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, 2005
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period from ___ to ___
Commission file number 0-7642
MEGADATA CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 11-2208938
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
47 ARCH STREET, GREENWICH, CT 06830
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(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: 203-622-4086
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Securities registered pursuant to
Section 12(b) of the Act: NONE
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Securities registered pursuant to
Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Indicate by check mark if the registrant is a well-known seasonded issuer, as
defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. YES [ ] NO [X]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of " accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of the voting shares of the Registrant held by
non-affiliates as of April 30, 2005 was $ 250,000
The number of shares of common stock, $0.01 par value,
outstanding as of January 25, 2006 was 4,088,115
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 2005 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange Commission
within 120 days of October 31, 2005, are incorporated by reference into Part III
of this Form 10-K.
Page 1 of 66
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
COMPANY BACKGROUND
Megadata Corporation (the "Company", "Megadata", "we", "our") is a New York
corporation founded in 1967. The Company conducts its business in the United
States, Canada, Europe, and Japan. The Company's offices are located at 47 Arch
Street, Greenwich, CT, 06830 and 35 Orville Drive, Bohemia, New York, 11716.
The Company's principal business is the delivery of unique flight information,
decision support software, analytics, and web-delivered collaborative decision
tools to the aviation industry and organizations that serve, or are served by,
the aviation industry.
The Company has what it believes is a unique database of flight information,
powered by a network of Company-owned passive radars which also incorporate
several other data sources. This network when combined with our suite of data
products, web-based software, and web-based collaborative decision tools,
provides airlines and airports services that the Company believes are usually
otherwise unavailable. The Company now provides services to over 40 airports and
dozens of airlines and continues to expand services to each customer in this
traditional, "industrial", market. Concurrently, the Company is taking its
specialized content and software, the credibility of which has been established
by its large customer base of airports and airlines, and marketing it to the
"non-industrial" market - corporate aviation and its ancillary industries, as
well as to the online travel services market. This market includes thousands of
organizations with a need for more accurate flight information and software
tools. In addition, the Company has created and implemented collaborative
web-based software which allows all of its customers, both industrial and
non-industrial, to instantly share information to improve individual and joint
decision making. The Company continues to market with an expanding internal
sales and marketing organization as well as through premier distributors.
Revenues during Fiscal Year (FY) 2005 increased by approximately 22%, or
$698,000, to $3,809,000 from $3,111,000 in FY 2004, while total costs and
expenses in FY 2005 increased by only about 5% or $194,000 to $4,315,000 from
$4,121,000 in FY 2004.
FORWARD LOOKING STATEMENTS
The information provided in this Annual Report on Form 10-K (including, without
limitation, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" "Liquidity and Capital Resources" and "Risk Factors"
below) contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 regarding the Company's future plans,
objectives, and expected performance. The words "believe," "may," "will,"
"could," "should," "would," "anticipate," "estimate," "expect," "project,"
"intend," "objective," "seek," "strive," "might," "likely result," "build,"
"grow," "plan," "goal," "expand," "position," or similar words, or the negatives
of these words, or similar terminology, identify forward-looking statements.
These statements are based on assumptions that the Company believes are
reasonable, but are subject to a wide range of risks and uncertainties, and a
number of factors could cause the Company's actual results to differ materially
from those expressed in the forward-looking statements referred to above. These
factors include, among others, the uncertainties related to the ability of the
Company to sell data subscriptions from its PASSUR(R) network and to make new
sales of its PASSUR(R) and other product lines (due to potential competitive
pressure from other companies or other products), as well as the current
uncertainty in the aviation industry due to terrorist events, the war on terror,
and airline bankruptcies. Other uncertainties which could impact the Company are
uncertainties with respect to future changes in governmental regulation and the
impact that such changes in regulation will have on the Company's business.
Additional uncertainties are related to a) the Company's ability to find and
maintain the personnel necessary to sell, manufacture, and service its products,
b) its ability to adequately protect its intellectual property, c) its ability
to secure future financing and d) its ability to maintain the continued support
of its significant shareholder. Readers are cautioned not to place undue
reliance on these forward-looking statements, which relate only to events as of
the date on which the statements are made and which reflect management's
analysis, judgments, belief, or expectation only as of such date. The Company
undertakes no obligation to publicly update any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
Page 2 of 66
GENERAL
The Company believes financial performance in the aviation industry is being
adversely affected by a lack of accurate flight information. The Company
believes its business opportunities come from addressing the following specific
problem areas in the aviation industry:
1. A lack of standardized, timely, accessible, and accurate information
in the aviation industry. The business community has come to expect
a sophisticated delivery of rich information in pace-setting
industries such as banking, news, and health care.
In aviation, valuable information exists, but is compartmentalized
among its various constituencies, including government air traffic
regulators, airlines, airports, fixed based operators, corporate
aviation departments, and passengers. As such, any aviation-related
organization must contend with multiple conflicting sources of
information (often within the same organization), or a lack of
access to the information at all.
The Company's business opportunities arise from the ability to
market the PASSUR(R) Information Network, a unique integrated
database of otherwise hard-to-access or compartmentalized
information. The Company believes the information provided by this
network is unique, and makes available a standardized comprehensive
data set, accessible to all aviation constituencies. The PASSUR(R)
passive radar network is integral to this database.
2. The aviation industry's lack of a standardized information
technology platform for accessing information. Megadata's Web
"dashboard" technology creates a single, "one-source" platform for
accessing valuable information from the PASSUR(R) Information
Network. The Company provides standardized access to the PASSUR(R)
database through data feeds, web application software, and
collaborative decision making tools.
BUSINESS STRATEGY
Over the past several years, Megadata has been developing and selling
information and software from its unique flight database (powered by the
PASSUR(R) passive radar network) to airlines and airports, while simultaneously
investing in growing the radar network and continuously integrating additional
information sets into the database. Because of its investments in this database
and web-dashboard technologies, and the "vetting" of both by its traditional
"industrial" airline and airport markets, Megadata is now taking new versions of
the information and software products to the "non-industrial" segment of the
aviation markets: corporate aviation and its ancillary industries and online
travel services. The Company has created and continues to create collaborative
web-based software that allows all of its customers, both industrial and
non-industrial, to instantly share information to improve individual and joint
decision making, creating additional value for both its traditional and new
markets. Our business strategy consists of:
1. LEAD AND CONTINUE TO DEVELOP THE INDUSTRY STANDARD FOR ACCURATE,
TIMELY FLIGHT INFORMATION WITH, WHAT IT CONSIDERS TO BE, A
ONE-OF-A-KIND PREMIUM DATABASE - THE PASSUR INFORMATION NETWORK(TM).
Megadata's flight information is a combination of multiple data sets
to include information derived from the network of passive radars
(PASSUR(R)), located throughout the country and in different parts
of the world. Currently, PASSUR(R) coverage is available for 37 of
the top 40 airports in the United States, including all of the top
10. In addition, nine of the top domestic and international airlines
utilize the information and software products derived from the
PASSUR(R) network. For example, leading airlines use Megadata's
estimated times of arrival (ETAs) to power their internal flight,
gate, and reservations systems to improve the overall operational
efficiency of the airline and to provide more reliable customer
service. The Company has 65 PASSUR(R) systems installed worldwide.
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2. LEAD THE DEVELOPMENT OF WEB-BASED APPLICATIONS, POWERED BY THE
PASSUR INFORMATION NETWORK, TO ITS TRADITIONAL INDUSTRIAL AVIATION
CUSTOMERS - AIRLINES, AIRPORTS, AND THE GOVERNMENT. These
organizations set the standard for how flight information should be
used throughout both the industrial and non-industrial markets.
These organizations, for whom Megadata has developed Web-delivered
software services, utilize the PASSUR(R) database as their source of
information, both live and archived, and as a communications and
collaborative decision-making platform within the industrial sector.
For example, numerous airports now use the Company's web tools to
manage landing fee revenue.
3. LEAD THE DEVELOPMENT OF WEB-BASED APPLICATIONS TO THE LARGER,
NON-INDUSTRIAL AVIATION MARKETPLACE. These organizations include
corporate security and corporate travel departments, corporate
flight aviation departments, fixed-based operators (FBOs), travel
management companies, limousine operators, and other ancillary or
support organization that require accurate information, whether
real-time or through historic analysis, to improve their decision
making. For example, fixed-based operators are using Megadata's web
reports to refine their marketing efforts related to fuel sales to
corporate aircraft.
4. LEAD THE AVIATION MARKET IN THE DEVELOPMENT AND DELIVERY OF
COLLABORATIVE WEB SERVICES THAT ORGANIZE WHAT IS CURRENTLY
FRAGMENTED INFORMATION WITHIN THE INDUSTRIAL AND NON-INDUSTRIAL
MARKETS. Megadata is creating PASSUR(R) Customer Networks that
bridge industrial and non-industrial aviation players, allowing
airports, airlines, air traffic organizations, and other airport
tenants to access live, relevant information that helps to improve
the overall efficiency of the aviation sector. For example, at John
F. Kennedy International, LaGuardia, and Dulles International
Airports, the airlines, the Federal Aviation Administration (the
"FAA"), airport operations, and FBOs use Megadata's award-winning
OPSnet(TM) Internet Communicator to consolidate, organize, and
disseminate information, and manage collaborative tasks such as
aircraft deicing during regular and particularly during irregular
operations.
5. DISTRIBUTE THE COMPANY'S SERVICES THROUGH THE PASSUR DISTRIBUTION
NETWORK OF LEADING AVIATION ORGANIZATIONS AND SYSTEM INTEGRATORS. As
Megadata expands into new markets, it sells through its internal
sales and marketing organization as well as through premium
distributors.
CUSTOMERS AND HOW THEY USE MEGADATA SERVICES
The Company provides its traditional customer base of more than 40 airports,
including some of the largest in the world, as well as dozens of airlines, plus
its new non-industrial customer with the following capabilities:
Designed to improve and manage revenue:
o Web-based landing fee tools that enable airports, airlines and
FBOs to manage fees with fewer resources, greater accuracy, greater
transparency and accountability, and generate additional landing fee
revenue for airports.
o Enhanced collaborative decision-making tools that enable airlines
to maximize schedule completion during irregular operations, thereby
protecting otherwise lost revenue, and enable airports to realize a
higher rate of revenue-generating activity, such as landing and
related handling fees, through higher rates of airport utilization
during irregular operations.
o Web-based marketing tools that allow its non-industrial customers
to instantly identify new marketing opportunities by accessing the
PASSUR(R) Information Network of unique flight information.
Designed to reduce costs through more efficient use of resources (for
operational applications):
o Accurate arrival data and ETAs for more effective management of
flight operations. With better arrival information, our customers
more effectively manage flights during "push," or busy, periods.
This tool enhances productivity of ground personnel and support
functions by complementing gate management and staff scheduling
programs, and has generated significant documented financial
returns.
Page 4 of 66
o Accurate arrival information for airlines and airports at the
local or "station" level to help manage diversions and connections,
and reduce the incidence of aircraft arriving at a gate without the
handling resources in place (so called "gate unmets"). A more
accurate picture of the terminal airspace, more accurate ETAs, and
views of current holding patterns also enable airlines to make
better decisions at the "system" level (airline command centers).
o Accurate arrival information for non-industrial customers to help
more effectively manage their resources, e.g. security details,
limousines, line and customer service, etc.
o Analytic reporting tools to improve operational performance by
providing affordable and easily distributed access to the PASSUR(R)
Information Network of operational information. For example,
airports use PASSUR(R) web reports to maximize efficient airfield
utilization; airlines use them to assess on-time performance and
measure other metrics of operational efficiency.
Designed to improve customer service:
o The most accurate arrival and ETA information available,
particularly during irregular operations, to provide the most
updated flight status to passengers. The ETA information can be
utilized to provide compliance with the aviation community's stated
goal of providing timely and accurate flight information to
customers.
o Web-based flight-tracking tools to improve public relations by
providing the surrounding airport communities with live flight
traffic and information as part of airport noise mitigation and
community outreach programs.
o Flight information to help enforce the laws and regulations
regarding noise levels emitted by an aircraft. When used as part of
an airport noise monitoring system, airport managers and noise
control officers can correlate noise events in the local community
with specific airline flight tracks.
Designed to improve safety, security, or emergency response:
o Replay flight events for analysis. The playback of flight tracks
and safety incidents allows airlines to more thoroughly analyze
those events, enhancing their programs for improving the efficiency
and safety of operations.
o Real-time situational awareness and an immediate replay capability
enable airlines and government agencies to be fully informed and
proactive in responding to emergency events.
PRODUCTS AND SERVICES
1. Flight data products fed directly to customers' information systems
and to PASSUR(R) distributors. These data feeds, which segment
different portions of the PASSUR(R) Information Network depending on
customer needs, link directly to customer systems or to customers
through third-party data integration systems. These feeds are
segmented into:
a. RightETA(TM), patent pending, which provides ETA and flight
status feeds for real-time schedule management, landing fee
feeds, and activity reports for operational analysis.
b. FlightSure(TM), patent pending, provides information and
software for integrated aircraft Noise Operations Monitoring
systems (NOMS).
2. Application software services (most of which are web-delivered and
web-hosted):
a. PASSUR(R) Pulse(TM) Revenue, patent pending, provides a
web-based live and archived detailed, accurate landing report
for airlines, airports and FBOs, creating maximum revenue
efficiency and create transparency and equity in the
distribution of landing fees among airport users.
b. PASSUR(R) Pulse(TM) Operations, patent pending, provides
web-based access to the PASSUR(R) database of operational
information for activity reporting and analysis.
c. PASSUR(R) inSight(TM), patent pending, is a
takeoff-to-landing, web-based tool that provides PASSUR(R)
terminal area information on a national flight tracking
platform. PASSUR(R) inSight is packaged with other PASSUR(R)
web-based applications to provide a premium flight tracking
"visual" capability.
d. AirportMonitor(TM), patent pending, is a web-based application
that provides the communities surrounding an airport with live
flight tracking and information as part of the airport's
public relations, community outreach and noise mitigation
programs.
Page 5 of 66
e. FlightPerform(TM), patent pending, is a live airspace analysis and
awareness system using more traditional air traffic-style displays
and tools, used by airports and airlines for real-time dispatch,
arrivals and facilities management. FlightPerform is the industry
"gold standard" for those customers that need the most dependable,
reliable capability to guide their operations in real time.
f. RapidResponse(TM), patent pending, provides the ability to
immediately replay flight events with a high level of precision,
specificity and detail, thereby enabling airlines and airports to
improve the efficiency and safety of operations. Real-time
situational awareness and immediate replay enable customers to be
fully informed and proactive in responding to emergencies. The
Company believes this product has Homeland Security Defense and
other government applications, and it is being marketed primarily
through premier government system integrators.
3. Collaborative Web "portal" tools that provide instant access to critical
information within organizations, and the ability to share and receive
information between organizations. These organizations form the foundation
of our PASSUR(R) Customer Network.
a. PASSUR(R) Portal(TM), patent pending, provides a dashboard of
real-time vital information on the status of the airport operation,
instant two-way communications, and direct access to all other
PASSUR(R) web-based software tools.
b. PASSUR(R) FlightLink(TM), patent pending, is a web-based, wireless,
flight information display system linking the airport, airline, and
the traveler, in the terminal and on the Web. This system can be
accompanied by our PASSUR(R) Kiosks(TM) and LCDs, what we believe
are state-of-the-art kiosks and flat panel display screens that are
powered by our software applications, such as PASSUR(R) FlightLink.
c. OPSnet(TM), patent pending, is an internet-based application
designed to improve airport/airline/FAA coordination through instant
communications, information sharing and collaborative decision
making among all parties during costly disruptions caused by
weather, security, and emergencies.
d. FlightNewsLive(TM), patented in 2004, is the first passenger
information display system (FIDS) with live graphics of terminal and
en-route airspace traffic, national weather, and automated
explanations for delays.
HOW MEGADATA GENERATES REVENUE
The Company generates revenues by selling; (1) subscription-based information
and software products or (2) equipment - a PASSUR(R) radar system (included in a
sale is an annual maintenance contract and an additional charge for
installation) or PASSUR(R) Kiosks or LCDs, and (3) consulting services. Under
the subscription model, the customer signs a minimum one-year contract for
access to the information services. The agreement also provides that the
information from the PASSUR(R) Information Network cannot be resold, used by
others, or used for unauthorized purposes. When PASSUR(R) radar systems are
sold, we retain both proprietary and distribution rights to the data generated
from such systems and, subject to certain exceptions, we can distribute such
data at the Company's sole discretion, with few exceptions. Consulting services
generally accompany the sale of our collaborative decision tools.
EMPHASIS ON INFORMATION SECURITY
The Company has incorporated the strictest levels of security with respect to
both the information generated by the PASSUR(R) Information Network and the
resulting end users.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Not applicable.
(C) NARRATIVE DESCRIPTION OF BUSINESS
The Company's principal business is the delivery of flight information,
web-delivered software, and web-delivered collaborative decision tools to the
aviation industry and organizations which serve, or are served by, the aviation
industry.
Page 6 of 66
1. PRODUCTS
The Company has transitioned from being a supplier of passive surveillance
systems (a capital equipment business) to a provider of subscription-based
information and decision support software products. These products leverage the
extensive passive surveillance data available through the PASSUR(R) Network to
provide application-specific efficiency tools to airlines, airports and related
commercial businesses.
(I) THE PASSUR SYSTEM
The PASSUR(R) system, together with associated data and software products,
is a reliable and cost effective source of time-critical and valuable
information about the position and flight path of aircraft. PASSUR(R) is an
important ingredient in the database that drives all present and future data,
information, and Company solution products. The Company, under an exclusive
license for patented technology owned by a third party together with its own
patents and patents pending, has used its proprietary hardware, data, and
software to develop an enhanced line of products. These PASSUR(R) systems
receive and process aircraft identification from aircraft transponder
transmissions interrogated by existing secondary surveillance radars.
Under the exclusive license agreement dated as of March 27, 1997, as
amended on October 28, 1999 and February 27, 2001, between a third party and the
Company, the Company is granted the exclusive right and license worldwide to
manufacture and sell PASSUR(R) systems for use with airline dispatch
arrangements and in other aircraft flight tracking systems. The Company is also
granted an exclusive worldwide license to sell PASSUR(R) systems and/or data
subscriptions for noise applications. The Company pays a royalty based on the
number of PASSUR(R) systems sold and/or installed and generating subscription
revenues subject to a minimum annual royalty of $75,000. This license agreement
is effective until the date of expiration of the last PASSUR(R) patent to
expire, which occurs in 2013.
(II) CUSTOM HARDWARE AND SOFTWARE ACTIVITIES
The Company is not involved in specialized research and development
projects sponsored and paid for by customers.
2. SERVICES
(I) INFORMATION SERVICES FROM THE PASSUR NETWORK
Information services include timely, accurate, user-friendly information
important to the efficient operation of airlines and airports. The information
services leverage the PASSUR(R) Network, and are tailored to address specific
customer requirements, many of which can only be satisfied by information
generated from the PASSUR(R) Network. The services provide airline and airport
customers with specific and timely information needed to efficiently manage
their airport, airside, and ground operations. The ETAs generated from the
PASSUR(R) system are an example of information services currently being used
throughout the customer network.
(II) DECISION SUPPORT SOFTWARE FROM THE PASSUR NETWORK
Decision support tools and software solutions have been developed to
improve quality and operating efficiency of specific airline and airport
operations. OpsNet is an example of a decision support service.
(III) MAINTENANCE SERVICES
The Company offers maintenance services pursuant to contractual
arrangements or an "on-call" basis. "On-call" services are provided on a time
and material basis.
Page 7 of 66
3. SOURCES OF RAW MATERIALS
The Company obtains its raw materials from component distributors and
manufacturers throughout the United States. The Company has multiple sources of
supply for a majority of its components.
4. DEPENDENCE ON CERTAIN CUSTOMERS
During the fiscal years ended October 31, 2005 and 2004, one customer
(Continental Airlines) accounted for approximately 18% and 23% of the Company's
revenues, respectively. During the fiscal year ended October 31, 2003, two (2)
customers, Continental Airlines and Aviation Development Council, accounted for
approximately 37% of the Company's revenues (24% and 13% respectively).
5. BACKLOG FOR SUBSCRIPTION REVENUE AGREEMENTS
The Company's committed backlog for subscription and maintenance services
at October 31, 2005 amounted to approximately $2,927,000. Of this amount,
$2,122,000 is scheduled for delivery or performance before October 31, 2006 and
the balance of $805,000 is scheduled for delivery or performance in subsequent
years. The backlog at October 31, 2004 and 2003 amounted to approximately
$3,768,000 and $1,781,000 respectively. Backlog consists of written purchase
orders or contracts.
6. COMPETITION
The PASSUR(R) applications are, to the best of the Company's knowledge,
relatively unique, however, there is an increase in availability of other forms
of flight tracking products. Depending on the end use of the Company's products,
the Company's primary competitors include Dimensions International, Lochard Pty,
Ltd, Rannoch Corporation and Sabre, Inc. The Company also sells certain data
solutions through systems integrators, including BAE, Inc, and Bruel & Kjaer
Inc., some of these integrators may also sell products that are competitive with
those offered by the Company. Most of these companies are significantly larger
than the Company, and have larger sales forces and greater financial resources
than the Company.
7. RESEARCH AND DEVELOPMENT
The Company's Research and Development ("R&D") efforts are primarily
focused on continued software and hardware enhancements, as well as maintenance
to the existing PASSUR(R) systems and related suite of software applications.
R&D is also focused on developing and maintaining the new software applications
and decision support products designed to expand the Company's software suite of
products.
During the fiscal year ended October 31, 2005, the Company incurred
approximately $393,000 in expenditures for R&D, none of which were customer
sponsored. In the fiscal years ended October 31, 2004 an 2003, approximately
$393,000 and $403,000, respectively, was expended for R&D, none of which was
customer sponsored.
8. ENVIRONMENTAL COSTS
The Company is not aware of any environmental issues which would have a
material adverse effect on future capital expenditures or current and future
business operations.
9. EMPLOYEES
As of October 31, 2005, the Company employed 14 full time employees,
including 6 officers.
Page 8 of 66
(D) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The following table sets forth the dollar amounts and the percentages
attributable to the sale by the Company of its products and services during the
past three fiscal years in and outside the United States:
NET REVENUES 2005 2004 2003
- ------------ ------------------- ------------------- -------------------
Domestic $3,635,000 95% $3,047,000 98% $2,208,000 97%
Exports 174,000 5% 64,000 2% 74,000 3%
---------- ----- ---------- ----- ---------- -----
Total Revenues: $3,809,000 100.0% $3,111,000 100.0% $2,282,000 100.0%
========== ===== ========== ===== ========== =====
ADDITIONAL INFORMATION
The Company's internet address is www.passur.com. The Company makes
available on its website under "SEC Filings", via a link to the United States
Securities and Exchange Commission's website, access to its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practical,
after electronically filing with and/or furnishing such information to the
Securities Exchange Commission. All such filings on the website are available
free of charge. Unless required to do so by law, the Company assumes no
obligation to update or revise any forward-looking statements in this annual
report on Form 10-K, whether as a result of new information, future events or
otherwise. A copy of this annual report on Form 10-K is available without charge
upon written request to: Investor Relations, Megadata Corporation, 47 Arch
Street, Greenwich, CT 06830.
ITEM 1A. RISK FACTORS
THE COMPANY HAS A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOWS FROM
OPERATIONS AND EXPECTS ITS LOSSES AND NEGATIVE CASH FLOWS TO CONTINUE FOR THE
NEXT SEVERAL REPORTING PERIODS.
The Company has incurred significant losses during the last seven fiscal
years. The Company incurred net losses of approximately $924,000 for the fiscal
year ended October 31, 2005, $1,390,000 for the fiscal year ended October 31,
2004 and $2,486,000 for the fiscal year ended October 31, 2003. As of October
31, 2005, the Company's accumulated deficit was approximately $10,012,000. The
Company anticipates that it will continue to incur net losses and negative cash
flows for the next several reporting periods. The Company's ability to achieve
and maintain profitability will depend upon its ability to generate significant
increased revenues through new and existing customer agreements, additional
services and/or products offered to existing customers and to control the costs
associated with the business operations. There is no guarantee that the Company
will be able to execute on these requirements. If the Company becomes profitable
for a specific reporting period, it still may not be able to sustain or increase
its profits on a quarterly or annual basis in the future.
Page 9 of 66
THE COMPANY'S SUCCESS IS DEPENDENT ON THE AVIATION INDUSTRY. IF THE COMPANY DOES
NOT EXECUTE ITS BUSINESS PLAN OR IF THE MARKET FOR ITS SERVICES FAILS TO DEVELOP
DUE TO THE DEPRESSED AVIATION INDUSTRY, ITS RESULTS OF OPERATIONS AND FINANCIAL
RESULTS COULD CONTINUE TO BE ADVERSELY AFFECTED.
The Company's revenues are solely derived from the aviation industry. The
Company's future revenues and results of operations are dependent on its
continued execution of its subscription-based revenue strategy and development
of new software solutions and applications for the aviation industry. Due to the
depressed aviation industry, it is not assured that the Company will be able to
continue to report growth in its subscription-based business or sustain its
current subscription business. If the Company is unable to sustain and/or
increase its levels of revenues, and it is not successful in reducing costs, its
cash requirements may increase and the results of operations will continue to be
adversely affected.
Additionally, the aviation industry has been impacted by budgetary
constraints and airline bankruptcies due to the downturn in the current economy,
the terrorist events of September 11, 2001 and the war on terrorism. The
aviation industry is extensively regulated by government agencies, particularly
the FAA and The National Transportation Safety Board. New air travel regulations
have been, and management anticipates will continue to be, implemented that
could have a negative impact on airline and airport revenues. Since
substantially all of the Company's current revenues are derived from either
airports or airlines, continued increased regulations of the aviation industry
or continued downturn in the economic situation of the aviation industry could
have a material adverse effect on the Company.
RELIANCE ON THE COMPANY'S QUARTERLY OPERATING RESULTS AS AN INDICATION OF FUTURE
RESULTS IS INAPPROPRIATE DUE TO POTENTIAL SIGNIFICANT FLUCTUATIONS.
The Company's future revenues and results of operations may fluctuate
significantly due to a combination of factors, including:
o Delays and/or decreases in the signing and invoicing of new
contracts;
o The length of time needed to initiate and complete customer
contracts;
o Revenues recognized from one-time sales events (selling or upgrading
systems) versus subscription based sales;
o The introduction and market acceptance of new and enhanced products
and services;
o The costs associated with providing existing and new products and
services;
o Economic conditions in the United States and the impact on the
aviation industry from the terrorist events of September 11, 2001
and continued war or terrorism; and
o The potential of future terrorist acts against the aviation
industry.
Accordingly, quarter-to-quarter comparisons of its results of operations
should not be relied on as an indication of performance. It is possible that in
future periods results of operations may be below those expected based upon
previous performance.
THE COMPANY MAY BE UNABLE TO RAISE ADDITIONAL FUNDS TO MEET OPERATING CAPITAL
REQUIREMENTS IN THE FUTURE.
The Company has incurred significant negative cash flows from operations
over the past several fiscal years. It has obtained a commitment from its
significant shareholder and Chairman to provide the resources necessary to meet
working capital and liquidity requirements through January 12, 2007. However,
future liquidity and capital requirements are difficult to predict, as they
depend on numerous factors, including the maintenance and growth of existing
product lines and service offerings, as well as the ability to develop, provide
and sell new products in an industry for which liquidity and resources are
already adversely affected.
Page 10 of 66
The Company has significant cash requirements, which are expected to
continue in the future. The Company may need to raise additional funds in order
to support discretionary capital expenditures and execute its business plan.
These funds in some cases may be beyond the scope and normal operating
requirements, for which the Company has a commitment from its significant
shareholder and Chairman and therefore, may not be approved and/or funded. In
such case, the Company may be required to seek alternate sources of financing
(which may not be available on favorable terms or at all) or abandon such
activities by either: terminating or eliminating certain operating activities;
terminating personnel; eliminating marketing activities; and/or eliminating
research and development programs. If any of the aforementioned occurs, the
Company's ability to expand could become adversely affected.
A LIMITED NUMBER OF CUSTOMER CONTRACTS ACCOUNTS FOR A HIGH PERCENTAGE OF THE
COMPANY'S REVENUES, AND THE INABILITY TO REPLACE A KEY CUSTOMER CONTRACT COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, BUSINESS AND FINANCIAL CONDITION.
The Company relies on a small number of customer contracts for a large
percentage of its revenues and expects that a significant percentage of its
revenues will continue to be derived from a limited number of customer
contracts. The Company's business plan is to obtain additional customers, but
anticipates that near term revenues and operating results will continue to
depend on large contracts from a small number of customers. Additionally, the
aviation industry, particularly the airline sector, has experienced several
Chapter 11 bankruptcy filings recently. Any Chapter 11 filings by our existing
customers may adversely affect our ability to continue such services and collect
payments due to the Company by such customers. As a result of this concentration
of our customer base, an inability to replace one or more of these large
customer contracts could materially adversely affect our business, financial
condition, operating results and cash flow.
THE SOFTWARE BUSINESS FOR THE AVIATION INDUSTRY IS HIGHLY COMPETITIVE, AND
FAILURE TO ADAPT TO THE CHANGING INDUSTRY NEEDS COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS, BUSINESS AND FINANCIAL CONDITION.
The industry in which we compete is marked by rapid and substantial
technology change, the steady emergence of new companies and products, as well
as evolving industry standards and changing customer needs. We compete with many
established companies in the industry we serve, and some of these companies may
have substantially greater financial, marketing and technology resources, larger
distribution capabilities, earlier access to potential customers and greater
opportunities to address customers' various information technology requirements.
As the aviation industry seeks to be more cost effective due to the continued
economic downturn, product pricing becomes increasingly important for our
customers. As a result we may experience increased competition from certain,
low-priced competitors. To remain competitive, we continue to develop new
products and continue to enhance existing products. We may be unsuccessful in
our ability to sell new products and/or product releases that meet the needs of
our industry in light of low-cost, less functional alternatives available in the
market. In addition, the pricing of new products or releases of existing
products may be above that required by the market place. Our inability to bring
such new products or enhancements to existing products to the market in a timely
manner or the failure for these products to achieve industry acceptance could
adversely affect our business, financial condition, operating results and cash
flow.
THE COMPANY DEPENDS UPON CERTAIN KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN
THESE EMPLOYEES.
The Company's future performance depends on the continued services of its
key technical and engineering personnel. Significant improvements have been made
in the past year to address such issues, in particular, technical redundancy,
but the Company continues to depend on the efforts of a limited number of key
personnel. The employment of any of the Company's key personnel could cease at
any time which could have an adverse affect on our business.
Page 11 of 66
THE PASSUR NETWORK COULD EXPERIENCE DISRUPTIONS, WHICH COULD AFFECT THE DELIVERY
OF DATA.
The Company's network infrastructure is maintained and hosted by AT&T
through an existing frame-relay network. If AT&T experiences system failures or
fails to adequately maintain the frame-relay network, the Company may experience
interruption of delivery of data / software services and customers may terminate
or elect not continue to subscribe to these services in the future. The
Company's network infrastructure may be vulnerable to computer viruses,
break-ins, denial of service attacks and similar disruptive problems. Computer
viruses, break-ins, denial of service attacks or other problems caused by third
parties could lead to interruptions, delays or cessation in service to
customers. There is currently no existing technology that provides absolute
security. Such incidents could deter potential customers and adversely affect
existing customer relationships.
THE COMPANY MAY BE SUBJECT TO EXISTING AND NEWLY ISSUED GOVERNMENT REGULATIONS
RELATING TO THE DISTRIBUTION OF FLIGHT-TRACKING DATA.
The Company currently maintains strict safety regulations for its data in
order to comply with current government regulations. Due to the continued
growing safety needs and concerns of the aviation industry, new government
regulations may be implemented. Such new regulations may, in some cases, hinder
the Company's ability to provide current and/or additional services.
UNAUTHORIZED USE OF THE COMPANY'S INTELLECTUAL PROPERTIES BY THIRD PARTIES MAY
DAMAGE AND/OR ADVERSELY AFFECT OUR BUSINESS.
We regard our trademarks, trade secrets and all other intellectual
property as critical to our future success. Unauthorized use of our intellectual
property by third parties may damage and/or impair our business. Our
intellectual property includes exclusive licenses to use patents held by third
parties, as well as Company-owned patents. We rely on trademarks, trade secrets,
patent protection and contracts, including confidentiality and non-exclusive
license agreements with our customers, employees, consultants, strategic
partners and others, to protect our intellectual property rights. Despite our
precautions, it may be possible for third parties to obtain and use our
intellectual property without our prior knowledge and/or authorization.
Prosecuting infringers could be time consuming and costly, and irrespective of
whether or not the Company is successful, could disrupt our business.
The Company currently has the exclusive license rights to use fifteen
patents in the United States and various foreign countries, relating to the
Company's PASSUR(R) System and related technologies. The licensed patents expire
in various years through 2013.
We currently own two issued patents, and one allowed application that is
scheduled to issue within three months. In addition, twelve additional patents
are pending with the United States Patent Office, some of which relate to newly
developed internet-based software applications, derived in large part from the
data generated from the Company's PASSUR(R) systems.
The issued and allowed patents expire in various years through 2023. We
also intend to seek additional patents on our products and technological
advances and/or software applications, when appropriate. There can be no
assurance that patents will be issued for any of our pending or future patent
applications or that any claims allowed from such applications will be of
sufficient scope, or provide adequate protection or any commercial advantage to
the Company. Additionally, our competitors may be able to design around our
patents and possibly affect our commercial interests.
Page 12 of 66
The Company also owns a federal trademark registration in the mark
PASSUR(R) for use with both the PASSUR(R) hardware system installation and the
software products which use the data derived from PASSUR(R) and other sources.
The PASSUR(R) federal registration will allow the Company to enforce its rights
in the mark in the federal court system. The registration does not assure that
others will be prevented from using similar trademarks in connection with
related products and/or services.
DEFENDING AGAINST INTELLECTUAL PROPERTY CLAIMS COULD POSE SIGNIFICANT LEGAL AND
PROFESSIONAL COSTS, AND IF UNSUCCESSFUL, COULD ADVERSELY AFFECT THE COMPANY.
We cannot guarantee that our future products, technologies and software
applications will not inadvertently infringe valid patents or other intellectual
property rights held by third parties. We may be subject to legal proceedings
and claims from time to time relating to the intellectual property of others.
Investigation of any claims from third parties alleging infringement of their
intellectual property, whether with or without merit, can be expensive and could
affect development, marketing, selling or delivery of our products. Defending
against intellectual property infringement claims could be time consuming and
costly, and irrespective of whether or not the Company is successful, could
disrupt our business. We may incur substantial expenses in defending against
these third party claims, regardless of their merit. Successful infringement
claims against the Company may result in significant monetary liability and
could adversely affect our business, financial condition, operating results and
cash flow.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
The Company's development facility is located in part of a one-story,
36,000 square foot building at 35 Orville Drive, Bohemia, New York. The building
previously was owned by the Company and was sold in October 1999 to an
unaffiliated buyer. The Company leases 12,000 square feet at an annual rental
cost of $89,000.
The Company's executive offices are located in a three-story office
building at 47 Arch Street, Greenwich, Connecticut. Effective October 1998, the
Company began subleasing space from Field Point Capital Management Company
(FPCM), a company 100% owned by the Company's Chairman of the Board, for $1,000
per month. Effective November 1, 2003, the Company's monthly rent for space
subleased from FPCM was reduced to $500 per month and its obligation for such
lease was on a month-to-month basis. Effective July 1, 2004, the Company
terminated its month to month sublease with FPCM and signed a direct lease for
additional space directly with the building owner for $2,500 per month.
Beginning August 1, 2005 the rent for the Company's headquarters located in
Greenwich increased to $3,750 per month ($45,000 per year to June 2009). The
Company believes these rates are competitive and are at or below market rates.
The Company's development facility and executive offices are suitable for
its requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal proceedings to
which the Company or any of its subsidiaries is a party or to which any of their
properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of fiscal 2005.
Page 13 of 66
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION
The Company's Common Stock, par value $0.01 per share (the "Common Stock"), is
traded on the over-the-counter bulletin board.
The following table sets forth the reported high and low sales prices for the
Company's common stock for each quarterly period during the Company's last two
fiscal years, as reported by the National Quotation Bureau, Inc.:
Period Prices*
- ------ -------
High Low
---- ---
FISCAL YEAR ENDED OCTOBER 31, 2005
FIRST QUARTER $.40 $.21
SECOND QUARTER .69 .21
THIRD QUARTER .28 .23
FOURTH QUARTER .40 .24
Fiscal Year Ended October 31, 2004
First Quarter $.60 $.30
Second Quarter .52 .28
Third Quarter .56 .27
Fourth Quarter .35 .25
* The quotations represent prices on the over-the-counter bulletin board between
dealers in securities, do not include retail markup, markdown or commission, and
do not necessarily represent actual transactions.
(B) HOLDERS
The number of registered equity security holders of record at January 25, 2006
was 302, as shown in the records of our transfer agent.
(C) DIVIDENDS
The Company has never paid cash dividends on its shares. The Company does not
anticipate paying cash dividends in the foreseeable future.
Page 14 of 66
(D) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of October 31, 2005 with respect to
the securities authorized for issuance under the Company's equity compensation
plans.
- -------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
UNDER EQUITY
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE COMPENSATION PLANS
BE ISSUED UPON EXERCISE EXERCISE PRICE OF EXCLUDING SECURITIES
PLAN CATEGORY OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (A)
- -------------------------------------------------------------------------------------------------------------------
(A) (B) (C)
- -------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLAN APPROVED BY
SECURITY HOLDERS 1,561,000 $.49 264,000
- -------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS NOT APPROVED -- -- --
BY SECURITY HOLDERS
- -------------------------------------------------------------------------------------------------------------------
TOTAL 1,561,000 $.49 264,000
- -------------------------------------------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated statements of operations data for the fiscal
years ended October 31, 2005, 2004 and 2003, and the consolidated balance sheet
data as of October 31, 2005 and 2004, have been derived from the Company's
audited financial statements included elsewhere in this Annual Report on Form
10-K. The selected consolidated statement of operations data for the years ended
October 31, 2002 and 2001, and the selected consolidated balance sheet data as
of October 31, 2003, 2002 and 2001, are derived from the Company's audited
consolidated financial statements which are not included in this Annual Report
on Form 10-K.
Selected Statement of Operations Data:
YEARS ENDED OCTOBER 31,
- ------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Net Revenues $3,808,773 $ 3,110,608 $ 2,282,279 $ 1,696,595 $ 940,637
Net Loss $ (923,872) $(1,389,536) $(2,486,122) $(2,110,212) $(1,629,490)
Net Loss Per
Common Share --
Basic and diluted (1) $(.23) $(.35) $(.71) $(.61) $(.47)
Dividend Declared -- -- -- -- --
- ------------------------------------------------------------------------------------------------------
Page 15 of 66
SELECTED BALANCE SHEET DATA:
OCTOBER 31,
- --------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Total Assets $ 4,287,242 $ 4,084,581 $ 4,533,279 $ 4,449,999 $ 3,356,343
Long-Term
Debt (2)(3)(4)(5)(6) $ 9,989,880 $ 8,866,465 $ 8,466,465 $ 5,705,000 $ 3,090,000
Total Shareholders'
(Deficit) Equity $(7,493,816) $(6,569,944) $(5,540,408) $(3,077,786) $ (988,824)
- --------------------------------------------------------------------------------------------------
(1) Net loss per share of common stock was computed using the weighted average
number of shares of common stock outstanding during the period. Conversion
of the common equivalent shares was not assumed since the result would
have been antidilutive.
(2) Long-term debt for 2001 consists of notes payable - related party which
was due after October 31, 2002.
(3) Long-term debt for 2002 consists of notes payable - related party which
was due after October 31, 2003.
(4) Long-term debt for 2003 consists of notes payable - related party which
was due after October 31, 2004.
(5) Long-term debt for 2004 consists of notes payable - related party which
was due after October 31, 2005.
(6) Long-term debt for 2005 consists of notes payable - related party which
was due after October 31, 2006.
Page 16 of 66
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
The Company is a provider of flight information, web-delivered software, and
web-delivered collaborative decision tools to the aviation industry and
organizations which serve, or are served by, the aviation industry.
Revenues consist primarily of subscription-based revenues, maintenance revenues
from customer owned PASSUR(R) systems, kiosks, system sales and system upgrades
and other revenues from services and/or products provided which are not part of
the subscription or maintenance business line.
Revenues during fiscal 2005 increased by approximately $698,000, or 22%, to
$3,809,000 from $3,111,000 in fiscal 2004. This increase was primarily due to
the continued development and deployment of new software applications, increased
effectiveness of the Company's marketing efforts, industry acceptance of the
Company's applications, the wide selection of products which address the
customers' needs and ease of delivery through web-based applications. These
efforts resulted in an increased number of new customers subscribing to our
suite of software applications and the increased subscriptions from our suite of
applications to existing customers. Revenues during fiscal 2004 increased by
approximately $829,000, or 36%, to $3,111,000 from $2,282,000 in fiscal 2003.
This increase was primarily due to the increased focus on the subscription based
revenue business model.
Management continues to concentrate its efforts on the sale of information and
decision support product applications utilizing data primarily derived from
PASSUR(R) Information Network. Such efforts include the continued development of
new product applications as well as enhancements and maintenance of existing
applications. As a result, subscription-based revenues of $3,270,000 in 2005,
compared to $2,556,000 in 2004 increased approximately $714,000, or 28%, for
fiscal 2005, when compared to fiscal 2004. The Company's subscription-based
sales for fiscal 2004 and 2003 were $2,556,000 and $1,739,000, respectively.
The Company's business plan is to continue to focus on increasing
subscription-based revenues from the suite of software applications and
development of new applications designed to address the needs of the aviation
industry. However, the Company, from time to time, will sell a PASSUR(R) system
at a customer's specific request.
The Company shipped five and installed five Company-owned PASSUR(R) systems
during fiscal 2005 (installations include systems shipped in current and
previous fiscal years), which were capitalized as part of the "PASSUR(R)
Information Network". The Company will continue to expand the PASSUR(R)
Information Network by shipping and installing additional PASSUR(R) systems
throughout fiscal 2006. Management anticipates that these future PASSUR(R) sites
will provide increased coverage of the PASSUR(R) Information Network and
increase the Company's potential for new customers at such locations as well as
provide existing customers with additional data solutions. The Company will
continue to market the data generated from the PASSUR(R) Information Network
directly to the aviation industry. The Company returned two Company-owned
PASSUR(R) systems from the field in fiscal year 2005. There were 42 Company
owned PASSUR(R)s located at various airports throughout the continental United
States at the end of fiscal 2005.
Page 17 of 66
COST OF SALES
Costs associated with system sales consist primarily of purchased materials,
direct labor and overhead costs. Costs associated with subscription and
maintenance revenues consists primarily of direct labor, depreciation of
PASSUR(R) Network assets, amortization of software development costs,
communication costs and allocated overhead costs. Also included in cost of sales
are costs associated with the upgrades of PASSUR(R) systems necessary to make
such systems compatible with new software applications, as well as the ordinary
repair and maintenance of existing network systems. Additionally, cost of sales
in each reporting period are impacted by: (1) the number of PASSUR(R) units
added to the asset account which include the production, shipments and
installations of these assets; and (2) capitalized costs associated with
software development programs, collectively referred to as "Capitalized Assets"
which are depreciated and/or amortized over their respective useful lives and
charged to cost of sales.
The Company has not segregated its cost of sales between cost of system sales
and cost of subscription and maintenance services, as it is not practical to
segregate such costs. During fiscal 2005, cost of sales decreased by
approximately $31,000, or 2%, as compared to fiscal 2004. This decrease was
primarily due to an increase in the capitalization of software development and
PASSUR(R) Network costs. In addition the Company did not dispose of any
PASSUR(R) Network and software development assets in fiscal 2005. The decrease
was partially offset by increases in outside consulting, communications,
amortization of capitalized software assets and headcount related costs.
During fiscal 2005, costs associated with subscription and maintenance revenues
including labor, communication costs and allocated overhead costs totaled
approximately $1,960,000 or 74% of gross cost of sales (before impact of
Capitalized Assets), an increase of approximately 44% from fiscal 2004. The
Company does not deem it practical to separate these costs between subscription
revenues and maintenance revenues. In addition, during fiscal 2005, costs
directly associated with subscription revenues included: (1) depreciation and
amortization of the PASSUR(R) network assets and software development costs,
totaling approximately $728,000 or 27% of gross cost of sales (before impact of
Capitalized Assets): and (2) the impact of Capitalized Assets totaling
approximately $646,000, a increase of approximately 49% from fiscal 2004.
During fiscal 2004, cost of sales increased by approximately $266,000, or 15%,
as compared to fiscal 2003. This increase was primarily due to the increases in
depreciation and amortization of PASSUR(R) Network and software development
assets, the one-time disposal of certain PASSUR(R) Network and software
development assets, communication costs, certain allocated overhead costs and
the decrease in the impact of Capitalized Assets charged to cost of sales in
fiscal 2004 as compared to fiscal 2003.
Finally, during fiscal 2004, the Company charged to cost of sales approximately
$111,000 and $41,000 for the disposal of certain PASSUR(R) Network and software
development assets.
RESEARCH AND DEVELOPMENT
During fiscal 2005, research and development expenses remained at approximately
the same level as in fiscal 2004. The Company's research and development efforts
include activities associated with the enhancement, maintenance and improvement
of the Company's existing hardware, software and information products.
During fiscal 2004, research and development expenses remained at approximately
the same level as those in fiscal 2003. The Company's research and development
efforts include activities associated with the enhancement, maintenance and
improvement of the Company's existing hardware, software and information
products. However, commencing mid-fiscal 2002, personnel who had been utilized
on such research and development activities were either redeployed from research
and development activities or were replaced by outside software contractors at a
more cost effective rate. The costs associated with outside contractors are
charged directly to cost of sales as these costs impact the amount of labor
associated with capitalized software programs which also impacts cost of sales.
Page 18 of 66
The Company anticipates that it will continue to invest in research and
development to develop, maintain and support the existing and newly developed
applications for its PASSUR(R) customers. There were no customer sponsored
research and development activities during fiscal 2005 or fiscal 2004. Research
and development expenses are funded through current operations.
SELLING, GENERAL AND ADMINISTRATIVE
During fiscal 2005, selling, general and administrative expenses increased by
approximately $225,000, or 13%, as compared to fiscal 2004. The increase was
primarily due to additional sales and marketing personnel and related expenses.
The increase in sales and marketing costs was partially offset by a decrease in
professional fees.
During fiscal 2004, selling, general and administrative expenses decreased by
approximately $246,000, or 13%, as compared to fiscal 2003. The decrease was
primarily due to reduction initiatives enacted throughout fiscal 2003, which the
Company recognized during 2004. Such initiatives resulted in decreased costs
associated with compensation, outside consultants, and allocated overhead costs.
Severance payments relating to the termination of employees during fiscal 2003
were expensed in fiscal year 2003. These cost reduction initiatives were
partially offset by increases in recruiting fees for new administrative and
sales personnel.
The Company anticipates increases in its sales and marketing efforts in order to
market new and existing products from the PASSUR(R) suite of software
applications. The Company anticipates that its sales and marketing expenses may
increase in fiscal 2006 resulting from these efforts, while efforts to maintain
and expand cost reduction initiatives are identified and implemented.
OTHER INCOME (EXPENSE)
Interest income and interest expense to unrelated parties were not significant
in fiscal 2005, 2004 and 2003.
Interest expense-related party increased by approximately $39,000, or 10%, in
fiscal 2005, as compared to fiscal 2004. The increase is due to approximately
$1,123,000 in higher debt and an effective interest rate slightly higher than
that charged for the same period in fiscal 2004.
Interest expense-related party decreased by approximately $279,000, or 43%, in
fiscal 2004, as compared to fiscal 2003. The decrease is due to the payment of
interest on outstanding debt in Company common stock, at an effective interest
rate lower than that charged for the same period of fiscal 2003, pursuant to the
Debt Agreement entered into by the Company and its significant shareholder dated
November 1, 2003.
INCOME TAXES
The provisions for income taxes for each year relate to state and local minimum
taxes. The Company has available approximately $16,079,000 in Federal tax loss
carryforwards to offset possible future income. These carryforwards expire in
various tax years through 2024. The Company has provided a full valuation
allowance on the net deferred tax asset of approximately $6,371,000, which
primarily consists of the net operating loss carry-forwards and available tax
credits.
Page 19 of 66
NET LOSS
The Company incurred a net loss of $924,000, or $.23 per diluted share, during
fiscal 2005, as compared to a net loss of $1,390,000, or $.35 per diluted share,
in fiscal 2004.
During fiscal 2005, total costs and expenses of $4,315,000 were higher than
total revenues and resulted in a loss from operations of $506,000. Total costs
and expenses increased by $194,000, or 5%, as compared to such costs in fiscal
2004.
Although revenues increased approximately 22% in fiscal 2005, total costs and
expenses increased approximately 5% as compared to such costs in fiscal 2004.
The Company incurred a net loss of $1,390,000, or $.35 per diluted share, during
fiscal 2004, as compared to a net loss of $2,486,000, or $.71 per diluted share,
in fiscal 2003.
During fiscal 2004, total costs and expenses of $4,121,000 were higher than
total revenues and resulted in a loss from operations of $1,010,000. Total costs
and expenses increased by $9,000, as compared to such costs in fiscal 2003.
Despite the increase in revenues of approximately 36% in fiscal 2004, increased
costs associated with communication costs, depreciation and amortization,
interest expense from outstanding debt and expenses associated with the
placement, operation, development and marketing of the Company-owned PASSUR(R)
Network contributed to the additional loss.
Page 20 of 66
QUARTERLY RESULTS OF OPERATIONS
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
OCT. 31, JULY 31, APRIL 30, JANUARY 31, OCT. 31, JULY 31, APRIL 30, JANUARY 31,
2005 2005 2005 2005 2004 2004 2004 2004
------------------------------------------------------------------------------------------------------
TOTAL NET REVENUES $1,012,012 $ 985,844 $ 978,772 $ 832,145 $ 876,181 $ 767,287 $ 737,601 $ 729,853
WRITE DOWN OF
NETWORK ASSETS (110,980)
LOSS FROM OPERATIONS (132,384) (82,256) (94,599) (196,827) (448,894) (205,264) (194,048) (161,701)
NET LOSS (238,101) (186,730) (194,651) (304,390) (543,629) (300,209) (288,433) (257,265)
BASIC AND DILUTED NET
LOSS PER SHARE $ (.06) $ (.05) $ (.05) $ (.07) $ (.13) $ (.07) $ (.08) $ (.07)
- ------------------------------------------------------------------------------------------------------------------------------
IMPACT OF INFLATION
In the opinion of management, inflation has not had a material effect on the
operations of the Company including selling prices, capital expenditures and
operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2005, the Company's current liabilities exceeded current assets
by $771,000. The notes payable to a related party of $9,989,880 are due November
1, 2006, thus are included in long-term liabilities at October 31, 2005. At
October 31, 2005, the Company's stockholders' deficit was $7,493,816. For fiscal
2005, the Company incurred a net loss of $924,000.
Management is addressing the working capital and stockholders' deficiencies and
operating losses by aggressively marketing its PASSUR(R) information
capabilities in its existing product lines, as well as in new products, which
are continually being developed and deployed. The Company intends to increase
the size and related airspace coverage of its owned "PASSUR(R) Network," by
continuing to install PASSUR(R) Systems throughout the United States and certain
foreign countries. In addition, management believes that expanding its existing
software suite of products, which address the wide array of needs of the
aviation industry, through the continued development of new product offerings,
will continue to lead to increased growth in the Company's customer base and
subscription-based revenues. Additionally, if the Company's business plan does
not generate sufficient cash-flows from operations to meet the Company's
operating cash requirements, the Company will attempt to obtain external
financing, and if such external financing is not consummated, the Company has a
commitment to receive additional financial support from its significant
shareholder and Chairman through January 12, 2007. Such commitment for financial
support may be in the form of additional advances or loans to the Company in
addition to the deferral of principal and interest payments due on the existing
loans, if deemed necessary.
Page 21 of 66
Net cash used in operating activities for fiscal 2005 was approximately
$393,000. Cash flows used in investing activities for fiscal 2005 was
approximately $764,000 and consisted primarily of investments in the Company's
PASSUR(R) network as well as capitalized software development costs. Cash flows
provided by financing activities for fiscal 2005 were approximately $1,123,000
from notes payables - related party. No principal payments on notes payable -
related party were made during fiscal 2005.
The Company was unprofitable in fiscal 2005. To date, the Company has
experienced increased revenues as a result of its subscription-based revenue
model. The Company is actively addressing the increasing costs associated with
supporting the business, and plans to identify and reduce any unnecessary costs
as part of its cost reduction initiatives. Additionally, the aviation market has
been impacted by budgetary constraints and airline bankruptcies due to the
downturn in the current economy, the terrorist events of September 11, 2001 and
the continued war on terrorism. The aviation market is extensively regulated by
government agencies, particularly the FAA and The National Transportation Safety
Board, and management anticipates that new regulations relating to air travel
may continue to be issued. Substantially all of the Company's revenues are
derived from either airports or airlines. It is premature to evaluate the
impact, if any, that any new regulations or changes in the economic situation of
the aviation industry could have on the future operations of the Company, either
positively or negatively.
Interest by potential customers in the information and decision support software
products obtained from the PASSUR(R) Network remains strong and the Company
anticipates an increase in future revenues. However, the Company cannot predict
if such revenues will materialize. If sales do not increase, additional losses
may occur. The extent of such profits or losses will be dependent on sales
volume achieved and Company cost reduction initiatives.
CONTRACTUAL OBLIGATIONS
As of October 31, 2005, the Company had contractual obligations as follows:
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
LESS THAN 1 MORE THAN
TOTAL YEAR 1 - 3 YEARS 3 YEARS
-----------------------------------------------------
Operating Leases $ 438,698 $ 133,550 $ 305,148 $ --
Promissory Notes $ 9,989,880 -- $ 9,989,880 --
Other Long-Term Obligations $ 700,000 $ 100,000 $ 225,000 $ 375,000
-----------------------------------------------------
Total contractual cash
obligations $11,128,578 $ 233,550 $10,520,028 $ 375,000
=====================================================
o Obligations under "Operating Leases" relate to the manufacturing and
research facility located in Bohemia, New York ($85,971 - fiscal
2005) and the Company's headquarters located in Greenwich, CT
($33,750 - fiscal 2005). All other operating leases are under a
month-to-month arrangement, therefore, such obligations have been
excluded from the above calculation (total monthly obligations total
$500 per month).
o Obligations under "Other Long-Term Obligations" relate to the
minimum royalty payments due to a third party for exclusive
licensing rights of certain patents relating to the PASSUR(R)
System. The annual minimum royalty payments total $75,000 and are
effective until the last licensed patent expires in 2013. The
Company's annual royalty payment may exceed the minimum royalty
amount of $75,000 based upon certain sales thresholds exceeded in
any given year; however, the minimum annual royalty obligation will
never be less than $75,000.
Page 22 of 66
OFF-BALANCE SHEET ARRANGEMENTS
None
CERTAIN RELATED PARTY TRANSACTIONS
Effective November 15, 2003, the Company and Mr. Gilbert entered into a
subsequent debt agreement whereby any additional promissory notes issued to Mr.
Gilbert will mature on November 1, 2004 and bear interest at 4.5% per annum,
payable in cash.
In fiscal 2004, G.S. Beckwith Gilbert, Chairman and a significant shareholder of
the Company, loaned the Company $400,000 under promissory notes bearing interest
at 4.5% per annum and maturing at November 1, 2004. As of October 31, 2004, the
total notes payable due to Mr. Gilbert totaled $8,866,465 and are secured by the
Company's assets.
On January 28, 2005, the Company and Mr. Gilbert entered into a subsequent
extended debt agreement effective November 1, 2004. Principal and accrued
interest as of October 31, 2004, aggregate into a principal amount of
$8,939,880, with a maturity date of November 1, 2005 bearing an interest rate of
4.5%.
On January 19, 2005, the Company and Field Point Capital Management Company
(FPCM), a company 100% owned by Mr. Gilbert, entered into an agreement to share
the services of an employee of the Company. Mr. Gilbert reimbursed the Company
for approximately 80% of the salary and taxes associated with the employee. The
net costs incurred by the Company for the period ended October 31, 2005 were
approximately $16,000.
Effective October 1998, the Company began subleasing space from Field Point
Capital Management Company (FPCM) for $1,000 per month rent. For the year ended
October 31, 2004, the Company's monthly rent for space subleased from FPCM was
reduced to $500 per month and its obligation for such lease was on a
month-to-month basis. Effective July 1, 2004, the Company terminated its month
to month sublease with FPCM. The Company did not make any rent payments to FPCM
during the year ended October 31, 2005. For the year ended October 31, 2004, the
Company paid FPCM total rent payments of approximately $4,000. For the year
ended October 31, 2003, the Company paid FPCM total rent payments of
approximately $12,000.
During fiscal 2005, the Company paid approximately $24,000 to Surf-Tech
Manufacturing, Inc. (a non-public corporation) for materials and labor in
connection with the production of various replacement and upgrade equipment of
PASSUR(R) systems. A Company Executive Vice President and Director is a 50%
shareholder of the aforementioned company, and the Company believes that these
rates are competitive and are at or below market rates.
During fiscal 2005 Mr. Gilbert lent the Company an additional $1,123,415,
bringing the loan to a total of $9,989,880 on October 31, 2005. On January 27,
2006, the Company and Mr. Gilbert entered into a subsequent extended debt
agreement effective November 1, 2005, with a maturity date of November 1, 2006
bearing an interest rate of 4.5%.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities based upon accounting policies management has
implemented. The Company has identified the policies and estimates below as
critical to its business operations and the understanding of its results of
operations. The impact and any associated risks related to these policies on the
Company's business operations is discussed throughout Management's Discussion
and Analysis of Financial Condition and Results of Operations where such
policies affect its reported financial results. Actual results may differ from
these judgments under different assumptions or conditions. The Company's
accounting policies that require management to apply significant judgment and
estimates include:
Page 23 of 66
REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 104, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS" ("SAB 104"), as codified.
SAB 104 requires that four basic criteria must be met before revenues can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the fee is fixed and determinable;
and (4) collectibility is reasonably assured. The Company also recognizes
revenue in accordance with Statement of Position 97-2, "SOFTWARE REVENUE
RECOGNITION" ("SOP 97-2"), as amended, when applicable.
The Company's revenues are generated from the following: (1) subscription and
maintenance agreements; (2) Kiosks, system sales, including system upgrade
sales; and (3) one-time license fees. The Company recognizes revenues from
system sales when the system is shipped in accordance with SAB 104 and SOP 97-2.
Revenues generated from subscription and maintenance agreements are recognized
over the term of such executed agreements and/or customer's receipt of such data
or services. In accordance with SOP 97-2, we recognize revenue from the
licensing of our software products or performance of maintenance when all of the
following criteria are met: (1) we have entered into a legally binding agreement
with a customer; (2) we deliver the products / services; (3) license /
maintenance agreement terms are deemed fixed or determinable and free of
contingencies or uncertainties that may alter the agreement such that it may not
be complete and final; and (4) collection is probable.
The Company records revenues pursuant to individual contracts on a
month-by-month basis, as outlined by the applicable agreement(s). In many cases,
the Company may invoice respective customers in advance of specified period(s),
either quarterly or annually, which coincides with the terms of the agreement.
In such cases, the Company will defer at the close of each month and/or
reporting period any subscription or maintenance revenues invoiced for which
services have yet to be rendered, in accordance with SOP 97-2.
Our software licenses generally do not include acceptance provisions. An
acceptance provision generally allows a customer to test the software for a
defined period of time before they commit to a binding agreement to license the
software. If a subscription agreement includes an acceptance provision, the
company will not recognize revenue until the earlier of the receipt of a written
customer acceptance or, if not notified by the customer to cancel the
subscription agreement, the expiration of the acceptance period.
From time to time, the Company will receive one-time payments from customers for
rights, including but not limited to the rights to use certain data at an agreed
upon location(s) for a specific use and/or for an unlimited number of users.
Such one-time payments are in the form of license fees. These fees are
recognized as revenue ratably over the term of the license agreement or expected
useful life of such license arrangement, whichever is longer, but typically five
years.
Any deferred revenue is classified on the Company's balance sheet as a liability
in the deferred income account until such time as revenue from services is
properly recognized as revenue in accordance with SAB 101 and/or SOP 97-2 and
the corresponding agreement.
Page 24 of 66
CAPITALIZED SOFTWARE COSTS
The Company follows the provisions of Statement of Financial Accounting
Standards No. 86, "ACCOUNTING FOR THE COSTS OF SOFTWARE TO BE SOLD, LEASED, OR
OTHERWISE MARKETED" ("SFAS 86"). Costs incurred to develop computer hardware and
software products as well as significant enhancements to software features of
the existing products to be sold or otherwise marketed are capitalized after
technological feasibility is established. Once the software products become
available for general release to the public, the Company will begin to amortize
such costs to cost of sales.
The Company's policy on capitalized software costs determines whether the costs
incurred are classified as capitalized costs (in accordance with SFAS 86) or as
research and development expenses. In cases whereby the Company capitalizes
costs incurred with development of new hardware/software products, a product
specification is designed and/or a working model of the respective project is
developed as the guideline for the criteria to capitalize costs associated with
such project in accordance with SFAS 86.
Once a product has been made available for sale and/or released for sale to the
general public, the development costs of that product are no longer capitalized
and amortization commences over a five year period and any additional costs
incurred to maintain or support such product are expensed as incurred. In some
cases, the Company may capitalize costs incurred in the development of enhanced
versions of already existing products, but will immediately expense any costs
incurred on products which were completed and released to the general public in
the form of continued maintenance of such products, in accordance with SFAS 86.
Management uses judgment in determining and evaluating whether development costs
meet the criteria for immediate expense or capitalization.
The Company's net capitalized software costs at October 31, 2005 totaled
approximately $948,000. The carrying value of the capitalized software costs is
dependent on the forecasted and actual performance of future cash flows
generated from such assets as determined and evaluated by management.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS" ("SFAS 144"). The Company reviews long-lived assets for impairment when
circumstances indicate the carrying amount of an asset may not be recoverable or
at each reporting period. An impairment is recognized when the sum of the
undiscounted estimated future cash flows expected to result from the use of the
asset is less than the carrying value. The Company evaluates the periods of
amortization continually in determining whether any events or circumstances
warrant revised estimates of useful lives.
The Company's long-lived assets include long-term fixed assets of the PASSUR(R)
Network and software development costs that at October 31, 2005 approximated
$2,276,000 and $948,000, respectively, which accounted for 75% of the Company's
total assets. The carrying value of the long-term assets is dependent on the
forecasted and actual financial performance and future cash flows of such assets
as determined by management.
At each reporting period, management evaluates the carrying values of the
Company's assets. The evaluation represents the undiscounted cash flows
generated from current contractual revenue sources and the anticipated forecast
revenue derived from each asset. It then evaluates these revenues on an overall
basis to determine if any impairment issues exist. As of October 31, 2005, based
upon management's evaluation of the above asset groups, no impairments exist of
these asset groups. If these forecasts are not met the Company may have to
record impairment charges not previously recorded. However, during the fourth
quarter of fiscal 2004, the Company disposed of certain PASSUR(R) Network assets
totaling approximately $111,000, which represented the remaining carrying value
of such assets. These disposals were due to network assets which were deemed
obsolete. In addition, the Company also determined during the fourth quarter of
fiscal 2004, to dispose of one in-process capitalized software project of
approximately $41,000 based upon the assumption that the project is no longer
viable. The project commenced in fiscal 2001 and at such time was considered a
viable project and properly capitalized under SFAS 86, but recent determinations
by the Company has resulted in the abandonment of the project.
Page 25 of 66
DEPRECIATION AND AMORTIZATION
The total net property, plant and equipment approximated $128,000, the total net
PASSUR(R) Network approximated $2,276,000 and the total net software development
costs approximated $948,000 The total depreciation and amortization expense
related to capitalized assets at October 31, 2005 approximated $775,000.
Management's judgment is required in the determination of the estimated
depreciable lives that are used to calculate the annual depreciation and
amortization expense.
Depreciation and amortization are provided on the straight-line basis over the
estimated useful lives of the assets, as follows:
Property, plant and equipment 3 to 10 Years
PASSUR(R) Network 5 to 7 Years
Software development costs 5 Years
The PASSUR(R) Network reflected on the Company's Consolidated Balance Sheets
represents PASSUR(R) Systems and the related software workstations used for the
data derived from the PASSUR(R) Systems. The PASSUR(R) Network is comprised of
PASSUR(R) Systems installed and supplying data to the company network, related
workstations with software and/or PASSUR(R) Systems built but not yet installed
into the company network. PASSUR(R) Network assets which are not installed into
the network are carried at cost and no depreciation is recorded. Once installed,
the PASSUR(R) Systems are depreciated over seven years and the related
workstations are depreciated over five years.
All of the Company's capitalized assets are recorded at cost (which may also
include salaries and related overhead costs incurred during the period of
development) and depreciated and/or amortized over the asset's estimated useful
life for financial statement purposes. The estimated useful life represents the
projected period of time that the asset will be productively employed by the
Company and is determined by management based on many factors, including
historical experience with similar assets, technological life cycles and
industry standards for similar assets. Circumstances and events relating to
these assets are monitored to ensure that changes in asset lives or impairments
(see "Impairment of Long-Lived Assets" above) are identified and prospective
depreciation expense or impairment expense is adjusted accordingly.
The total depreciation and/or amortization for the year ended October 31, 2005
for property, plant and equipment approximated $47,000, the PASSUR(R) Network
approximated $538,000 and software development costs approximated $190,000.
STOCK-BASED COMPENSATION
The Company currently measures compensation expense for stock option grants
using the intrinsic value method prescribed for in APB No. 25 "ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES". Under this method, the company does not record
compensation expense when stock options are granted provided that the exercise
price is not less than the fair market value of the stock when the option is
granted. In accordance with SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" and SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE", the Company discloses its pro-forma net loss and
pro-forma net loss per common share as if the fair value-based method has been
applied in measuring compensation expense for stock option grants.
Page 26 of 66
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
"Shared-Based Payment." Statement 123(R) addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the grant-date fair-value of
stock options and other equity-based compensation issued to employees in the
income statement. The revised Statement generally requires that an entity
account for those transactions using the fair-value-based method, and eliminates
the intrinsic value method of accounting in APB Opinion No. 25, "Accounting for
Stock Issued to Employees", which was permitted under Statement 123, as
originally issued.
The revised Statement requires entities to disclose information about the nature
of the share-based payment transactions and the effects of those transactions on
the financial statements.
Statement 123(R) is effective for public companies that do not file as small
business issuers as of the beginning of the first annual reporting period that
begins after June 15, 2005 (i.e., first quarter 2006 for the Company). All
public companies must use either the modified prospective or the modified
retrospective transition method. Early adoption of this Statement for interim or
annual periods for which financial statements or interim reports have not been
issued is encouraged. The Company is currently evaluating a plan of
implementation and expects that the financial statement impact of adoption will
approximate the proforma impact presented in footnote 1.
In June 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND ERROR
CORRECTIONS, ("SFAS 154") which is a replacement of APB Opinion No. 20,
ACCOUNTING CHANGES and FASB Statement No. 3, REPORTING ACCOUNTING CHANGES IN
INTERIM FINANCIAL STATEMENTS. SFAS 154 changes the accounting for and reporting
of changes in accounting principles and error corrections by requiring
retrospective application to prior period financial statements unless
impracticable. This statement is effective in fiscal years beginning after
December 15, 2005 and the Company plans to adopt SFAS 154 on October 1, 2006.
The Company does not expect the adoption of SFAS 154 to have a significant
impact on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from potential changes in interest
rates. The Company regularly evaluates these risks. The Company believes the
amount of risk relating to changes in interest rates is not material to the
Company's financial condition or results of operations. The Company has not and
does not anticipate entering into derivative financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 15(a)(1) of this Annual Report on Form 10-K for the
Company's annual financial statements.
See Part II, Item 7 of this Annual Report on Form 10-K for selected
quarterly financial data.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Page 27 of 66
ITEM 9A. CONTROLS AND PROCEDURES
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
For purposes of Rules 13a-14 and 15d-14 of the Exchange Act 1934
("Exchange Act") the term "disclosure controls and procedures" refers to the
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods. The Company's management including the Company's Chief
Executive Officer and Chief Financial Officer has evaluated the effectiveness of
its disclosure controls and procedures as of the end of period covered by this
report. Based on that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, the Company's disclosure controls
and procedures were effective at ensuring that required information will be
disclosed on a timely basis in the Company's reports filed under the Exchange
Act.
(B) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management, including the Company's Chief Executive Officer
and Chief Financial Officer, has evaluated the Company's internal control over
financial reporting (as defined by Rule 13a-15(f) under the Exchange Act) to
determine whether any changes occurred during the fourth quarter of the fiscal
year ended October 31, 2005 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Based on that evaluation, there has been no such change during the fourth
quarter of the period covered by this report.
ITEM 9B. OTHER INFORMATION
None
Page 28 of 66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The following table sets forth the names and ages of the Company's directors, as
well as the year each individual became a director and the position(s) with the
Company, if any, held by each individual.
Director Director Position and Offices
Name Age Since With Company
- ------------------------- --- -------- -------------------------------
G.S. Beckwith Gilbert 63 1997 Chairman of the Board and a
Director *
Richard R. Schilling, Jr. 80 1974 Director
John R. Keller 65 1997 Executive Vice President, and a
Director
Bruce N. Whitman 72 1997 Director
Paul L. Graziani 48 1997 Director
James T. Barry 44 2000 President, Chief Executive
Officer and a Director **
James J. Morgan 63 2005 Director ***
Each director is elected to serve until the succeeding annual meeting of
shareholders and until his successor is duly elected and qualifies.
*Effective February 1, 2003, G.S. Beckwith Gilbert retired as Chief Executive
Officer of the Company.
**Effective February 1, 2003, James T. Barry was appointed Chief Executive
Officer of the Company. Effective April 14, 2003, Mr. Barry was appointed
President of the Company.
***Effective September 12, 2005, James J. Morgan was appointed to the Company's
board of directors.
Page 29 of 66
(b) Identification of Executive Officers
The following table sets forth the names and ages of the Company's executive
officers, as well as the office(s) held by each individual and the year in which
he or she began to serve in such capacity.
Officer Officer Position and Offices
Name Age Since With Company
- ------------------ --- ------- ------------------------------------
James T. Barry 44 1998 President, Chief Executive Officer
and a Director *
Jeffrey P. Devaney 46 2004 Chief Financial Officer, Treasurer,
and Secretary **
John R. Keller 65 1970 Executive Vice President and a
Director
Dr. James A. Cole 65 1988 Senior Vice President of Research &
Development
Matthew H. Marcella 48 2003 Vice President of Software
Development
Ron A. Dunsky 43 2003 Vice President of Marketing ***
Each officer is elected to serve at the discretion of the Board of
Directors.
*Effective February 1, 2003, James T. Barry was appointed Chief Executive
Officer of the Company. Effective April 14, 2003, Mr. Barry was appointed
President of the Company.
**Effective November 16, 2004, Jeffrey P. Devaney was appointed Chief Financial
Officer, Treasurer and Secretary of the Company.
***Effective May 21, 2003, Ron A. Dunsky was appointed as Vice President of
Marketing.
(c) Identification of Certain Significant Employees
None
(d) Family Relationship
None
Page 30 of 66
(e) Business Experience
The following sets forth the business experience during the past five years of
each director and executive officer:
G.S. Beckwith Gilbert Mr. Gilbert has continued to serve as the
Company's Chairman of the Board since his election
in 1997. Mr. Gilbert was appointed Chief Executive
Officer in October of 1998 and served as such
until his retirement from that post on February 1,
2003. In addition, Mr. Gilbert has been President
and Chief Executive Officer of Field Point Capital
Management Company, a merchant-banking firm, since
1988. He is a partner of Wolsey & Co., a
merchant-banking firm and a director of Davidson
Hubeny Brands. Mr. Gilbert is also a trustee of
the Rockefeller University, a member of the Board
of Fellows of Harvard Medical School, a director
of the Albert and Mary Lasker Foundation, and a
trustee of the Williston Northampton School.
Richard R. Schilling, Jr. Mr. Schilling has been a Director of the Company
since 1974. Mr. Schilling is a member of the law
firm of Burns, Kennedy, Schilling & O'Shea, New
York, New York.
Bruce N. Whitman Mr. Whitman has been a Director of the Company
since 1997. Mr. Whitman is the President and a
Director of FlightSafety International and held
other posts such as Executive Vice President since
1961. He is also a Director of Aviall, Inc., The
General Aviation Manufacturers Association, The
Congressional Medal of Honor Foundation and The
Smithsonian National Air & Space Museum. Mr.
Whitman is also a member of the Board of Governors
of the Civil Air Patrol, a trustee of Kent School
and America's National World War II Museum.
Paul L. Graziani Mr. Graziani has been a Director of the Company
since 1997. Mr. Graziani is the President and
Chief Executive Officer of Analytical Graphics,
Inc. (AGI), a leading producer of commercially
available, analysis and visualization software for
the aerospace, defense and intelligence
communities. Mr. Graziani has been recently
recognized as "CEO of the Year" by the
Philadelphia region's Eastern Technology Council
and "Businessman of the Year" by the local Great
Valley Regional Chamber of Commerce. He is also a
Director of The Space Foundation, a member of the
Board of Governors of the Aerospace Industries
Association (AIA); and a member of the advisory
boards of the Galaxy Explorers and Penn State
Great Valley.
James J. Morgan Mr. Morgan has been a director of the Company
since September 12, 2005. Mr. Morgan is a partner
in the New York City based private equity firm
Jacobson Partners. In his role at Jacobson
Partners, Mr. Morgan serves as a board member of
Learning Care Group, Inc. and Bertucci's Inc. Mr.
Morgan retired in 1997 as President and Chief
Executive Officer of Philip Morris Incorporated.
Page 31 of 66
Dr. James A. Cole Dr. Cole currently serves as Senior Vice President
and the Director of Research and Development of
the Company. Dr. Cole earned a Ph.D. in physics
from Johns Hopkins University in 1966. He is a
current member of the American Association for the
Advancement of Science, American Physics Society,
Association for Computing Machinery, Institute of
Electrical and Electronic Engineers and IEEE
Computer Society. Dr. Cole has been with the
Company since 1974.
John R. Keller Mr. Keller has been with the Company since its
inception in 1967 as one of the co-founders. Mr.
Keller received his bachelor's and master degrees
in engineering from New York University in 1960
and 1962, respectively. Mr. Keller currently
serves as Executive Vice President of the Company.
James T. Barry Mr. Barry was named President of the Company on
April 14, 2003 and Chief Executive Officer on
February 1, 2003. Since Mr. Barry joined the
Company in 1998, he has held the positions of
Chief Operating Officer, Chief Financial Officer,
Secretary and Executive Vice President. He is also
a Senior Vice President of Field Point Capital
Management Company. From 1989 to 1998, he was with
Dianon Systems, Inc., most recently as Vice
President of Marketing. Prior to Dianon, Mr. Barry
was an officer in the United States Marine Corps.
Jeffrey P. Devaney Mr. Devaney joined the Company as Chief Financial
Officer and Secretary on June 14, 2004. Prior to
joining the Company, Mr. Devaney was the Chief
Financial Officer at Cierant Corporation from 2002
to 2004. From 2000 to 2001, he was a controller at
SageMaker, Inc. From 1995 to 2000 he was the
controller at Information Management Associates,
Inc.
Matthew H. Marcella Mr. Marcella was named Vice President - Software
Development on January 15, 2003. Mr. Marcella
joined the Company in 2001 from Cityspree Inc.,
where he served as lead software architect from
2000 to 2001. From 1999 to 2000, he was a Vice
President at Deutsche Bank and Nomura Securities.
From 1996 to 1999, he was a technical officer at
UBS Securities.
Ron A. Dunsky Mr. Dunsky was named Vice President of Marketing
on May 21, 2003. Since Mr. Dunsky joined the
Company in 2001, he served as Director of
Marketing and New Product Development. Prior to
joining the Company, Mr. Dunsky was a senior
aviation producer with the New York bureau of
ABCNews.com from 2000 to 2001. Prior to
ABCNews.com, he was a senior aviation producer
with the New York bureau of CNN from 1995 to 2000.
Page 32 of 66
(f) Involvement in Certain Legal Proceedings
The Company knows of no event which occurred during the past five years
and which is described in Item 401(f) of Regulation S-K relating to any director
or executive officer of the Company.
(g) Audit Committee Financial Expert
Our Board of Directors has determined that Paul L. Graziani, Chairman of
the Company's Audit Committee, meets the Securities and Exchange Commission's
criteria of an "audit committee financial expert" as set forth in item 401(h)(2)
of Regulation S-K. Mr. Graziani acquired the attributes necessary to meet such
criteria by holding positions that provided relevant experience. Mr. Graziani is
independent, as defined under applicable National Association of Security
Dealers rules.
(h) Identification of Audit Committee
Our Board of Directors has appointed an Audit Committee, consisting of
three directors. All of the members of the Audit Committee are independent of
our company and management, as independence is defined under applicable National
Association of Securities Dealers rules. The Audit Committee consists of Mr.
Graziani, Mr. Schilling and Mr.Whitman.
(i) Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, executive officers and 10%
stockholders to file reports of ownership and reports of change in ownership of
the Company's Common Stock and other equity securities with the Securities and
Exchange Commission. Directors, executive officers and 10% stockholders are
required to furnish the Company with copies of all Section 16(a) forms they
file. Based on a review of the copies of such reports furnished to it, the
Company believes that during the fiscal year ended October 31, 2005, the
Company's directors, executive officers and 10% stockholders complied with all
Section 16(a) filing requirements applicable to them.
(j) Board Nominations by Shareholders
There have not been any material changes to the procedures by which the
Company's shareholders may recommend nominees to the Company's board of
directors as disclosed in the definitive proxy statement on Schedule 14A filed
on February 28, 2005 by the Company with the Securities and Exchange Commission
in connection with the Company's 2005 annual shareholder meeting.
(k) Code of Ethics
The Company hereby incorporates by reference into this Item the
information contained under the heading "Code of Ethics" in the Company's
definitive proxy statement that will be filed with the Securities and Exchange
Commission within 120 days of October 31, 2005 (the "2006 Proxy Statement.")
ITEM 11. EXECUTIVE COMPENSATION
The Company hereby incorporates by reference into this Item the
information contained under the heading "Executive Compensation" in the 2006
Proxy Statement.
Page 33 of 66
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The Company hereby incorporates by reference into this Item the
information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the 2006 Proxy Statement.
For information regarding securities authorized for issuance under the
Company's equity compensation plans, see Item 5(d) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with management and others
Effective November 1, 2003, the Company and Mr. Gilbert modified certain terms
and conditions of the outstanding notes as of October 31, 2003. The modified
terms included a maturity date of November 1, 2004 as well as the issuance of
600,000 shares of Megadata common stock as payment of annual interest on such
note. The Company issued 600,000 shares of common stock on January 15, 2004
representing the payment of interest on such note for fiscal 2004.
During fiscal 2004, the Chairman of the Company, Mr. Gilbert loaned the Company
an additional $400,000 in the aggregate under certain promissory notes bearing
interest of 4.5% per annum and maturing on November 1, 2004, bringing the loan
to a total of $8,939,880.
On January 28, 2005, the Company and Mr. Gilbert entered into a subsequent
extended debt agreement effective November 1, 2004. with a maturity date of
November 1, 2005 bearing an interest rate of 4.5%. The notes payable are
classified as long-term as of October 31, 2004.
During fiscal 2005 Mr. Gilbert lent the Company an additional $1,123,415,
bringing the loan to a total of $9,989,880 on October 31, 2005. On January 27,
2006, the Company and Mr. Gilbert entered into a subsequent extended debt
agreement effective November 1, 2005, with a maturity date of November 1, 2006
bearing an interest rate of 4.5%.
Effective October 1998, the Company began leasing space from Field Point
Capital Management Company (FPCM), a company 100% owned by the Company's
Chairman, for $1,000 per month. For the year ended October 31, 2004, the
Company's monthly rent for space subleased from FPCM was reduced to $500 per
month and its obligation for such lease was on a month-to-month basis. Effective
July 1, 2004, the Company terminated its month to month sublease with FPCM. The
Company did not make any rent payments to FPCM during the year ended October 31,
2005. For the year ended October 31, 2004, the Company paid FPCM total rent
payments of approximately $4,000. For the year ended October 31, 2003, the
Company paid FPCM total rent payments of approximately $12,000.
(b) Certain Business Relationships
None
(c) Indebtedness of Management
None
(d) Transactions with Promoters
Not applicable
Page 34 of 66
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Company hereby incorporates by reference into this Item the
information contained under the heading "Principal Accounting Fees and Services"
in the 2006 Proxy Statement.
Page 35 of 66
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) List of documents filed as a part of
this Annual Report on Form 10-K: Page
-------------------------------- ----
(1) Index to consolidated financial statements
included in Part II of this Report:
Report of Independent Registered Public
Accounting Firm - BDO Seidman, LLP F-1
Report of Independent Registered Public
Accounting Firm - Ernst & Young LLP F-2
Consolidated balance sheets as of
October 31, 2005 and 2004 F-3
Consolidated statements of
operations for the years ended
October 31, 2005, 2004 and 2003 F-4
Consolidated statements of
stockholders' deficit for the years ended
October 31, 2005, 2004 and 2003 F-5
Consolidated statements of cash
flows for the years ended
October 31, 2005, 2004 and 2003 F-6
Notes to consolidated financial
statements F-7
(2) Index to Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts S-1
Schedules for which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
Page 36 of 66
(c) Index to Exhibits
The following exhibits are required to be filed with this Annual Report on Form
10-K by Item 15(a) (3) and (c).
Exhibits
3.1 The Company's composite Certificate of Incorporation, dated as of January
24, 1990, is incorporated by reference from our Annual Report on Form 10-K
for the fiscal year ended October 31, 1989.
3.2 The Company's By-laws, dated as of May 16, 1988, are incorporated by
reference from our Annual Report on Form 10-K for the fiscal year ended
October 31, 1998.
10.1 The Company's 1988 Bonus Pool Plan is incorporated by reference from our
Annual Report on Form 10-K for the fiscal year ended October 31, 1998.
10.2 The Company's 1988 Stock Option Plan is incorporated by reference from our
Annual Report on Form 10-K for the fiscal year ended October 31, 1998.
10.3 The Company's 1999 Stock Incentive Plan is incorporated by reference from
our Proxy Statement on Schedule 14A dated June 23, 1999.
10.4 Severance Agreement with Yitzhak N. Bachana effective October 2, 1998 is
incorporated by reference from our Form 8-K, dated October 6, 1998.
10.5 Letter of Agreement for employment services, dated December 28, 1999,
between the Company and Ken J. McNamara is incorporated by reference to
Exhibit 10.5 to our Annual Report on Form 10-K for the fiscal year ended
October 31, 1999.
10.6 The Company's amendment to the 1999 Stock Incentive Plan is incorporated
by reference from our Proxy Statement on Schedule 14A, dated March 12,
2002.
10.7 Letter of Agreement for employment services, dated September 5, 2002,
between the Company and Delon Dotson is incorporated by reference from our
Form 8-K , dated September 12, 2002.
10.8 The Company's amendment to the 1999 Stock Incentive Plan is incorporated
by reference from our Proxy Statement on Schedule 14A, dated March 12,
2003.
10.9 Debt Agreement, dated November 1, 2003, between the Company and G.S.
Beckwith Gilbert is incorporated by reference from our Form 8-K, dated
January 23, 2004.
10.10 Debt Extension Agreement, dated as of, November 1, 2004, between the
Company and G.S. Beckwith Gilbert.
16 Change in Certifying Accountant is incorporated by reference from our Form
8-K/A, dated October 28, 1998.
21 List of Subsidiaries is incorporated by reference from our Annual Report
on Form 10-K report for the fiscal year ended October 31, 1981.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Page 37 of 66
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Page 38 of 66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MEGADATA CORPORATION
DATED: JANUARY 27, 2006 By: /s/ James T. Barry
----------------------------------------
James T. Barry
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated:
DATED: JANUARY 27, 2006 /s/ James T. Barry
----------------------------------------
James T. Barry
President, Chief Executive Officer and Director
(Principal Executive Officer)
DATED: JANUARY 27, 2006 /s/ Jeffrey P. Devaney
----------------------------------------
Jeffrey P. Devaney
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
Page 39 of 66
SIGNATURES (CONTINUED)
DATED: JANUARY 27, 2006 /s/ G.S. Beckwith Gilbert
----------------------------------------
G.S. Beckwith Gilbert
Chairman and Director
DATED: JANUARY 27, 2006 /s/ John R. Keller
----------------------------------------
John R. Keller
Executive Vice President and Director
DATED: JANUARY 27, 2006 /s/ Richard R. Schilling, Jr.
----------------------------------------
Richard R. Schilling, Jr.
Director
DATED: JANUARY 27, 2006 /s/ Bruce N. Whitman
----------------------------------------
Bruce N. Whitman
Director
DATED: JANUARY 27, 2006 /s/ Paul L. Graziani
----------------------------------------
Paul L. Graziani
Director
DATED: JANUARY 27, 2006 /s/ James J. Morgan
---------------------------------------
James J. Morgan
Director
Page 40 of 66
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Megadata Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Megadata
Corporation and Subsidiaries as of October 31, 2005 and 2004 and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the years then ended. We have also audited the schedule as listed in Part IV,
Item 15(a)(2) for the two years ended October 31, 2005. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation and schedule. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Megadata Corporation
and Subsidiaries at October 31, 2005 and 2004, and the results of its operations
and its cash flows for the two years then ended October 31, 2005, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
Melville, New York
January 9, 2006, except for
footnote 6, which is January 27, 2006
F-1
Page 41 of 66
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Megadata Corporation and Subsidiaries
We have audited the accompanying consolidated statements of operations,
stockholders' deficit, and cash flows of Megadata Corporation and Subsidiaries
for the year ended October 31, 2003. Our audit also includes the financial
statement schedule listed in the Index at Item 15(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements 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 results of operations and
cash flows of Megadata Corporation and Subsidiaries for the year ended October
31, 2003, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Melville, New York
January 16, 2004
F-2
Page 42 of 66
Megadata Corporation and Subsidiaries
Consolidated Balance Sheets
OCTOBER 31,
2005 2004
------------ ------------
ASSETS
Current assets:
Cash $ 89,029 $ 122,849
Accounts receivable, net 483,617 422,641
Inventories 166,118 138,648
Prepaid expenses and other current assets 170,191 34,456
------------ ------------
Total current assets 908,955 718,594
Property, plant and equipment, net 128,352 92,111
PASSUR(R) network, net 2,275,884 2,481,375
Software development costs, net 947,626 779,926
Other assets 26,425 12,575
------------ ------------
Total Assets $ 4,287,242 $ 4,084,581
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 321,238 $ 292,974
Accrued expenses and other current liabilities 559,908 369,106
Accrued expenses--related parties 81,564 135,604
Note payable, current portion 4,815 --
Deferred income, current portion 712,333 770,419
------------ ------------
Total current liabilities 1,679,858 1,568,103
Note payable, less current portion 4,815 --
Deferred income, less current portion 106,505 219,957
Notes payable--related party 9,989,880 8,866,465
------------ ------------
11,781,058 10,654,525
Commitment and contingencies
Stockholders' deficit:
Preferred shares - authorized 5,000,000 shares, par value
$.01 per share; none issued or outstanding -- --
Common shares--authorized 10,000,000 shares, par value
$.01 per share; issued 4,784,615 in 2005 and 2004 47,846 47,846
Additional paid-in capital 4,094,182 4,094,182
Accumulated deficit (10,012,369) (9,088,497)
------------ ------------
(5,870,341) (4,946,469)
Treasury Stock, at cost, 696,500 shares in 2005
and 2004 (1,623,475) (1,623,475)
------------ ------------
Total stockholders' deficit (7,493,816) (6,569,944)
------------ ------------
Total liabilities and stockholders' deficit $ 4,287,242 $ 4,084,581
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
Page 43 of 66
Megadata Corporation and Subsidiaries
Consolidated Statements of Operations
YEARS ENDED OCTOBER 31,
2005 2004 2003
------------ ------------ ------------
Revenues:
Subscription $ 3,270,098 $ 2,556,078 $ 1,738,709
Maintenance 434,175 429,650 514,550
Other 104,500 124,880 29,020
------------ ------------ ------------
Total revenues 3,808,773 3,110,608 2,282,279
------------ ------------ ------------
Cost and expenses:
Cost of sales 2,002,335 2,033,182 1,767,556
Research and development 392,496 392,766 403,080
Selling, general and administrative expenses 1,920,008 1,694,567 1,940,961
------------ ------------ ------------
4,314,839 4,120,515 4,111,597
------------ ------------ ------------
Loss from operations (506,066) (1,009,907) (1,829,318)
Other income (expense):
Interest income 1,928 473 566
Interest expense--related party (414,576) (375,675) (654,385)
------------ ------------ ------------
Loss before income taxes (918,714) (1,385,109) (2,483,137)
Provision for income taxes 5,158 4,427 2,985
------------ ------------ ------------
Net loss $ (923,872) $ (1,389,536) $ (2,486,122)
============ ============ ============
Basic and diluted loss per common share $ (.23) $ (.35) $ (.71)
============ ============ ============
Weighted-average shares used in the calculation of basic
and diluted net loss per common share 4,088,115 3,961,885 3,484,365
============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
Page 44 of 66
Megadata Corporation and Subsidiaries
Consolidated Statements of Stockholders' Deficit
Years Ended October 31, 2005, 2004, and 2003
COMMON
SHARES AFTER
DEDUCTING ADDITIONAL TOTAL
TREASURY COMMON PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
STOCK SHARES AMOUNT CAPITAL STOCK DEFICIT
------------------------------------------------------------------------------------
Balance at October 31, 2002 3,473,115 41,696 3,716,832 (5,212,839) (1,623,475) (3,077,786)
Exercise of common stock options 15,000 150 2,100 -- -- 2,250
Common stock options granted 21,250
for services performed -- -- 21,250 -- --
Net loss (2,486,122) (2,486,122)
------------------------------------------------------------------------------------
Balance at October 31, 2003 3,488,115 41,846 3,740,182 (7,698,961) (1,623,475) (5,540,408)
Issued as interest on notes payable 600,000 6,000 354,000 -- -- 360,000
Net loss -- -- -- (1,389,536) -- (1,389,536)
------------------------------------------------------------------------------------
Balance at October 31, 2004 4,088,115 $ 47,846 $ 4,094,182 $ (9,088,497) $(1,623,475) $ (6,569,944)
------------------------------------------------------------------------------------
NET LOSS -- -- -- (923,872) -- (923,872)
------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 2005 4,088,115 $ 47,846 $ 4,094,182 $(10,012,369) $(1,623,475) $ (7,493,816)
------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
Page 45 of 66
Megadata Corporation and Subsidiaries
Consolidated Statements of Cash Flows
YEARS ENDED OCTOBER 31,
2005 2004 2003
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (923,872) $ (1,389,536) $ (2,486,122)
Adjustments to reconcile net loss to net cash used in
(provided by) operating activities:
Depreciation and amortization 774,945 709,787 651,660
Provision for bad debts -- -- 2,488
Loss on disposal of network assets -- 110,980 150,492
Common stock issued for interest -- 360,000
Common stock options granted for services performed
-- -- 21,250
Changes in operating assets and liabilities:
Accounts receivable (60,976) 63,052 (257,505)
Inventories (27,470) 56,606 108,379
Prepaid expenses and other current assets (135,736) 49,469 (11,725)
Other assets (13,850) 4,740 (1,230)
Accounts payable 28,264 83,681 (247,462)
Deferred income (171,538) 147,688 58,313
Accrued expenses and other current liabilities 136,762 (50,533) (26,414)
--------------------------------------------
Total adjustments 530,401 1,535,470 448,246
--------------------------------------------
Net cash provided by (used in) operating activities (393,471) 145,934 (2,037,876)
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to PASSUR(R) network (332,382) (198,897) (495,525)
Capital expenditures (73,382) (27,484) (15,321)
Additions to Software development costs, net (358,000) (245,684) (252,347)
--------------------------------------------
Net cash used in investing activities (763,764) (472,065) (763,193)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock options exercised -- -- 2,250
Proceeds from notes payable--related party 1,123,415 400,000 2,761,465
--------------------------------------------
Net cash provided by financing activities 1,123,415 400,000 2,763,715
--------------------------------------------
Increase (Decrease) in cash (33,820) 73,869 (37,354)
Cash--beginning of year 122,849 48,980 86,334
--------------------------------------------
Cash--end of year $ 89,029 $ 122,849 $ 48,980
============================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 414,576 $ 6,475 $ 632,934
Income taxes $ 5,159 $ 4,426 $ 2,985
Capital expenditures financed $ 14,000 -- --
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
Page 46 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2005
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Megadata Corporations, (the "Company") principal business is the delivery of
unique flight information, application software, and web-delivered collaborative
decision tools to the aviation industry and organizations that serve, or are
served by, the aviation industry.
BASIS OF PRESENTATION
At October 31, 2005, the Company's current liabilities exceeded current assets
by $771,000, it had a stockholder's deficit of $10,012,000, and it incurred a
net loss of $924,000 for the year ended October 31, 2005.
Management is addressing the working capital and stockholders' deficiencies and
operating losses by aggressively marketing the Company's PASSUR(R) information
capabilities in its existing product lines, enhancements to existing products as
well as in new products, which are currently being developed and in some cases
have been deployed. The Company is continuing to increase the size of the
Company-owned PASSUR(R) network, which management believes will lead to
continued growth in subscription-based revenues. In addition, the Company will
attempt to obtain external financing, and if such external financing is not
consummated, the Company has a commitment to receive additional financial
support from a significant shareholder through January 12, 2007. Such commitment
for financial support may be in the form of additional advances or loans to the
Company in addition to the deferral of principal and interest payments due on
existing loans, if deemed necessary.
Footnotes have been rounded to the nearest thousand for presentation purposes.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Megadata
Corporation and its wholly-owned subsidiary. All significant inter-company
transactions and balances have been eliminated in consolidation.
F-7
Page 47 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION POLICY
The Company follows the provisions of the American Institute of Certified Public
Accountants Statement of Position 97-2, or SOP 97-2, SOFTWARE REVENUE
RECOGNITION, as amended. SOP 97-2 delineates the accounting practices for
software products, maintenance and support services and consulting revenue.
Under SOP 97-2, the Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is determinable and
collection of the resulting receivable is probable. For arrangements involving
multiple elements (e.g. maintenance, support and other services), the Company
allocates revenue to each element of the arrangement based on vendor-specific
objective evidence of its fair value, or for products not being sold separately,
the objective and verifiable fair value established by management.
The Company recognizes revenue on the sale of products and systems when the
products or systems have been shipped and in accordance with Staff Accounting
Bulletin 104 and SOP 97-2. Installation charges, if any, are not material and
are recognized when installation services are completed.
The Company recognizes services and maintenance revenues on a straight-line
basis over the service contract period. Revenues for data subscription services
are recognized on a monthly basis upon the execution of an agreement and the
customer's receipt of the data.
The Company recognizes license fee revenues on a straight-line basis over either
the term of the license agreement or the expected useful life of such license
arrangement, whichever is longer, which typically does not exceed five years.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVENTORIES
Inventories are valued at the lower of cost or market with cost being determined
using the first-in, first-out (FIFO) method. Costs included in inventories
consist of materials, labor, and manufacturing overhead, which is related to the
purchase and manufacturing of inventories.
F-8
Page 48 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE
The Company uses installment license and/ or maintenance agreements as standard
business practice. The Company has a history of successfully collecting
primarily all amounts due under the original payment terms, without making
concessions on payments, software products, maintenance or other services. Net
account receivable is composed of either the monthly, quarterly or annual
committed amounts due from customers pursuant to the terms of each respective
customer's agreement. These account receivable balances include unearned revenue
attributable to deferred subscription revenues, deferred maintenance revenues
and unamortized license fee revenues. Deferred revenue amounts represent fees
billed prior to actual performance of services, which will be amortized into
revenue over either the respective license agreement term or the estimated
useful life of such revenue, whichever is longer.
For the period ended October 31, 2005, the provision for doubtful accounts is
$6,000 compared to none recorded as of the fiscal year ended October 31, 2004.
The Company monitors its outstanding accounts receivable balance and believes
the $6,000 provision is reasonable.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and are depreciated on a
straight-line basis over the estimated useful lives of the related assets.
Amortization of leasehold improvements is calculated on a straight-line basis
over the estimated useful life of the improvements or the term of the lease,
including renewal options expected to be exercised, whichever is shorter.
Routine repair and maintenance are expensed when incurred.
PASSUR NETWORK
The PASSUR(R) network installations, which include the direct and indirect
production and installation costs incurred for each of the Company-owned
PASSUR(R) systems (the "PASSUR(R) Network"), are recorded at cost, net of
accumulated depreciation of $1,929,000 and $1,441,000 as of October 31, 2005 and
2004, respectively. Depreciation is charged to cost of sales and is calculated
using the straight-line method over the estimated useful life of the asset,
which is estimated at seven years for PASSUR(R) Systems and five years for
related workstations. Units that are not placed into service (at October 31,
2005 total of 3 units) are not depreciated until they are placed in service.
During fiscal 2005, 2004 and 2003, the Company capitalized $475,000, $353,000
and $612,000 of costs related to the PASSUR(R) Network, respectively. During
fiscal 2005, the amount capitalized to the PASSUR(R) Network includes transfers
from inventory of approximately $44,000.
F-9
Page 49 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PASSUR NETWORK (CONTINUED)
In fiscal 2005 the Company did not dispose of any PASSUR(R) Network assets.
During fiscal 2004, the Company disposed of certain PASSUR(R) Network assets and
recorded a loss on disposal of approximately $111,000, which represented the
net book value of these assets. Such loss on disposal was recorded in cost of
sales.
CAPITALIZED SOFTWARE COSTS
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 86, "ACCOUNTING FOR THE COSTS OF SOFTWARE TO BE SOLD,
LEASED, OR OTHERWISE MARKETED." Costs incurred to develop computer software
products as well as significant enhancements to software features of the
existing products to be sold or otherwise marketed are capitalized, after
technological feasibility is established and ending when the product is
available for release to customers. Once the software products become available
for general release to the public, the Company will begin to amortize such costs
to cost of sales.
Amortization of capitalized software costs is provided on a product-by-product
basis based on the greater of the ratio of current gross revenues to the total
of current and anticipated future gross revenues or the straight-line method
over the estimated economic life of the product beginning at the point the
product becomes available for general release, typically over five years. Costs
incurred to improve and support products after they become available for general
release are charged to expense as incurred. The assessment of recoverability of
capitalized software development costs requires the exercise of judgment by
management. In the opinion of management, all such costs capitalized as of
October 31, 2005 are recoverable through anticipated future sales of such
applicable products. During fiscal 2005 and 2004 the Company capitalized
approximately $358,000 and $287,000, respectively. During fiscal year 2005, 2004
and 2003, the Company recorded approximately $190,000, $145,000 and $65,000 of
amortization related to software development projects, respectively, of which
certain projects were completed and released for sale and certain projects were
still in development as each year end.
In fiscal 2005 the Company did not write off any capitalized software projects.
During fiscal 2004, the Company wrote off costs incurred to date for one
in-process capitalized software project totaling approximately $41,000, which
was charged to Cost of Sales. The capitalized software project commenced in
fiscal 2001 and was deemed by the Company to be no longer viable. The project
was never completed nor made available for sale.
F-10
Page 50 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment when circumstances indicate
the carrying amount of an asset may not be recoverable. An impairment is
recognized to the extent the sum of undiscounted estimated future cash flows
expected to result from the use of the asset is less than the carrying value.
Assets to be disposed of are carried at the lower of their carrying value or
fair value, less costs to sell.
The Company evaluates the periods of amortization continually in determining
whether later events and circumstances warrant revised estimates of useful
lives. If estimates are changed, the unamortized costs will be allocated to the
increased or decreased number of remaining periods in the revised life.
COST OF SALES
The Company has not segregated its cost of sales between cost of system sales
and cost of subscription and maintenance revenues, as it is not practicable to
segregate such costs. Costs associated with system sales consist primarily of
purchased materials, direct labor and overhead costs.
Costs associated with subscription and maintenance revenues consists primarily
of direct labor, communication costs, depreciation of PASSUR(R) Network assets,
amortization of software development costs and overhead costs allocations. Also
included in costs of sales are costs associated with the upgrades of PASSUR(R)
systems necessary to make such systems compatible with new software applications
as well as the ordinary repair and maintenance of existing network systems.
Additionally, cost of sales in each reporting period are impacted by: (1) the
number of PASSUR(R) Network units added which include the production, shipments
and installations of these assets which are capitalized to the PASSUR(R)
Network; and (2) capitalized costs associated with software development programs
which are amortized in cost of sales.
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax return.
The Company uses the liability method in accounting for income taxes in
accordance with SFAS No. 109, "ACCOUNTING FOR INCOME TAXES." Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
F-11
Page 51 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
NET LOSS PER COMMON SHARE INFORMATION
The Company reports basic and diluted net loss per common share in accordance
with the Financial Accounting Standards Board Statement No. 128, "EARNINGS PER
SHARE." Net loss per common share was computed using the weighted-average number
of common shares outstanding during the period. Conversion of the common
equivalent shares relating to outstanding stock options and warrants is not
assumed since the results would have been antidilutive.
DEFERRED INCOME
Deferred income includes advances received on maintenance agreements and/or
subscription services which are derived from the Company's PASSUR(R) Network and
which may be prepaid either annually or quarterly, as well as advanced one-time
payments received for license fees relating to Company software applications.
Revenues from maintenance and subscription services are recognized as income
ratably over the maintenance and/or subscription period that coincides with the
respective agreement. Revenues from license fees are recognized as income on a
straight-line basis over either the term of the license agreement or expected
useful life of such license arrangement, whichever is longer, which typically
does not exceed five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts of the Company's cash, receivables, accounts payable and
accrued liabilities approximate their fair values principally because of the
short-term nature of these items. The fair value of related party debt is not
practical to determine.
F-12
Page 52 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company grants options for a fixed number of shares to employees, directors
and consultants with an exercise price equal to the fair value of the shares at
the date of grant. The Company accounts for stock option grants to employees
under the recognition and measurement principles of Accounting Principles Board
("APB") No 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" and related
interpretations because the Company believes the alternative fair value
accounting provided for under SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION," requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB No. 25, because
the exercise price of the Company's employee stock options equals the market
price (fair value) of the underlying stock on the date of grant, no compensation
expense is recorded.
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS No. 123 as
amended by SFAS No. 148 to stock-based compensation (see Note 8. Stock Options):
FISCAL YEARS ENDED
--------------------------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003
--------------------------------------------
Reported net loss $ (924,000) $ (1,390,000) $ (2,486,000)
Pro-forma stock compensation
expense (28,900) (22,000) (33,000)
--------------------------------------------
Pro-forma net loss $ (952,900) $ (1,412,000) $ (2,519,000)
============================================
Reported basic and diluted net
loss per common share $ (.23) $ (.35) $ (.71)
============================================
Pro-forma basic and diluted net
loss per common share $ (.23) $ (.36) $ (.72)
============================================
F-13
Page 53 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE LOSS
For the fiscal years ended October 31, 2005, 2004 and 2003, the Company's
comprehensive loss is equivalent to that of the Company's total net loss for
those respective periods.
Certain reclassifications have been made to the prior year financial statements
to conform to the current period presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
"Shared-Based Payment." Statement 123(R) addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the grant-date fair-value of
stock options and other equity-based compensation issued to employees in the
income statement. The revised Statement generally requires that an entity
account for those transactions using the fair-value-based method, and eliminates
the intrinsic value method of accounting in APB Opinion No. 25, "Accounting for
Stock Issued to Employees", which was permitted under Statement 123, as
originally issued.
The revised Statement requires entities to disclose information about the nature
of the share-based payment transactions and the effects of those transactions on
the financial statements.
Statement 123(R) is effective for public companies that do not file as small
business issuers as of the beginning of the first annual reporting period that
begins after June 15, 2005 (i.e., first quarter 2006 for the Company). All
public companies must use either the modified prospective or the modified
retrospective transition method. Early adoption of this Statement for interim or
annual periods for which financial statements or interim reports have not been
issued is encouraged. The Company is currently evaluating a plan of
implementation and expects that the financial statement impact of adoption will
approximate the proforma impact presented above.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, ("SFAS 154") which is a replacement of APB Opinion No. 20,
Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements. SFAS 154 changes the accounting for and reporting
of changes in accounting principles and error corrections by requiring
retrospective application to prior period financial statements unless
impracticable. This statement is effective in fiscal years beginning after
December 15, 2005 and the Company plans to adopt SFAS 154 on October 1, 2006.
The Company does not expect the adoption of SFAS 154 to have a significant
impact on its financial statements.
F-14
Page 54 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. INVENTORIES
Inventories are summarized as follows:
OCTOBER 31,
2005 2004
-------------------
Parts and raw materials $102,000 $ 63,000
Finished goods 64,000 76,000
-------------------
$166,000 $139,000
===================
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
ESTIMATED
USEFUL OCTOBER 31,
LIVES 2005 2004
--------------------------------------
Leasehold improvements 3-5 years $ 109,000 $ 109,000
Equipment 5-10 years 2,386,000 2,303,000
Furniture and fixtures 5-10 years 415,000 415,000
------------------------
2,910,000 2,827,000
Less accumulated depreciation
and amortization 2,782,000 2,735,000
------------------------
$ 128,000 $ 92,000
========================
The Company recorded depreciation and amortization expense on the assets
included in property, plant and equipment of $47,000, $34,000, and $50,000 for
the years ended October 31, 2005, 2004, and 2003, respectively.
F-15
Page 55 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. SOFTWARE DEVELOPMENT COSTS
Software development costs are comprised of costs incurred to develop computer
software products as well as significant enhancements to software features of
the existing products to be sold or otherwise marketed, after technological
feasibility is established and ending when the product is available for release
to customers. As of October 31, 2005 and 2004, the Company had approximately
$1,363,000, and $1,005,000 of such costs capitalized, and $416,000 and $225,000
of accumulated amortization, respectively. The weighted average amortization
period of the Company's software development costs as of October 31, 2005 is
approximately 3 years.
Amortization expense on these assets for the fiscal years ended October 31,
2005, 2004 and 2003 was approximately $190,000, $145,000, and $65,000,
respectively. Amortization expense for the years ended October 31, 2006, 2007,
2008, 2009 and 2010 will approximate $199,000, $187,000, $142,000, $57,000 and
$9,000, respectively.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
OCTOBER 31,
2005 2004
-------------------
Accrued payroll, payroll taxes and benefits $245,000 $149,000
Accrued professional fees 151,000 103,000
Accrued license fees 100,000 75,000
Accrued travel and entertainment -- 19,000
Accrued advertising and marketing 28,000 --
Other accrued liabilities 36,000 23,000
-------------------
$560,000 $369,000
===================
6. NOTES PAYABLE--RELATED PARTY
Effective November 1, 2003, the Company and Mr. Gilbert modified certain terms
and conditions of the outstanding notes as of October 31, 2003. The modified
terms included a maturity date of November 1, 2004 as well as the issuance of
600,000 shares of Megadata common stock as payment of annual interest on such
note. The Company issued 600,000 shares of common stock on January 15, 2004
representing the payment of interest on such note for fiscal 2004.
During fiscal 2004, the Chairman of the Company, Mr. Gilbert loaned the Company
an additional $400,000 in the aggregate under certain promissory notes bearing
interest of 4.5% per annum and maturing on November 1, 2004, bringing the loan
to a total of $8,939,880.
On January 28, 2005, the Company and Mr. Gilbert entered into a subsequent
extended debt agreement effective November 1, 2004. with a maturity date of
November 1, 2005 bearing an interest rate of 4.5%. The notes payable are
classified as long-term as of October 31, 2004.
During fiscal 2005 Mr. Gilbert lent the Company an additional $1,123,415,
bringing the loan to a total of $9,989,880 on October 31, 2005. On January 27,
2006, the Company and Mr. Gilbert entered into a subsequent extended debt
agreement effective November 1, 2005, with a maturity date of November 1, 2006
bearing an interest rate of 4.5%.
F-16
Page 56 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LEASES AND NOTE PAYABLE
The Company's software development facility is located in Bohemia, New York,
under a lease that was extended for an additional three years commencing
November 1, 2005 through October 31, 2008. Minimum rent under this agreement for
the period ended October 31, 2005 approximates $86,000 per year. This lease
provides for additional payments of real estate taxes and other operating
expenses over the minimum rental amount. The Company's headquarters located in
Greenwich, CT are rented for a five year period ending June 30, 2009 at an
amount of $45,000 per year. All other operating leases are under a
month-to-month arrangement. See also Note 10. Related Parties.
Fiscal Year Ended October 31: Operating Leases
2006 $ 134,000
2007 136,000
2008 139,000
2009 30,000
2010 --
Thereafter --
Total minimum lease payments $ 439,000
In November of 2005, the Company entered into a three year financing agreement
with a third party for accounting software. The total amount financed at zero
percent interest amounted to approximately $14,000. The minimum payments due on
the note will approximate $5,000 for fiscal year ended October 2006 and 2007,
respectively. The note will be paid in full during fiscal year 2007.
8. INCOME TAXES
The Company's provision for income taxes in each year consists of current state
and local minimum taxes.
At October 31, 2005, the Company has available a federal net operating loss
carry-forward of approximately $16,079,000 for income tax purposes which will
expire in various tax years from 2006 through 2025. The Company has provided a
full valuation allowance on the net deferred tax asset of approximately
$6,371,000, which primarily consists of the net operating loss carry-forwards
and available tax credits.
F-17
Page 57 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS
The Company's stock option plans provide for the granting of stock options for
up to 1,800,000 shares of the Company's common stock. The option price per share
is the fair market value at date of grant, except on the issuance of
non-qualified options in which the option price is not less than 85% of the fair
market value of the common stock. Options granted may be exercised up to a
maximum of ten years from the date of grant; however, individuals who own more
than 10% of the Company's common stock must exercise their options within five
years of the date of the grant and these options are exercisable at 110% of the
fair market value of the common stock at the date of grant.
SFAS No. 123 and SFAS No. 148 define a fair value method of accounting for the
issuance of stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. Pursuant to SFAS No. 123 and SFAS No. 148, companies are
encouraged, but are not required, to adopt the fair value method of accounting
for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
APB No. 25, but are required to disclose in a note to the consolidated financial
statements pro forma net loss and per share amounts as if the Company had
applied the new method of accounting. SFAS No. 123 and SFAS No. 148 also require
increased disclosures for stock based compensation arrangements.
The Company has elected to comply with APB Opinion No. 25 and related
interpretations in accounting for its stock options because the alternate fair
value accounting provided for under SFAS No. 123 requires use of option
valuation models which were not developed for use in valuing employee stock
options. Under APB Opinion No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
In accordance with SFAS No. 123, pro forma information regarding net loss and
net loss per common share has been determined as if the Company had accounted
for its employee stock options under the fair value method of that statement.
The fair value for these stock options was estimated at the date of grant, using
a Black-Scholes option pricing model with the following weighted average
assumptions for 2005, 2004, and 2003, respectively: risk-free interest rates of
3.92% for fiscal 2005, 2004 and 2003; no dividend yield; volatility factors of
the expected market price of the Company's common stock of 1.113 in fiscal 2005;
1.113 in fiscal 2004, and 1.133 in fiscal 2003; and an 8 year weighted-average
expected life of the options.
F-18
Page 58 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including expected stock price volatility.
In management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options due to
changes in subjective input assumptions which may materially affect the fair
value estimate and because the Company's employee stock options have
characteristics significantly different from those of traded options. For
purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period.
Information with respect to options during the years ended October 31, 2005,
2004 and 2003 are as follows:
2005 2004 2003
--------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------------------------------------------------------------------------
Options outstanding--
beginning of year 1,210,000 $ .56 1,043,000 $ .58 1,093,000 $ .65
Incentive options granted 351,000 .25 342,000 .42 319,000 .32
Options forified and expired -- -- (175,000) .40 (354,000) .58
Options exercised -- -- -- -- (15,000) .15
---------------------------------------------------------------------------
Options outstanding--
end of year 1,561,000 $ .49 1,210,000 $ .56 1,043,000 $ .58
===========================================================================
Options exercisable at
end of year 909,900 $ .62 680,710 $ .69 596,331 $ .73
===========================================================================
Weighted average fair
value per share of
options granted during $ .25 $ .42 $ .29
the year ======= ======= =======
F-19
Page 59 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding
at October 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- --------------- ------ ---------------- -------------- ------ --------------
$ .15 - $ .24 333,500 6.7 years $.15 147,500 $.15
$ .25 - $ .38 569,000 8.0 years .29 205,740 .28
$ .40 - $ .55 316,000 7.5 years .50 214,160 .50
$ .63 - $ .84 285,000 4.9 years .79 285,000 .79
$1.63 - $2.75 57,500 4.4 years 2.60 57,500 2.60
---------- ---------
1,561,000 909,900
========== =========
As of October 31, 2005, there were 1,840,000 shares of common stock reserved for
future issuance under the Company's stock option plan.
10. MAJOR CUSTOMERS
The Company is a supplier of information and decision support software serving
the needs of the aviation industry, primarily airlines, airports and other
aviation related companies. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral. Credit losses
historically have been immaterial.
During the year ended October 31, 2005, one customer accounted for approximately
18% of total revenues. During the year ended October 31, 2004, one customer
accounted for approximately 23% of total revenues. During the year ended October
31, 2003, two customers accounted for approximately 24% and 13% of total
revenues. The Company had export sales of approximately $174,000, $64,000 and
$74,000 in fiscal 2005, 2004, and 2003, respectively. All sales, including
export sales, are denominated in U.S. dollars.
11. RELATED PARTY TRANSACTIONS
Effective October 1998, the Company began leasing space from Field Point Capital
Management Company (FPCM), a company 100% owned by the Company's Chairman, for
$1,000 per month. For the year ended October 31, 2004, the Company's monthly
rent for space subleased from FPCM was reduced to $500 per month and its
obligation for such lease was on a month-to-month basis. Effective July 1, 2004,
the Company terminated its month to month sublease with FPCM. The Company did
not make any rent payments to FPCM during the year ended October 31, 2005. For
the year ended October 31, 2004, the Company paid FPCM total rent payments of
approximately $4,000. For the year ended October 31, 2003, the Company paid FPCM
total rent payments of approximately $12,000.
F-20
Page 60 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
For the years ended October 31, 2005, 2004, and 2003 the Company paid
approximately $24,000, $23,000, and $16,000 respectively, to Surf-Tech
Manufacturing, Inc. (a non-public corporation) for materials and labor in
connection with either the production of various replacement components, systems
production or upgrade equipment of PASSUR(R) systems. A Company Executive Vice
President and Director is a 50% shareholder of the aforementioned company, and
the Company believes that these rates are competitive and are at or below market
rates.
On January 19, 2005, the Company and Field Point Capital Management Company
(FPCM), a company 100% owned by Mr. Gilbert, entered into an agreement to share
the services of an employee of the Company. Mr. Gilbert reimbursed the Company
for approximately 80% of the salary and taxes associated with the employee. The
net costs incurred by the Company for the period ended October 31, 2005 were
approximately $16,000.
Accrued expenses - related parties consist of the following:
OCTOBER 31,
2005 2004
-------------------
Interest on notes payable (note 6) $ -- $ 73,000
Accounts payable employee reimbursements -- 33,000
Accrued travel expenses 47,000 20,000
Due to FPCM -- 10,000
Accrued commission 22,000 --
-------------------
$ 69,000 $136,000
===================
12. ROYALTY AGREEMENT
The Company is a party to a license agreement, as amended in fiscal 2001,
whereby the Company is granted the exclusive right and license worldwide to
manufacture and sell PASSUR(R) systems for use with airline dispatch
arrangements and in other aircraft flight tracking systems. The Company is also
granted an exclusive worldwide license to sell PASSUR(R) systems and/or data
subscriptions for noise applications. The Company pays a royalty based on the
number of PASSUR(R) systems sold and/or installed and generating subscription
revenues subject to a minimum annual royalty of $75,000. This license agreement
is in effect until the date of expiration of the last PASSUR(R) patent to
expire, which occurs in 2013.
During October 1999, the license agreement was amended primarily with respect to
when additional royalties would be payable by the Company for new installations
of Company-owned systems assuming the minimum annual royalty payment requirement
had been earned. Under the amended agreement, these additional royalties are
payable based only upon a percentage of the revenue received from each
Company-owned installation.
F-21
Page 61 of 66
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. QUARTERLY RESULTS OF OPERATIONS
The following table provides unaudited quarterly consolidated results of
operations for each quarter of fiscal years 2005 and 2004. The Company believes
this unaudited information has been prepared substantially on the same basis as
the annual audited financial statements and all necessary adjustments,
consisting of any normal recurring adjustments, have been included in the
amounts stated below to present fairly the Company's results of operations. The
operating results for any quarter are not necessarily indicative of the
operating results for any future period. Certain balances have been reclassified
to conform to the presentation of balances as stated in this Annual Report on
Form 10-K.
13. QUARTERLY RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
OCT. 31, JULY 31, APRIL 30, JANUARY 31, OCT. 31, JULY 31, APRIL 30, JANUARY 31,
2005 2005 2005 2005 2004 2004 2004 2004
------------------------------------------------------------------------------------------------------
TOTAL NET REVENUES $1,012,012 $ 985,844 $ 978,772 $ 832,145 $ 876,181 $ 767,287 $ 737,601 $ 729,853
WRITE DOWN OF NETWORK ASSETS (110,980)
LOSS FROM OPERATIONS (132,384) (82,256) (94,599) (196,827) (448,894) (205,264) (194,048) (161,701)
NET LOSS (238,101) (186,730) (194,651) (304,390) (543,629) (300,209) (288,433) (257,265)
BASIC AND DILUTED NET LOSS
PER SHARE $ (.06) $ (.05) $ (.05) $ (.07) $ (.13) $ (.07) $ (.08) $ (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
F-22
Page 62 of 66
Megadata Corporation and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
ADDITIONS
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE
BEGINNING OF COSTS AND ACCOUNTS - DEDUCTIONS AT END
DESCRIPTION PERIOD EXPENSES DESCRIBE - DESCRIBE OF PERIOD
- -----------------------------------------------------------------------------------------------------
Year Ended
October 31, 2005;
- -----------------------------------------------------------------------------------------------------
Reserves and allowances
deducted from asset
accounts:
- -----------------------------------------------------------------------------------------------------
Reserve for estimated
doubtful accounts -
accounts receivable (12,000) (5,725) (6,275)
- -----------------------------------------------------------------------------------------------------
Valuation allowance on
deferred tax asset $5,988,500 $376,500(a) $6,365,000
- -----------------------------------------------------------------------------------------------------
$5,988,500 (12,000) $376,500 (5,725) $6,371,275
- -----------------------------------------------------------------------------------------------------
Year Ended
October 31, 2004;
Reserves and allowances
deducted from asset
accounts:
Reserve for estimated
doubtful accounts -
accounts receivable $ 6,838 -- ($6,838) --
Valuation allowance on
deferred tax asset $5,362,500 $626,000(a) $5,988,500
-----------------------------------------------------------------------
$5,369,338 -- $626,000 ($6,838) $5,988,500
=======================================================================
Year Ended
October 31, 2003;
Reserves and allowances
deducted from asset
accounts:
Reserve for estimated
doubtful accounts -
accounts receivable $ 4,350 $2,488 $ 6,838
Valuation allowance on
deferred tax asset $4,300,000 $1,062,500(a) $5,362,500
-----------------------------------------------------------------------
$4,304,350 $2,488 $1,062,500 $5,369,338
=======================================================================
(a) Valuation allowance for deferred tax assets.
S-1
Page 63 of 66