------------------
(1) Represents earned but unpaid salary through October 31, 1998. Mr. Gilbert
became the Company's President and Chief Executive Officer in October 1998.
(2) Includes repayment of earned and previously accrued salary through date of
his resignation on October 2, 1998.
(3) Includes earned but unpaid salary as well as a severance settlement through
October 2, 1998.
(4) Does not include earned but unpaid salary of $ 84,615 as of October 31,
1997.
(5) Represents partial repayment of earned and previously accrued salary.
(6) Does not include earned but unpaid salary of $111,538 as of October 31,
1996.
(7) Mr. Bachana resigned as President on October 2, 1998.
- - --------------------------------------------------------------------------------
16
(b) (1) Compensation pursuant to plans.
---------------------------------------------------
The current base salaries of Messrs. Gilbert, Cole, and Keller are $140,000,
$120,000 and $120,000, respectively. All of the officers are employed on an
at-will basis.
(2) Pension Table.
-----------------------
Not applicable.
(3) Alternative pension plan disclosure.
--------------------------------------------------
Not applicable.
(4) Stock and stock appreciation right plans.
--------------------------------------------------------
The Company's 1982 and 1988 incentive stock option plans provide for the
granting of stock options for 100,000 shares of the Company's common stock for
each plan.
(i) 1982 Stock Option Plan.
----------------------------------
The Company's 1982 Stock Option Plan authorizes the granting of "incentive stock
options" ("ISOs" - as defined under Section 422A of the Internal Revenue Code of
1986, as amended) in respect of a maximum of 100,000 shares to executives and
key employees of the Company. Pursuant to the terms of the 1982 Stock Option
Plan, ISOs in respect of a maximum of 40,000 shares can be granted during any
one fiscal year. The 1982 Stock Option Plan is administered by the Stock Option
Committee of the Board of Directors (the "Committee") which may grant
non-assignable options to executive officers and key employees in such manner,
and at such times, and in amounts, subject to a $100,000 limit, as the Committee
may, in its absolute discretion, determine. The members of the Committee are
Paul L Graziani, Bruce N. Whitman, and Richard R. Schilling, Jr. The option
price per share is the fair market value of the shares on the date the option is
granted and such option must be exercised by the optionee within ten years of
the date of grant. However, options granted to individuals who own more than 10%
of the shares of the Company must be exercised within five years of the date of
the grant and are exercisable at 100% of the fair market value of the shares.
No options were granted or exercised pursuant to the 1982 Stock Option Plan
during the Company's fiscal year ended October 31, 1998. No options can be
granted after 1992 under this plan.
(ii) 1988 Stock Option Plan.
-----------------------------------
The 1988 Stock Option Plan provides for the grant to employees of the Company
and its subsidiaries of either (x) ISOs or (y) non-qualified options. A total of
100,000 common shares have been reserved for issuance under the 1988 Stock
Option Plan. The 1988 Stock Option Plan terminates in 1998.
17
The 1988 Stock Option Plan is administered by the Committee, which determines
the grantees and the exercise price, designates the exercise periods, not to
exceed 10 years (5 years in the event that the grantee holds more than 10% of
the Company's equity), the time, manner, and form of payment upon exercise of an
option, designates whether the options are intended to be ISOs, and determines
other terms and conditions.
The 1988 Stock Option Plan provides that, in determining the participants to
whom options shall be granted and the number of shares to be covered by each
option, the Committee may take into account the nature of the services rendered
by the participant, his or her own present and potential contributions to the
Company's success, and such other factors as the Committee may deem relevant.
The aggregate fair market value of shares for which ISOs are granted to any
employee and exercisable for the first time by such employee during any calendar
year (under all stock option plans of the Company and its subsidiaries) may not
exceed $100,000. ISOs granted under the 1988 Stock Option Plan may not be
granted at a price less than the fair market value of the common shares on the
date of grant (or 110% of fair market value in the case of employees holding 10%
or more of the shares of the Company). Non-qualified options will not be granted
at exercise prices less than 85% of the fair market value of the common shares
on the date of grant.
An option granted under the 1988 Stock Option Plan is exercisable, during the
optionholder's lifetime, only by the optionholder and is not transferable by the
optionholder except by will or the laws of descent and distribution. If an ISO
optionholder retires, the optionholder's ISOs may be exercised to the extent
they were exercisable upon retirement, until the earlier of the ISOs specified
expiration date or three months from the date of the optionholder's retirement.
In the case of an ISO optionholder's cessation of employment by reason of
disability or death, the applicable carryover periods are one year and two
years, respectively.
Upon the occurrence of a Change in Control (as defined below), outstanding
options become immediately exercisable. During the six months after a Change in
Control, in lieu of exercising an option, a holder may surrender such options to
the Company in whole or in part and, upon such surrender, the Company must pay
to the holder in exchange therefor an amount of cash per share equal to the
aggregate of the excess of (i) the greater of (x) the average price per share
paid or to be paid for shares actually acquired in connection with such Change
in Control, (y) the price per share paid or payable in connection with any
tender offer for the Company's common shares leading to the Change in Control,
or (z) the mean between the high and low selling prices of such shares on the
date of the Change of Control, over (ii) the exercise prices of the shares
subject to such surrendered options. Officers of the Company may receive such a
cash payment only during a restricted period immediately following the public
release of information concerning the Company's earnings (but not within six
months of the grant of such option). During all other periods they may only
receive shares. A Change in Control means (i) consummation by any Person (as
defined in the Securities Exchange Act of 1934, as amended [the "1934 Act"])
other than the Company of (or the first purchase by any Person [other than the
Company] of any common shares under) a tender offer or exchange offer; (ii) the
acquisition by any Person (other than the Company) which theretofore legally or
beneficially (as defined in SEC Rule 13d-3) owned less than 20% of the then
outstanding common shares of the Company in a transaction or series of
transactions that results in such Person directly or indirectly owning legally
or beneficially 20% or more of the then outstanding common shares of the
Company; (iii) the consummation of any merger or consolidation with, or the sale
of substantially all the assets of the Company to, any Person; or (iv) any other
transaction pursuant to which any Person shall have the right to elect a
majority of the directors of the Company or which would be required to be
reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A promulgated
under the 1934 Act.
Three options were granted pursuant to the 1988 Stock Option Plan during the
Company's fiscal year ended October 31, 1998. These options were awarded on
January 29, 1998 to Messrs. Bachana, Cole, and Keller in equal amounts of 20,000
options each at an exercise price of $.38 and are immediately exercisable for a
period of 10 years, except for Mr. Bachana, whose exercise period is five years.
No options granted under the 1988 plan were exercised during fiscal 1998,
however Mr. Bachana's options expired as a result of his resignation on October
2, 1998. As of October 31, 1998 no further options are available for grant under
the 1988 stock option plan. The table required by SK Item 402(c) will be
included in the Company's definitive proxy material.
18
(c) Other Compensation.
-------------------------------
None.
(d) Compensation of Directors.
---------------------------------------
1. Standard Arrangements.
---------------------------------
Non-officer directors are compensated by the Company for services rendered to
the Company in connection with their directorial duties by the payment of $1,000
for each Board of Directors' meeting or Committee meeting actually attended.
2. Other Arrangements.
-----------------------------
None.
(e) Termination of employment and change of control
arrangement.
--------------------------------------------------------------
None.
19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- - --------------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
--------------------------------------------------------------
The following table sets forth information with respect to the only persons who,
to the best knowledge of the Company as derived from schedule 13d filed by such
persons, beneficially owned more than 5% of the common stock of the Company as
of January 20, 1999. Unless otherwise indicated below, each person included in
the table has sole voting and investment power with respect to all shares
included therein.
Name and Address Amount and Nature Percent of
of Beneficial Owner of Ownership Class (1)
- - --------------------------------------------------------------------------------
G.S. Beckwith Gilbert 846,000 (2) 32.99
66 Field Point Road
Greenwich, CT 06830
Data Probe, Inc. 579,400 (3) 22.59
49 East 21 Street
New York, NY 10010
- - --------------------------------------------------------------------------------
(1) For the purposes of this table, "percent of class" held by each
person has been calculated based on a total class equal to the sum
of (i) 2,511,600 shares of common stock issued and outstanding on
January 20, 1999 plus (ii) for such person the number of shares of
common stock subject to stock options or warrants presently
exercisable, or exercisable within 60 days after January 20, 1999,
held by that person.
(2) Mr. Gilbert has shared voting and investment power with respect to
70,000 shares included in the table above.
(3) Yitzhak N. Bachana, a Director of the Company, owns 57.22% of the
outstanding shares of Data Probe, Inc. and by virtue thereof may
be deemed to be the beneficial owner of more than 5% of the
Company's outstanding shares. This amount does not include 10,000
shares personally held by Mr. Bachana.
20
(b) Security Ownership of Management.
----------------------------------------------------
The following chart sets forth the number of the Company's
common shares, $0.01 par value, beneficially owned by all of the
directors of the Company and by the directors and officers of the
Company as a group as at January 20, 1999. Unless otherwise indicated
below, each person indicated in the table has sole voting and
investment power with respect to all shares included therein.
Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class (1)
- - --------------------------------------------------------------------------------
G.S. Beckwith Gilbert 846,000(2) 32.99
Yitzhak N. Bachana 10,000(3) .39
John R. Keller 124,500(4) 4.85
Richard R. Schilling,, Jr 3,000 0.11
James A. Cole 44,000(5) 1.71
Bruce N. Whitman 93,000 3.62
Paul L. Graziani 7,000 0.27
Officers and Directors
as a Group (7 persons) 1,127,500 43.97
- - --------------------------------------------------------------------------------
(1) For the purposes of this table, "percent of class" held by
each person has been calculated based on a total class
equal to the sum of (i) 2,511,600 shares of common stock
issued and outstanding on January 20, 1999 plus (ii) for
such person the number of shares of common stock subject
to stock options or warrants presently exercisable, or
exercisable within 60 days after January 20, 1999, held by
that person.
(2) Mr. Gilbert has shared voting and investment power with
respect to 70,000 shares included in the table above.
(3) Mr. Bachana is President, Chairman of the Board, and
majority shareholder of Data Probe, Inc. which owns
579,400 common shares of the Company which are excluded
from the foregoing table.
(4) Includes Mr. Keller's options to purchase an aggregate of
27,500 shares, all of which options are immediately
exercisable.
(5) Includes Dr. Cole's options to purchase an aggregate of
25,000 shares, all of which options are immediately
exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- - -------------------------------------------------------------------------
(a) Transactions with management and others.
----------------------------------------------------------
During the period between September 18, 1996 and June 6, 1997
the Company signed agreements with a private investor (the
"Investor") that provided for three loans of $100,000 each, of
21
which $200,000 was received in 1996 and $100,000 was received
in 1997. The three notes bore interest at a rate of 9% per
annum, and were payable by July 30, 1997. In addition, stock
warrants were awarded for the purchase of up to 1,400,000
common shares. On June 6, 1997, the Investor and his affiliate
purchased 700,000 shares for the amount of $500,000, paid by
$400,000 in cash and cancellation of the first $100,000 note.
On October 31, 1997, the Investor and two other directors
purchased 200,000 shares for the amount of $150,000. The
purchase of these shares validated a stock purchase warrant,
that gives the Iinvestor and his affiliates the right to
purchase 500,000 shares at $1.25 per share. This warrant
expires October 31, 2001, and is exercisable during the year
preceding expiration. On July 30, 1997, the remaining notes
totalling $200,000 were amended and restated by a new note
bearing interest at 9% per annum, with quarterly payments of
$25,000 plus accrued interest due on the last business day of
each calendar quarter, commencing December, 1997, with any
remaining balance being due July 30, 1999. The note is secured
by the Company's assets excluding its building.
During 1997, the Investor was elected a director of the
Company and Chairman of the Board and on October 2, 1998 the
Investor was elected to the additional post of President and
Chief Executive Officer.
In November 1998, and on January 11,1999, the Investor issued
promissory notes aggregating $300,000 which are payable
quarterly, maturing at various dates from June 30, 2000
through June 30, 2001. As of January 11, 1999, the total notes
payable due to the Investor totalled $475,000.
The Company had contracted with Data Probe, Inc., which is
majority owned by the Company's former president, to provide
certain research and development and sales support services
through July, 1996. The Company has incurred approximately
$60,442 for the year ended October 31, 1996 in consideration
for the aforementioned services.
For the years ended October 31, 1998 and 1997, the Company
reimbursed Datatab, Inc., a subsidiary of Data Probe, Inc.,
$47,683 and $65,763, respectively, for services rendered by an
employee of Datatab, Inc. for the Company.
On January 16, 1996, the Company signed a promissory note to
an officer for a $30,000 loan, which was secured by certain
test equipment. The note bore interest at 10% per annum, and
was paid in full on July 16, 1997. Total interest payments for
the year ended October 31, 1996 were $2,265. In addition, net
loans of $6,883 were made by another officer which had no
provision for interest and were paid on demand.
In addition, during 1998 the Company reimbursed Field Point
Capital Management Company, an entity affiliated with the
Investor/President, for services rendered by an employee of
Field Point Capital Management Company to the Company in the
amount of $31,500.
The Company is leasing space from Field Point Capital
Management Company, a company 100% owned by the Company's
President. From October 2, 1998 through January 31, 1999 the
Company paid rental of $4,000 to Field Point Capital
Management Company. Effective February 1, 1999, the Company
will pay Field Point Capital Management Company $2,000 per
month rent.
(b) Certain business relationships.
-------------------------------------------
None.
22
(c) Indebtedness of management.
------------------------------------------
None.
(d) Transactions with promoters.
-----------------------------------------
Not applicable.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- - --------------------------------------------------------------------------------
(a) 1.Financial Statements Page
------------------------------------------------ -------
Included in Part II of this report:
Independent Auditors' Reports F-1
Consolidated balance sheets as at
October 31, 1998 and 1997 F-4
Consolidated statements of
operations for the years ended
October 31, 1998, 1997 and 1996 F-5
Consolidated statements of
stockholders' equity F-6
Consolidated statements of cash
flows for the years ended
October 31, 1998, 1997 and 1996 F-7
Notes to consolidated financial
Statements F-8
Schedules for which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
(b) Reports Filed On Form 8-K
----------------------------------------
Form 8-K, changes in management,
Dated October 6, 1998
Form 8-K/A, Changes in Certifying
Accountant, dated October 28, 1998
24
(c) Exhibits
---------------
Exhibits No. Footnote
-------------------------------------------------------------------------
3 - 1 Certificates of Incorporation filed January 3, 1967 1
3 - 2 Certificate of Amendment filed August 4, 1969 1
3 - 3 Certificate of Amendment filed September 30, 1969 1
3 - 4 Certificate of Amendment filed July 17, 1970 1
3 - 5 Certificate of Amendment filed September 27, 1972 1
3 - 6 Certificate of Amendment filed September 27, 1972 1
3 - 7 Certificate of Amendment filed April 22, 1974 1
3 - 8 Certificate of Amendment filed November 23, 1976 1
3 - 9 Certificate of Amendment filed April 18, 1977 1
3 - 10 Certificate of Amendment filed July 11, 1979 1
3 - 11 Certificate of Amendment filed on November 12, 1981 2
3 - 12 Composite of Certificate of
Incorporation of the Company 2
3 - 13 Certificate of Amendment filed September 14, 1988 4
3 - 14 By-Laws 4
3 - 15 Certificate of Amendment filed August 16, 1983 5
3 - 16 Certificate of Change filed January 24, 1990 5
3 - 17 Composite Certificate of Incorporation through
January 24, 1990 5
10 - 1 1988 Bonus Pool Plan 4
10 - 2 The Company's 1982 Stock Option Plan 3
10 - 3 The Company's 1988 Stock Option Plan 4
10 - 4 Employment Agreement with David T. Zeiter
dated August 29, 1988 4
10 - 5 Severance Agreement with Yitzhak N. Bachana effective
October 2, 1998
14(a)-1 Form 8-K Changes in Management 7
16 Change in Certifying Accountant 6
21 List of Subsidiaries 2
(1) Document filed with the Company's Form S-1 filed with the
Securities and Exchange Commission on January 30, 1981
and incorporated herein by reference.
(2) Document filed with the Company's Form 10-K for the fiscal year
ended October 31, 1981 and incorporated herein by reference.
(3) Document filed as Exhibit A to the Company's Notice of Annual
Meeting of Shareholders and Proxy Statement dated November 2, 1982,
and incorporated herein by reference.
(4) Document filed with the Company's Form 10-K for the fiscal year
ended October 31, 1988 and incorporated herein by reference.
(5) Document filed with the Company's Form 10-K for the fiscal year
ended October 31, 1989 and incorporated herein by reference.
(6) Document filed with the Company's Form 8-K/A dated October 28, 1998
and incorporated herein by reference. (7) Document filed with the
Company's Form 8-K dated October 6, 1998 and incorporated herein by
reference.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MEGADATA CORPORATION
Dated: January 29, 1999. By: /s/ G. S. Beckwith Gilbert
-------------------------------------
G. S. Beckwith Gilbert, Chairman,
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 Company and in
the capacities and on the date indicated:
Dated: January 29, 1999. /s/ G. S. Beckwith Gilbert
--------------------------------------
G. S. Beckwith Gilbert, Chairman,
President, and Chief Executive Officer
Dated: January 29, 1999. /s/ Herbert E. Shaver
--------------------------------------
Herbert E. Shaver, Controller
(Principal Financial and Accounting
Officer)
Dated: January 29, 1999. /s/ John R. Keller
--------------------------------------
John R. Keller,
Executive Vice President and Director
Dated: January 29, 1999. /s/ Richard R. Schilling, Jr.
--------------------------------------
Richard R. Schilling, Jr., Director
Dated: January 29, 1999. /s/ Yitzhak N. Bachana
-----------------------------
Yitzhak N. Bachana, Director
Dated: January 29, 1999. /s/ Bruce A. Whitman
-----------------------------
Bruce A. Whitman, Director
Dated: January 29, 1999. /s/ Paul L. Graziani
-----------------------------
Paul L. Graziani, Director
26
Form 10-K--Item 14(a)(1) and (2)
Megadata Corporation and Subsidiaries
Index to Consolidated Financial Statements
Reports of Independent Auditors.......................................... F - 2
Consolidated Financial Statements:
Balance Sheets........................................................ F - 4
Statements of Operations.............................................. F - 5
Statements of Stockholders' Equity.................................... F - 6
Statements of Cash Flows.............................................. F - 7
Notes to Consolidated Financial Statements............................ F - 8
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.
F-1
Report of Independent Auditors
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, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 consolidated financial position of
Megadata Corporation and Subsidiaries at October 31, 1998, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Melville, New York
January 11, 1999
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Megadata Corporation:
We have audited the accompanying consolidated balance sheets of Megadata
Corporation and subsidiaries as of October 31, 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended October 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 financial position of Megadata Corporation
and subsidiaries at October 31, 1997 and the results of their operations and
cash flows for each of the two years in the period ended October 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ghassemi, Phoel & Co.
-----------------------------
Certified Public Accountants
Lynbrook, New York
January 21, 1998
F-3
Megadata Corporation and Subsidiaries
Consolidated Balance Sheets
OCTOBER 31
1998 1997
---------------- -----------------
ASSETS
Current assets:
Cash $ 17,731 $ 318,595
Accounts receivable 35,341 299,586
Inventories 266,916 448,775
Prepaid expenses and other current assets 58,931 87,561
----------- -----------
Total current assets 378,919 1,154,517
Property, plant and equipment, net 1,382,745 1,418,891
Other assets 33,326 21,888
=========== ===========
$ 1,794,990 $ 2,595,296
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 136,016 $ 155,989
Accrued expenses and taxes 354,439 120,475
Accrued expenses--related parties 13,898 89,215
Notes payable--related party 175,000 100,000
Deferred income 90,519 150,122
Installment note payable 33,230 11,592
Current portion of long-term debt 58,382 53,242
----------- -----------
Total current liabilities 861,484 680,635
Notes payable--related party, less current portion 25,000 100,000
Installment note payable, less current portion 37,894
Long-term debt 562,654 621,036
----------- -----------
1,487,032 1,401,671
Stockholders' equity:
Common shares--authorized 5,000,000 shares, par value
$.01 per share; issued 3,203,100 shares in 1998 and 1997 32,031 32,031
Additional paid-in capital 2,460,653 2,465,571
(Deficit) retained earnings (567,501) 313,248
----------- -----------
1,925,183 2,810,850
Less cost of 691,500 common shares held in treasury 1,617,225 1,617,225
----------- -----------
Total stockholders' equity 307,958 1,193,625
=========== ===========
$ 1,794,990 $ 2,595,296
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
Megadata Corporation and Subsidiaries
Consolidated Statements of Operations
YEAR ENDED OCTOBER 31
1998 1997 1996
--------------- ---------------- ---------------
Revenues:
Net sales $ 1,000,270 $ 1,406,231 $ 1,068,814
Service 52,973 72,721 43,147
--------------- ---------------- ---------------
Total revenues 1,053,243 1,478,952 1,111,961
--------------- ---------------- ---------------
Cost and expenses:
Cost of sales 857,122 766,980 924,303
Cost of service 72,897 73,045 96,166
Research and development 121,789 147,383 119,960
Research and development--related party - - 60,442
General and administrative expenses 634,242 461,941 435,000
Restructuring charge 170,140 - -
--------------- ---------------- ---------------
1,856,190 1,449,349 1,635,871
--------------- ---------------- ---------------
(Loss) income from operations (802,947) 29,603 (523,910)
Other income (expense):
Interest income 7,301 5,932 902
Interest expense (61,714) (67,537) (67,933)
Interest expense--related party (15,000) (21,475) -
Other income - - 8,567
--------------- ---------------- ---------------
Loss before income taxes (872,360) (53,477) (582,374)
Provision for income taxes 8,389 1,023 2,376
=============== ================ ===============
Net loss $ (880,749) $ (54,500) $ (584,750)
=============== ================ ===============
Net loss per common share--basic and diluted $ (.35) $ (.03) $ (.36)
=============== ================ ===============
Weighted average number of common shares
outstanding--basic and diluted 2,511,600 1,903,267 1,611,600
=============== ================ ===============
F-5
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Megadata Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity
Years Ended October 31, 1998, 1997, 1996
COMMON
SHARES
AFTER
DEDUCTING COMMON ADDITIONAL RETAINED LESS SHARES TOTAL
TREASURY SHARES PAID-IN EARNINGS HELD IN SHAREHOLDER'S
STOCK AMOUNT CAPITAL (DEFICIT) TREASURY EQUITY
------------ ------------- -------------- --------------- ---------------- ----------------
Balance at October 31, 1995 1,611,600 $ 23,031 $ 1,883,731 $ 952,498 $ 1,617,225 $ 1,242,035
Net loss for the year
ended October 31, 1996 -- -- -- (584,750) -- (584,750)
------------ ------------- -------------- --------------- ---------------- ----------------
Balance at October 31, 1996 1,611,600 23,031 1,883,731 367,748 1,617,225 657,285
Proceeds from issuance of
common stock 900,000 9,000 581,840 -- -- 590,840
Net loss for the year
ended October 31, 1997 -- -- -- (54,500) -- (54,500)
------------ ------------- -------------- --------------- ---------------- ----------------
Balance at October 31, 1997 2,511,600 32,031 2,465,571 313,248 1,617,225 1,193,625
Fees in connection with
issuance of common stock -- -- (4,918) -- -- (4,918)
Net losses for the year
ended October 31, 1998 -- -- -- (880,749) -- (880,749)
------------ ------------- -------------- --------------- ---------------- ----------------
Balance at October 31, 1998 2,511,600 $ 32,031 $ 2,460,653 $ (567,501) $ 1,617,225 $ 307,958
============ ============= ============== =============== ================ ================
F-6
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Megadata Corporation and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED OCTOBER 31
1998 1997 1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (880,749) $ (54,500) $ (584,750)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation 68,103 63,335 63,268
Loss on disposal of fixed assets 11,594 - -
Changes in operating assets and liabilities:
Accounts receivable 264,245 (207,731) (54,050)
Inventories 181,859 (49,133) 150,247
Prepaid expenses and other current assets 28,630 (18,979) 11,216
Other assets (11,438) - 2,164
Accounts payable (19,973) 18,622 38,431
Accrued expenses and other current liabilities 99,044 (54,271) 234,714
----------- ----------- -----------
Total adjustments 622,064 (248,157) 445,990
----------- ----------- -----------
Net cash used in operating activities (258,685) (302,657) (138,760)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (21,141) (5,633) (3,583)
----------- ----------- -----------
Net cash used in investing activities (21,141) (5,633) (3,583)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease (increase) in other assets--deferred mortgage
cost - 5,878 (25,539)
(Payments of) proceeds from notes
payable--related party - (36,883) 236,883
Proceeds from (payments of) installment note 37,122 (3,852) 2,725
Repayments of long-term debt (53,242) (48,556) (47,829)
Proceeds from sale of shares, net - 590,840 -
Payment of fees in connection with stock sale (4,918) - -
----------- ----------- -----------
Net cash (used in) provided by financing activities (21,038) 507,427 166,240
----------- ----------- -----------
(Decrease) increase in cash (300,864) 199,137 23,897
Cash--beginning of year 318,595 119,458 95,561
=========== =========== ===========
Cash--end of year $ 17,731 $ 318,595 $ 119,458
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Acquisition of equipment financed with notes payable
$ 22,410 $ - $ -
Cash paid during the year for:
Interest $ 79,103 $ 84,412 $ 68,914
Income taxes 1,456 2,360 1,196
F-7
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Megadata designs and manufactures specialized computer equipment with
applications in the aviation and communication industries. Its product line
includes: PASSUR (Passive Secondary Surveilance Radar) systems which monitor air
traffic in real time: SA9600 Wireless Radio Moderns: MURS, ALCX and RESNET
airline reservation access systems; as well as customized hardware and software
which enable the Company's products to fit its customers' specific requirements.
BASIS OF PRESENTATION
At October 31, 1998, the Company's current liabilities exceeded current assets
by approximately $483,000 and reported a net loss of approximately $880,000,
which includes restructuring related charges of $170,000 and an inventory
write-down of $196,000. Management will address this working capital deficiency
and operating losses by reducing operating expenses as outlined in its
restructuring plan (see Note 8), by utilizing cash proceeds from the proposed
sale of the building for working capital purposes and, if required, by obtaining
external financing.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Megadata
Corporation (the Company) and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is computed on
the straight-line method over the estimated useful lives of the asset.
F-8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." This standard establishes the
accounting for the impairment of long-lived assets, certain identifiable
intangibles and the excess of cost over net assets acquired, related to those
assets to be held and used in operations, whereby impairment losses are required
to be recorded when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets and certain identifiable intangibles that are expected to be disposed of.
REVENUE RECOGNITION POLICY
The Company recognizes revenue when products are shipped. Service revenues are
recognized on a straight-line basis over the service contract period.
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.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
F-9
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS/INCOME PER COMMON SHARE INFORMATION
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
Per Share." SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented and, where
appropriate, restated to conform to the SFAS No. 128 requirements.
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 was not assumed since the result would have been antidilutive.
EMPLOYEE STOCK OPTIONS
The Company has a stock option program which is more fully described in Note 12.
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion ("APB Opinion") No. 25, "Accounting for Stock Issued to
Employees." Under the Company's stock option program, options are granted with
an exercise price equal to the market price of the underlying common stock of
the Company on the date of grant. Accordingly, no compensation expense is
recognized in connection with the grant of stock options.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." The new standard defines 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,
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 Opinion No. 25,
but are required to disclose in the financial statement footnotes, pro forma net
(loss) income and per share amounts as if the Company had applied the new method
of accounting for all grants made beginning with 1995. SFAS No. 123 also
requires increased disclosures for stock-based compensation arrangements.
F-10
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which is
effective for years beginning after December 15, 1997. SFAS No. 131 established
standards for the way the public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographical areas, and major customers. Since SFAS No. 131 is not required to
be applied to interim financial statements in the initial year of adoption, the
Company is not required to disclosure segment information in accordance with
SFAS No. 131 until the fiscal year ending October 31, 1999, if applicable. In
the Company's first quarter of fiscal 2000 report, and in subsequent quarters,
it would present the interim disclosures required by SFAS No. 131 for both
fiscal 2000 and 1999, if applicable. Management does not expect that adoption of
SFAS No. 131 will have a significant impact on the Company's determination that
it operates in one business segment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATION
Certain items within the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
F-11
2. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consists of the following:
OCTOBER 31
1998 1997
----------------- ----------------
Prepaid real estate taxes $ 32,206 $ 28,073
Prepaid insurance 22,215 18,478
Other current assets 4,510 41,010
================= ================
$ 58,931 $ 87,561
================= ================
3. INVENTORIES
Inventories are summarized as follows:
OCTOBER 31
1998 1997
----------------- ----------------
Parts and raw materials $ 69,071 $ 103,251
Work-in-process 74,632 282,352
Finished goods 123,213 63,172
================= ================
$ 266,916 $ 448,775
================= ================
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
ESTIMATED
USEFUL OCTOBER 31
LIVES 1998 1997
----------------- ----------------- ----------------
Land $ 200,000 $ 200,000
Building 31.5 years 1,780,000 1,793,805
Building improvements 3-5 years 66,670 65,420
Factory equipment 5-10 years 2,279,846 2,241,645
Furniture, fixtures
and improvements 5-10 years 113,158 113,158
Automobile 3-5 years - 31,395
----------------- ----------------
4,439,674 4,445,423
Less accumulated depreciation 3,056,925 3,026,532
================= ================
$ 1,382,745 $ 1,418,891
================= ================
F-12
4. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
The Company recorded depreciation and amortization expense on the assets
included in property, plant and equipment of $68,103, $63,335 and $63,268 for
the years ended October 31, 1998, 1997 and 1996, respectively.
5. ACCRUED EXPENSES AND TAXES
Accrued expenses and other current liabilities consist of the following:
OCTOBER 31
1998 1997
----------------- ---------------
Accrued payroll, payroll taxes and benefits $ 50,904 $ 51,673
Accrued professional fees 34,000 18,000
Accrued restructuring charge 167,485 -
Other accrued liabilities 102,050 50,802
================= ===============
$ 354,439 $ 120,475
================= ===============
6. NOTES PAYABLE--RELATED PARTY
During the period between September 18, 1996 and June 6, 1997 the Company signed
agreements with a private investor (the "Investor") that provided for three
loans of $100,000 each, of which $200,000 was received in 1996 and $100,000 was
received in 1997. The three notes bore interest at a rate of 9% per annum, and
were payable by July 30, 1997. In addition, stock warrants were awarded for the
purchase of up to 1,400,000 common shares. On June 6, 1997, the Investor and his
affiliate purchased 700,000 shares for the amount of $500,000, paid by $400,000
in cash and cancellation of the first $100,000 note.
On October 31, 1997, the Investor and two other directors purchased 200,000
shares for the amount of $150,000. The purchase of these shares validated a
stock purchase warrant, that gives the investor and his affiliates the right to
purchase 500,000 shares at $1.25 per share. This warrant expires October 31,
2001, and is exercisable during the year preceding expiration. On July 30, 1997,
the remaining notes totalling $200,000 were amended and restated by a new note
bearing interest at 9% per annum, with quarterly payments of $25,000 plus
accrued interest due on the last business day of each calendar quarter,
commencing December, 1997, with any remaining balance being due July 30, 1999.
The note is secured by the Company's assets excluding its building.
F-13
6. NOTES PAYABLE--RELATED PARTY (CONTINUED)
During 1997, the Investor was elected a director of the Company and Chairman of
the Board and on October 2, 1998 the Investor was elected to the additional post
of President and Chief Executive Officer.
In November 1998, and on January 11,1999, the Investor issued promissory notes
aggregating $300,000 which are payable quarterly, maturing at various dates from
June 30, 2000 through June 30, 2001. As of January 11, 1999, the total notes
payable due to the Investor totalled $475,000.
7. DEFERRED INCOME
Deferred income represents advances received on maintenance agreements and
deposits from customers for equipment that will be shipped in the next fiscal
year.
8. RESTRUCTURING RELATED CHARGES
In October 1998, the Company announced a Restructuring Plan in which it will
focus its attention primarily on its PASSUR line of passive radar systems. As
part of this restructuring, the Company will move its corporate headquarters and
national sales office to Greenwich, Connecticut. The Company has offered for
sale its building in Bohemia, New York and will move its manufacturing and
research and development facility to a more modern location in the same area.
The Restructuring Charges include exit costs of $93,000 related to the building,
severance costs of $53,000, asset write-downs of $24,000 relating to assets to
be sold or abandoned, and inventory write-downs of $196,000 associated with the
elimination of certain nonstrategic inventory and product lines (which costs are
included in costs of sales).
9. INSTALLMENT NOTES PAYABLE
Notes due on financing of insurance premiums and equipment purchases bearing
interest at 8.25% and 12.5% per annum, with the final payments due November,
2000 and August 2001, respectively.
F-14
10. LONG-TERM DEBT
The Company has a mortgage on its building in Bohemia, New York with the
Roosevelt Savings Bank. The mortgage matures on June 1, 2001 and requires annual
payments based upon a 10-year amortization schedule. Interest is at a fixed rate
of 9.25%. Annual principal repayments of long-term debt are as follows:
October 31:
1999 $ 58,382
2000 64,017
2001 498,637
=================
Total $ 621,036
=================
11. INCOME TAXES
Components of the provision for income taxes are as follows:
YEAR ENDED OCTOBER 31
1998 1997 1996
---------------- ---------------- --------------
Current:
States and local $ 8,389 $ 1,023 $ 2,376
================ ================ ==============
Total $ 8,389 $ 1,023 $ 2,376
================ ================ ==============
At October 31, 1998, the Company has available a federal net operating loss
carryforward of approximately $5,300,000 for income tax purposes to offset
future taxable income and which will expire in various years from 2006 through
2018. The Company has $25,000 of general business tax credit carryforwards
available which expire in various years through 2008. The Company has provided a
full valuation allowance on the net deferred tax asset which primarily consists
of the net operating loss carryforwards and tax credit available.
F-14
12. STOCK OPTIONS
The Company's 1982 and 1988 stock option plans provide for the granting of stock
options for up to 100,000 shares of the Company's common stock for each plan.
The 1982 plan provides that only 40,000 options can be granted during any one
fiscal year. The 1988 plan provides that no individual can receive in excess of
$100,000, as determined by the fair market value of options during any calendar
year. Under both plans, the option price per share is the fair market value at
date of grant, except on the issuance of non-qualified options pursuant to the
1988 plan in which the option price is not less than 85% of the fair market
value of the shares. 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 shares. As of October 31, 1998 no further options are available for grant
under the 1982 and 1988 stock option plans.
The Company has elected to comply with APB Opinion No. 25, and related
interpretations in accounting for its employee stock options because the
alternate fair value accounting provided for under SFAS No. 123, "Accounting for
Stock-Based Compensation" requires use of option valuation models which were not
developed for use in valuing employee stock options. Under APB Opinion No. 25,
no compensation expense is recognized in connection with the grant of stock
options under the stock option plans.
In accordance with SFAS No. 123, pro forma information regarding net (loss) and
(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 1998, 1997 and 1996, respectively; risk-free interest rates of
5.0%, no dividend yields on the Common Stock, volatility factors of the expected
market price of the Company's Common Stock of 1.029 and the weighted average
expected life of the options is approximately 8 years.
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 the 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.
F-15
12. STOCK OPTIONS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
COMMON 1998
------------------
Pro forma net (loss) ($ 902,000)
==================
Pro forma net (loss) per common share--basic and
diluted $ (.36)
==================
Information with respect to options during the years ended December 31, 1998,
1997 and 1996 under SFAS No. 123 is as follows:
1998 1997 1996
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- - ------------------------------- ------------- -------------- ------------- ------------- ------------- -------------
Options outstanding--beginning
of year 25,000 $ 1.35 25,000 $1.35 55,000 $1.73
Options granted: -
Incentive options 60,000 .38 - - -
Options canceled and expired (32,500) (1.13) - - (30,000) (2.04)
------------- -------------- ------------- ------------- ------------- -------------
Options outstanding--
end of year 52,500 $.38 25,000 $1.35 25,000 $1.35
============= ============== ============= ============= ============= =============
Options exercisable at
end of year 52,500 $ .38 25,000 $1.35 25,000 $1.35
============== ============= =============
============= ============= =============
Weighted average fair value
per share of options
granted during the year $.35
=============
Exercise prices for stock options outstanding and for options exercisable as of
October 31, 1998 were as follows:
NUMBER RANGE OF
NUMBER OF OPTIONS EXERCISE
OF OPTIONS EXERCISABLE PRICES
- - ------------------- --------------------- ---------------------
52,500 52,500 $ .38
=================== ===================== =====================
F-16
12. STOCK OPTIONS (CONTINUED)
The weighted average remaining contractual life of the above-described stock
options is 8 years.
Shares of common stock reserved for future issuance as of October 31, 1998 are
as follows:
NUMBER
OF SHARES
------------------
Stock options 52,500
Warrants issued 500,000
==================
552,500
==================
13. MAJOR CUSTOMERS
During the fiscal year ended October 31, 1998, three customers accounted for
approximately 28%, 14% and 10% of revenues. During the fiscal year ended October
31, 1997, three customers accounted for approximately 27%, 22% and 14% of
revenues. During the fiscal year ended October 31, 1996, one customer accounted
for approximately 25% of revenues. The Company had export sales of approximately
$93,000, $173,000 and $234,000 in fiscal 1998, 1997 and 1996, respectively.
14. RELATED PARTY TRANSACTIONS
The Company had contracted with Data Probe, Inc., which is majority owned by the
Company's former president, to provide certain research and development and
sales support services through July, 1996. The Company has incurred
approximately $60,442 for the year ended October 31, 1996 in consideration for
the aforementioned services.
For the years ended October 31, 1998 and 1997, the Company reimbursed Datatab,
Inc., a subsidiary of Data Probe, Inc., $47,683 and $65,763, respectively, for
services rendered by an employee of Datatab, Inc. for the Company.
On January 16, 1996, the Company signed a promissory note to an officer for a
$30,000 loan, which was secured by certain test equipment. The note bore
interest at 10% per annum, and was paid in full on July 16, 1997. Total interest
payments for the year ended October 31, 1996 were $2,265. In addition, net loans
of $6,883 were made by another officer which had no provision for interest and
were paid on demand.
F-17
14. RELATED PARTY TRANSACTIONS (CONTINUED)
In addition, during 1998 the Company reimbursed Field Point Capital Management
Company, an entity affiliated with the Investor/President, for services rendered
in the amount of $31,500.
The Company is leasing space from Field Point Capital Management Company, a
company 100% owned by the Company's President. From October 2, 1998 through
January 31, 1999 the Company paid rental of $4,000 to Field Point Capital
Management Company. Effective February 1, 1999, the Company will pay Field Point
Capital Management Company $2,000 per month rent.
15. ROYALTY AGREEMENT
During March of 1997, the Company entered into a license agreement whereby the
Company was granted the exclusive right and license worldwide to manufacture and
sell PASSUR and ATMS systems for use with airline dispatch arrangements and in
other aircraft flight tracking. The Company was also granted an exclusive
license to sell PASSUR systems for noise applications in the United States. The
company shall pay a royalty based on the number of PASSUR systems sold, subject
to a minimum annual royalty of $50,000. This license agreement is in effect
until the date of expiration of the last PASSUR patent to expire.
16. YEAR 2000 (UNAUDITED)
The Company has diligently studied the impact of the Year 2000 on the
hardware and software it sells as well as its own internal systems.
The Company's top technical and development personnel have carefully reviewed
the Company's PASSUR hardware product line and related software and are
satisfied that they are Year 2000 compliant.
A review of Year 2000 compliance for the other products sold by the Company,
radio modems and protocol converters, is continuing and should be completed by
the middle of 1999.
A thorough review of the Company's internal systems is continuing. The Company
is also working with suppliers and service providers with whom it does business
to determine their Year 2000 compliance and to minimize any impact their
noncompliance (if any) would have on the Company. These studies are also
scheduled for completion by the middle of 1999.
16. YEAR 2000 (UNAUDITED) (CONTINUED)
To date, the Company has not found any area where a Year 2000 compliance problem
with either its internal systems or outside providers could have a material
adverse impact on any part of the Company's business operations.
F-18