-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DRKVzwQFJKSHuHzhuB2fJ8lGldnxAWo+0d4SvvDEu0K9MUnfG7hctaoF+zQCKiI2 h9hEV//KwMvUI/JxBuBlmw== 0000909012-08-000119.txt : 20080129 0000909012-08-000119.hdr.sgml : 20080129 20080129165213 ACCESSION NUMBER: 0000909012-08-000119 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20071031 FILED AS OF DATE: 20080129 DATE AS OF CHANGE: 20080129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEGADATA CORP CENTRAL INDEX KEY: 0000225628 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 112208938 STATE OF INCORPORATION: NY FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07642 FILM NUMBER: 08558627 BUSINESS ADDRESS: STREET 1: 47 ARCH STREET CITY: GREENWICH STATE: CT ZIP: 11716 BUSINESS PHONE: 5165896800 MAIL ADDRESS: STREET 1: 47 ARCH STREET CITY: GREENWICH STATE: CT ZIP: 11716 FORMER COMPANY: FORMER CONFORMED NAME: MEGADATA COMPUTER & COMMUNICATIONS CORP DATE OF NAME CHANGE: 19770201 FORMER COMPANY: FORMER CONFORMED NAME: BELLOK DEVICES INC DATE OF NAME CHANGE: 19740314 10-K 1 t303974.txt 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, 2007 OR | _ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___ to ___ Commission file number 0-7642 MEGADATA CORPORATION (Exact Name of Registrant as Specified in Its Charter) NEW YORK 11-2208938 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 47 ARCH STREET, GREENWICH, CT 06830 ----------------------------- ----- (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code: 203-622-4086 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.01 PER SHARE Indicate by check mark 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 28, 2007 was $2,890,000 The number of shares of common stock, $0.01 par value, outstanding as of January 25, 2008 was 4,091,448 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Definitive Proxy Statement for the 2008 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days of October 31, 2007, are incorporated by reference into Part III of this Form 10-K. -1- 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, also known by many of its customers as the PASSUR(R) 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 from its proprietary PASSUR(R) network of live, unique flight information, decision support software, analytics, and web-delivered collaborative decision solutions to the aviation industry and organizations that serve, or are served by, the aviation industry. The Company owns and operates a unique database of flight information with proprietary decision-making software, primarily powered by a growing international network of passive radars (PASSUR(R)s) located at more than 85 airports world-wide, including 33 of the top 35 U.S. airports - from which it provides PASSUR(R) information, analytics, and decision support tools to improve the financial condition and operational efficiency of aviation organizations. The Company offers unique user friendly information as well as decision algorithms which provide innovative commercial air traffic solutions to more than 50 airports, including 8 of the top 10 U.S. airports; to dozens of airlines, including 7 of the top 10 U.S. airlines; and to more than 150 corporate aviation customers, as well to the U.S. Government. In addition, the company has created and implemented collaborative web-based software that allows the company's customers to instantly share information to improve individual and joint decision making, creating additional value for those customers. The Company has what it believes is a unique database of flight information, powered by a network of Company-owned passive radars known as PASSUR(R)s 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, airports, Corporate Aviation, and the Government, services that the Company believes are usually otherwise unavailable. 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) 2007 increased by approximately 32%, or $1,384,000 to $5,698,000 from $4,314,000 in FY 2006, while total costs and expenses in FY 2007 increased by about 26% or $958,000 to $4,694,000 from $3,736,000 in FY 2006. 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, -2- 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. GENERAL The Company believes financial performance in the aviation industry can be enhanced by more accurate and timely flight information, analytics, and collaboration. 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 other 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 its 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 aviation organizations, and those who serve aviation. 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. The main objectives of Megadata's business strategy are to: 1. LEAD AND CONTINUE TO DEVELOP THE INDUSTRY STANDARD FOR ACCURATE, TIMELY FLIGHT INFORMATION WITH, WHAT WE CONSIDER TO BE, A ONE-OF-A-KIND PREMIUM DATABASE - THE PASSUR(R) 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 33 of the top 35 airports in the United -3- States. The Company has 71 Company owned PASSUR(R) systems installed worldwide and is continually working to add new products to the existing customer base. Leading airlines utilize the information and software products derived from the Company-owned PASSUR(R) network. For example, 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. 2. LEAD THE DEVELOPMENT OF WEB-BASED APPLICATIONS, POWERED BY THE PASSUR(R) INFORMATION NETWORK, TO OUR TRADITIONAL INDUSTRIAL AVIATION CUSTOMERS - AIRLINES, AIRPORTS, AND THE GOVERNMENT. These organizations set the standard for how flight information should be used throughout both the industrial and non-industrial markets. These organizations, for whom 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 provide a bridge for industrial and non-industrial aviation companies, 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 four of the country's top airports, John F. Kennedy International, LaGuardia, Dulles International Airports, and Denver International Airport, the airlines, the Federal Aviation Administration (the "FAA"), airport operations, and FBOs use Megadata's award-winning PASSUR(R) 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(R) 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 50 airports, including some of the largest in the world, as well as dozens of airlines, plus its non-industrial customer base with the following capabilities which are: 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 customers to instantly identify new marketing opportunities and determine the most appropriate customer pricing by accessing the PASSUR(R) Information Network of unique flight information. -4- 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 Company product, Right ETA, enhances productivity of ground personnel and support functions by complementing gate management and staff scheduling programs, and has generated significant documented financial returns. 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 which feed 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). c. Pulse Revenue(TM) Data Feed, patent pending, which provides the data source for calculating landing fee reports and invoices in airport statistical and/or revenue management systems. -5- 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, as well as transparency and equity in the distribution of landing fees among airport users. b. PASSUR(R) Pulse Audit(TM), patent pending, module gives airports access to the most complete, accurate and timely activity reports of arrivals and departures, based on the PASSUR(R) radar record and integrated database of flight information, including detailed owner/operator information, maximum certificated weights by tail number, seat configurations, runway utilization, dwell times, and other details in aggregate and by individual flight. c. PASSUR(R) Pulse Proactive Billing(TM) module, patent pending, allows airlines to log onto a secure website to view and download their landing fee reports, automatically generated by the PASSUR(R) database of flight information. The program is hosted by Megadata and managed through online tools by the airport, including detailed reporting and invoicing tools, automatic aircraft weight calculations, and detailed owner/operator and aircraft information by flight. d. PASSUR(R) Pulse(TM) Operations, patent pending, provides web-based access to the PASSUR(R) database of operational information for activity reporting and analysis. e. 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. f. AirportMonitor(TM), patented in 2006, 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. g. FlightPerform(TM) is a live airspace analysis and awareness system using more traditional air traffic-style displays and tools, used by airports and airlines for real-time dispatch, arrivals and facilities management. FlightPerform is the industry "gold standard" for those customers that need the most dependable, reliable capability to guide their operations in real time. h. 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. i. ATC Portal(TM), patent pending and a new product, provides a delay management solution that is designed to reduce the incident of and cost of delays. j. Fuel Portal(TM), patent pending and a new product, provides improved methods to price and sell more fuel through data and analytics of aircraft fuel requirements. 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. c. PASSUR(R) 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 all weather conditions and particularly 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. -6- HOW MEGADATA GENERATES REVENUE The Company generates revenues by selling: (1) subscription-based information and software products (2) annual maintenance contracts for PASSUR(R) radar systems and (3) consulting and professional services. Under the subscription model, the customer signs at least a 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. 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 The Company operates as one business segment which provides information and software services to the aviation industry and organizations that serve, or are served by, the aviation industry. (C) NARRATIVE DESCRIPTION OF BUSINESS The Company's principal business is the delivery from its proprietary PASSUR(R) network of live, unique flight information, decision support software, analytics, and web-delivered collaborative decision solutions to the aviation industry and organizations that serve, or are served by, the aviation industry. 1. PRODUCTS The Company has transitioned from being a supplier of passive surveillance systems (a capital equipment business) to a provider of subscription-based information and decision support software products. These products leverage the extensive passive surveillance data available through the PASSUR(R) Network to provide application-specific efficiency tools to airlines, airports and related commercial businesses. (I) THE PASSUR(R) 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. 2. SERVICES (I) INFORMATION SERVICES FROM THE PASSUR(R) NETWORK Information services include timely, accurate, user-friendly information important to the efficient operation of airlines, airports and other customers. The information services leverage the PASSUR(R) Network, and are designed 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. -7- (II) DECISION SUPPORT SOFTWARE FROM THE PASSUR(R) NETWORK Decision support tools and software solutions have been developed to improve quality and operating efficiency of specific airline and airport operations. PASSUR(R) OpsNet(TM) is an example of a decision support service. (III) MAINTENANCE SERVICES The Company offers maintenance services pursuant to contractual arrangements or on an "on-call" basis. "On-call" services are provided on a time and material basis. 3. SOURCES OF RAW MATERIALS The Company obtains its raw materials from component distributors and manufacturers throughout the United States. The Company has multiple sources of supply for a majority of its components. 4. DEPENDENCE ON CERTAIN CUSTOMERS During the fiscal years ended October 31, 2007, 2006 and 2005, one customer (Continental Airlines) accounted for approximately 13%, 16%, and 18% of the Company's revenues, respectively. 5. BACKLOG FOR SUBSCRIPTION REVENUE AGREEMENTS The Company's committed backlog for subscription and maintenance services at October 31, 2007 amounted to approximately $4,754,000. Of this amount, $3,956,000 is scheduled for delivery or performance before October 31, 2008 and the balance of $798,000 is scheduled for delivery or performance in subsequent years. The backlog at October 31, 2006 and 2005 amounted to approximately $3,978,000 and $2,927,000 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 are other forms of flight tracking products. Depending on the end use of the Company's products, the Company's primary competitors include Sabre, Inc., Siemens, and SITA. The Company also sells certain data solutions through systems integrators, including Lochard Pty, LTD, and Era Corporation, some of whom may also sell products that are competitive with those offered by the Company. Most of these companies are 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. None of the Company's research and development was customer sponsored. During fiscal 2007, research and development expenses, net of capitalized software, decreased approximately $112,000 or 27% as compared to fiscal 2006. This decrease is primarily due to an increase in the capitalization of costs associated with software development programs. Gross research and development expenditures were approximately $495,000 in fiscal 2007, of which $188,000 was capitalized, resulting in a net cost of $307,000. During fiscal 2007, the $397,000 balance of capitalized software was deducted in computing cost of revenues. Total capitalized software in fiscal year 2007 was $585,000. Gross R&D expenses were $500,000 and $473,000 in fiscal years 2006 and 2005, respectively. 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. -8- 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, 2007, the Company employed 20 full time employees, including 6 officers. (D) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS The following table sets forth the dollar amounts and the percentages attributable to the sale by the Company of its products and services during the past three fiscal years in and outside the United States:
NET REVENUES 2007 2006 2005 ------------------------------------------------------------------------------- Domestic $5,457,000 96% $4,088,000 95% $3,635,000 95% Exports 241,000 4% 226,000 5% 174,000 5% ---------- ---------- ---------- ---------- ---------- ---------- Total Revenues: $5,698,000 100% $4,314,000 100% $3,809,000 100% ========== ========== ========== ========== ========== ==========
(E) AVAILABLE 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 and 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 10K, 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 While the Company had net income during fiscal years 2007 and 2006, it incurred significant net losses during the previous five fiscal years. The Company had net income of approximately $455,000 and $103,000 for the fiscal years ended October 31, 2007 and 2006, respectively, and incurred a net loss of $924,000 for the fiscal year ended October 31, 2005. As of October 31, 2007, the Company's accumulated deficit was approximately $9,455,000. The Company's ability to 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. -9- 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 of 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. While the Company's operations were cash flow positive as of October 31, 2007 and 2006, the Company's debt in fiscal year 2007 increased by $1,400,000 to fund its investment during the year in capitalized software as well as additions to the PASSUR(R) network. The Company had an accumulated deficit of approximately $9,455,000 as of October 31, 2007. The Company has incurred significant negative cash flows from operations over previous 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 Jaunuary 10, 2009. 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. -10- 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: (i) terminating or eliminating certain operating activities; (ii) terminating personnel; (iii) eliminating marketing activities; and/or (iv) 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 of 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. -11- THE PASSUR(R) 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 NEW 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 thirteen 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 three issued patents, and twenty 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 2024. 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. -12- 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 research and manufacturing 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 $93,014. The Company's executive offices are located in a three-story office building at 47 Arch Street, Greenwich, Connecticut. Effective July 1, 2004, the Company signed a lease 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. Effective November 1, 2007, the Company signed a new lease for two floors in the building for $7,500 per month ($90,000 per year) through June 30, 2009. The Company believes these rates are competitive and are at or below market rates. The Company's research and manufacturing facility and its 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 2007. -13- 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, 2007 FIRST QUARTER $ 3.50 $ 2.20 SECOND QUARTER 3.60 2.50 THIRD QUARTER 3.60 2.20 FOURTH QUARTER 3.90 2.25 Fiscal Year Ended October 31, 2006 First Quarter $ .65 $ .30 Second Quarter .62 .45 Third Quarter .60 .45 Fourth Quarter 3.50 .53 - -------------------------------------------------------------------------------- * 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 22, 2008 was 296, 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. -14- (D) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The following table provides information as of October 31, 2007 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 COMPENSATION PLANS NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EXCLUDING SECURITIES BE ISSUED UPON EXERCISE EXERCISE PRICE OF REFLECTED IN COLUMN PLAN CATEGORY OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS (A) - --------------------------------------------------------------------------------------------------------------------- (A) (B) (C) - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- EQUITY COMPENSATION PLAN APPROVED BY SECURITY HOLDERS 1,715,500 $.51 506,167 - --------------------------------------------------------------------------------------------------------------------- EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS -- -- -- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- TOTAL 1,715,500 $.51 506,167 - ---------------------------------------------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA The selected consolidated statements of operations data for the fiscal years ended October 31, 2007, 2006 and 2005, and the consolidated balance sheet data as of October 31, 2007 and 2006, 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, 2004 and 2003, and the selected consolidated balance sheet data as of October 31, 2005, 2004 and 2003, 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, ============================================================================================================ 2007 2006 2005 2004 2003 ---- ---- ---- ---- ---- Net Revenues $ 5,698,236 $ 4,314,222 $ 3,808,773 $ 3,110,608 $ 2,282,279 Net Income (loss) $ 454,582 $ 102,915 $ (923,872) $ (1,389,536) $ (2,486,122) Net income (loss) (1) per common share - basic $ .11 $ .03 $ (.23) $ (.35) $ (.71) Net income (loss) (1) per common share - diluted $ .08 $ .02 $ (.23) $ (.35) $ (.71) Dividend Declared -- -- -- -- -- ============================================================================================================
-15-
SELECTED BALANCE SHEET DATA: YEARS ENDED OCTOBER 31, ============================================================================================================ 2007 2006 2005 2004 2003 ---- ---- ---- ---- ---- Total Assets $ 7,929,304 $ 6,028,816 $ 4,287,242 $ 4,084,581 $ 4,533,279 Long-Term Debt (2)(3)(4)(5)(6) $ 12,614,880 $ 11,214,880 $ 9,989,880 $ 8,866,465 $ 8,466,465 Total Stockholders' Deficit $ (6,767,256) $ (7,293,786) $ (7,493,816) $ (6,569,944) $ (5,540,408) ============================================================================================================ (1) Basic net income (loss) per share of common stock was computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is based on the sum of the weighted average number of common shares outstanding and common stock equivalents. For 2005, 2004 and 2003 basic net loss per share equaled diluted net loss per share because the effect of common stock equivalents was anti-dilutive, and therefore excluded from the calculation of diluted net loss per share. (2) Long-term debt for 2003 consists of notes payable - related party which was due after October 31, 2003. (3) Long-term debt for 2004 consists of notes payable - related party which was due after October 31, 2004. (4) Long-term debt for 2005 consists of notes payable - related party which was due after October 31, 2005. (5) Long-term debt for 2006 consists of notes payable - related party which was due after October 31, 2006. (6) Long-term debt for 2007 consists of notes payable - related party which was due after October 31, 2007.
-16- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS REVENUES The Company's principal business is the delivery from its proprietary PASSUR(R) network of live, unique flight information, decision support software, analytics, and web-delivered collaborative decision solutions to the aviation industry and organizations that serve, or are served by, the aviation industry. Revenues consist primarily of subscription-based revenues and maintenance revenues from customer owned PASSUR(R) systems. Revenues during fiscal 2007 increased by approximately $1,384,000, or 32%, to $5,698,000 from $4,314,000 in fiscal 2006. Revenues during fiscal 2006 increased by approximately $505,000 or 13%, to $4,314,000 from $3,809,000 in fiscal 2005. These increases were 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, as well as 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 the Company's suite of software applications and the increased subscriptions from its suite of applications by existing customers. 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 $5,246,000 in fiscal 2007 increased approximately $1,404,000, or 37%, compared to $3,842,000 in fiscal 2006. The Company's subscription-based sales for fiscal 2005 were $3,270,000. 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. The Company shipped nineteen and installed seventeen Company-owned PASSUR(R) systems during fiscal 2007 (these installations include systems shipped in current and previous fiscal years). The balance of the units shipped should be installed during fiscal year 2008. The shipped and installed PASSUR(R)s were capitalized as part of the Company owned "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 2008. The Company manufactured thirty PASSUR(R) units during fiscal 2007 and completed ten units that were in work-in-process at the end of fiscal 2006. The Company is continuing its manufacturing program in fiscal 2008 and there were a number of subassemblies in work-in-process inventory at the end of fiscal 2007. Management anticipates that future PASSUR(R) sites will provide increased coverage for the PASSUR(R) Information Network and will increase the Company's ability to contract with new customers at such locations and will 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 one Company-owned PASSUR(R) system from the field in fiscal year 2007 and it will be shipped to another location. There were seventy-one Company owned PASSUR(R) systems located at various airports world-wide at the end of fiscal 2007. -17- COST OF REVENUES Costs associated with subscription and maintenance revenues consist 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 revenues are costs associated with the upgrades of PASSUR(R) systems necessary to make older systems compatible with new software applications, as well as the ordinary repair and maintenance of existing network systems. Additionally, cost of revenues in each reporting period are impacted by: (1) the number of PASSUR(R) units produced, upgraded, shipped, and installed during the year which are added to the PASSUR(R) network and (2) capitalized costs associated with software development projects, collectively referred to as "Capitalized Assets" which are depreciated and/or amortized over their respective useful lives and charged to cost of revenues. During fiscal 2007, cost of revenues increased by approximately $610,000 or 48%, as compared to fiscal 2006. This increase was primarily due to an increase in headcount related costs, data feeds, as well as depreciation and amortization of capitalized software assets, and a decrease in the capitalization of manufacturing related costs. This increase was partially offset by an increase in the number of PASSUR(R) systems added to the PASSUR(R) network, as well as an increase in the value of software development projects which were capitalized. During fiscal 2006, cost of revenues decreased by approximately $736,000 or 37%, as compared to fiscal 2005. This decrease was primarily due to a reduction in the cost of outside consultants and an increase in the number of PASSUR(R) systems added to the PASSUR(R) network, as well as an increase in the value of software development projects which were capitalized. This decrease was partially offset by increases in headcount related costs, as well as depreciation and amortization of capitalized software assets. RESEARCH AND DEVELOPMENT During fiscal 2007, research and development expenses, net of capitalized software, decreased approximately $112,000 or 27% as compared to fiscal 2006. This decrease is primarily due to an increase in the capitalization of costs associated with software development programs. Gross research and development expenditures were approximately $495,000 in fiscal 2007, of which $188,000 was capitalized, resulting in a net cost of $307,000. During fiscal 2007, the $397,000 balance of capitalized software was deducted from cost of revenues. Total capitalized software in fiscal year 2007 was $585,000. Gross R&D expenses were $500,000 and $473,000 in fiscal years 2006 and 2005, respectively. 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. 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 2007, 2006, or 2005. Research and development expenses are funded by current operations. SELLING, GENERAL AND ADMINISTRATIVE During fiscal 2007, selling, general and administrative expenses increased by approximately $460,000, or 22%, as compared to fiscal 2006. The increase was primarily due to additional sales and marketing personnel and related expenses, professional fees and marketing expenses. During fiscal 2006, selling, general and administrative expenses increased by approximately $131,000, or 7%, as compared to fiscal 2005. The increase was primarily due to additional sales and marketing personnel and related expenses, as well as higher marketing costs and legal fees. -18- 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 2008 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 2007, 2006, and 2005. Interest expense-related party increased by approximately $68,000, or 14%, in fiscal 2007, as compared to fiscal 2006. The increase is due to $1,400,000 in higher debt. Interest expense-related party increased by approximately $61,000 or 15%, in fiscal 2006, as compared to fiscal 2005. The increase is due to $1,225,000 in higher debt. INCOME TAXES The provisions for income taxes for each year relate to state and local minimum taxes. The Company has available approximately $12,989,000 in Federal tax loss carry-forwards to offset possible future income. These carry forwards expire in various tax years through 2025. The Company has provided a full valuation allowance on the net deferred tax asset of approximately $4,855,000, which primarily consists of the net operating loss carry-forwards and available tax credits. NET INCOME The Company earned net income of $455,000, or $.08 per diluted share, during fiscal 2007, as compared to net income of $103,000, or $.02 per diluted share, in fiscal 2006. During fiscal 2007, revenues of $5,698,000 exceeded costs and expenses of $4,694,000 and resulted in income from operations of $1,004,000. Revenues increased by 32% in fiscal 2007 and total costs and expenses increased by $958,000, or 26%, as compared to fiscal 2006. The Company incurred net income of $103,000, or $.02 per diluted share, during fiscal 2006, as compared to a net loss of $924,000, or $.23 per diluted share, in fiscal 2005. During fiscal 2006, total revenues of $4,314,000 exceeded costs and expenses of $3,736,000 and resulted in income from operations of $578,000. Revenues increased 13% in fiscal 2006 and total costs and expenses decreased by $579,000, or 13% as compared to fiscal 2005. -19-
QUARTERLY RESULTS OF OPERATIONS THREE MONTHS ENDED -------------------------------------------------------------------------------------------------------------- OCT. 31, JULY 31, APRIL 30, JAN 31, OCT. 31, JULY 31, APRIL 30, JAN 31, 2007 2007 2007 2007 2006 2006 2006 2006 -------------------------------------------------------------------------------------------------------------- TOTAL REVENUES $ 1,537,588 $ 1,466,793 $ 1,392,175 $ 1,301,680 $ 1,206,214 $ 1,074,277 $ 1,015,967 $ 1,017,764 INCOME (LOSS) FROM OPERATIONS 280,280 291,418 245,983 186,240 459,237 141,779 (12,604) (10,037) NET INCOME (LOSS) 143,464 142,264 114,973 53,881 334,278 22,390 (126,740) (127,013) NET INCOME (LOSS) PER COMMON SHARE - - BASIC $ .04 $ .03 $ .03 $ .01 $ .08 $ .01 $ (.03) $ (.03) NET INCOME (LOSS) PER COMMON SHARE - - DILUTED $ .03 $ .03 $ .02 $ .01 $ .06 $ .01 $ (.03) $ (.03) - -----------------------------------------------------------------------------------------------------------------------------------
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, 2007, the Company's current liabilities exceeded current assets by $418,000. The notes payable to a related party of $12,614,880 are due November 1, 2008, thus are included in long-term liabilities at October 31, 2007. At October 31, 2007, the Company's stockholders' deficit was $6,767,000. For fiscal 2007, the Company had net income of $455,000. Management is addressing the working capital and stockholders' deficiencies 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 10, 2009. Such commitment for financial support may be in the form of additional advances or loans to the Company in addition to the deferral of principal and interest payments due on the existing loans, if deemed necessary. Net cash provided by operating activities for fiscal 2007 was approximately $1,900,000. Cash flows used in investing activities for fiscal 2007 was approximately $3,213,000 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 2007 were primarily from $1,400,000 of notes payables - related party. No principal payments on notes payable - related party were made during fiscal 2007. -20- The Company was profitable in fiscal year 2007. 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, 2007, 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 $ 348,000 $ 187,000 $ 161,000 -- Promissory Notes 12,614,880 -- 12,614,880 -- Other Long-Term Obligations 536,000 161,000 225,000 150,000 ----------- ----------- ----------- ----------- Total Contractual Cash Obligations $13,498,880 $ 348,000 $13,000,880 $ 150,000 =========== =========== =========== ===========
Obligations under "Operating Leases" relate to the research and manufacturing facility located in Bohemia, New York ($93,014 - fiscal 2007) and the Company's headquarters located in Greenwich, CT ($45,000 - fiscal 2007). All other operating leases are under a month-to-month arrangement, therefore, such obligations have been excluded from the above calculation. 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. As of October 31, 2007 the Company has $86,000 accrued in accrued expenses and other accrued liabilities for fiscal 2007 royalty payments. o OFF-BALANCE SHEET ARRANGEMENTS None. -21- CERTAIN RELATED PARTY TRANSACTIONS During fiscal 2007, G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, loaned the Company an additional $1,400,000 in exchange for promissory notes bearing interest payable in cash at 4.5% per annum and maturing on November 1, 2008, bringing the principal amount of notes due to Mr. Gilbert to $12,614,880 on October 31, 2007. During fiscal 2006, Mr. Gilbert lent the Company an additional $1,225,000, bringing the total loan to $11,214,880, before accrued interest of $247,867 was added to the principal, resulting in a total of $11,462,747 owed to Mr. Gilbert on October 31, 2006. During fiscal 2005, Mr. Gilbert lent the Company an additional $1,123,415, resulting in a total of $9,989,880 owed to Mr. Gilbert on October 31, 2005. The notes are secured by the Company's assets. The notes payable are classified as long-term as of October 31, 2007, 2006 and 2005. During fiscal 2007, the Company paid approximately $246,000 to Surf-Tech Manufacturing, Inc. (a non-public corporation) for materials and labor in connection with the production of various replacement, new and upgraded equipment for PASSUR(R) systems. The Company believes that these rates are competitive and are at or below market rates. A Company Executive Vice President and Director was a 50% shareholder of the aforementioned company through July 31, 2007, at which time such shares were sold. 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. The actual impact of these factors may differ under different assumptions or conditions. The Company's accounting policies that require management to apply significant judgment and estimates include: REVENUE RECOGNITION The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS" ("SAB 104"), as codified. SAB 104 requires that four basic criteria must be met before revenues can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. The Company also recognizes revenue in accordance with Statement of Position 97-2, "SOFTWARE REVENUE RECOGNITION" ("SOP 97-2"), as amended, when applicable. The Company's revenues are generated from the following: (1) subscription and maintenance agreements and (2) 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 evidence of an agreement with a customer; (2) we deliver the products/services; (3) license or maintenance agreement terms are deemed fixed or determinable and free of contingencies or uncertainties that may alter the agreement such that the sale may not be complete and/or final and (4) collection is probable. -22- 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 commiting 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 104 and/or SOP 97-2 and the corresponding agreement. CAPITALIZED SOFTWARE COSTS The Company follows the provisions of Statement of Financial Accounting Standards No. 86, "ACCOUNTING FOR THE COSTS OF SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED" ("SFAS 86"). Costs incurred to develop computer hardware and software products as well as 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 where 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 capitalization of 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 additional costs incurred to maintain products which were completed and released to the general public, 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, 2007 totaled approximately $1,500,000. The carrying value of the capitalized software costs is dependent on the forecasted and actual future cash flows generated from such assets as determined and evaluated by management. -23- 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. 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, 2007 approximated $4,518,000 and $1,500,000, respectively, which accounted for 76% of the Company's total assets. The carrying value of the long-term assets is dependent on the forecasted and actual financial performance as well as 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 considers 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, 2007, 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. As of October 31, 2007, based upon management's evaluation of the above asset groups, no impairments of these asset groups exist. DEPRECIATION AND AMORTIZATION As of October 31, 2007, the total net property, plant, and equipment approximated $328,000, the total net PASSUR(R) Network approximated $4,518,000, and the total net software development costs approximated $1,500,000. The total depreciation and amortization expense related to capitalized assets at October 31, 2007 approximated $1,051,000. 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 is 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 costs carried 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, as well as related workstations with software and/or PASSUR(R) Systems built but not yet installed in the company network. PASSUR(R) Network assets which are not installed in 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 production and/or 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 (but does not exceed seven years). 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. -24- For the year ended October 31, 2007, total depreciation and/or amortization of $1,051,000 consisted of $108,000 for property, plant and equipment, $659,000 for the PASSUR(R) Network, and $284,000 for Software development costs. STOCK-BASED COMPENSATION Effective November 1, 2005, the Company adopted SFAS No. 123R, "Share-Based Payments," using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. Therefore, prior period financial statements have not been restated. The fair value of stock options were determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for stock options in footnote disclosures required under SFAS No. 123. Such fair value is recognized as expense over the service period, net of estimated forfeitures. The adoption of SFAS No.123R resulted in no cumulative change in accounting as of the date of adoption. RECENT ACCOUNTING PRONOUNCEMENTS In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("FAS 159"). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. FAS 159 does not apply to the Company's fiscal 2007 financial statements since it is effective only for fiscal years beginning after November 15, 2007. The Company has determined that the adoption of FAS 159 will not have a material impact on future Financial Statements. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 clarifies that fair value is the amount that would be exchanged to sell an asset or transfer a liability in an orderly transaction between market participants. Further, the standard establishes a framework for measuring fair value in generally accepted accounting principles and expands certain disclosures about fair value measurements. SFAS 157 does not apply to the Company's fiscal 2007 financial statements since it is effective only for fiscal years beginning after November 15, 2007. The Company does not expect that the adoption of SFAS 157 will have a material impact on its future consolidated financial position, results of operations, or cash flows. On July 13, 2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on de-recognition, classification, interest, and penalties, accounting in interim periods, disclosure, and transition. FASB Interpretation (FIN) No. 48 takes effect for years beginning after December 15, 2006, which for the Company will be the fiscal year beginning November 1, 2007. The Company is in the process of evaluating the impact that the adoption of this accounting pronouncement will have on its future financial statements. -25- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from potential changes in interest rates. The Company regularly evaluates these risks. The Company believes the amount of risk relating to changes in interest rates is not material to the Company's financial condition or results of operations. The Company has not and does not anticipate entering into derivative financial instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Part IV, Item 15(a)(1) of this Annual Report on Form 10-K for the Company's annual financial statements. See Part II, Item 7 of this Annual Report on Form 10-K for selected quarterly financial data. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES For purposes of Rules 13a-14 and 15d-14 of the Exchange Act 1934 ("Exchange Act") the term "disclosure controls and procedures" refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized, and reported within required time periods. The Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures as of the end of period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are 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, 2007, that have materially affected, or are reasonably likely to materially affect, its 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. -26- 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 Name Age Since Officers With Company - -------------------------------------------------------------------------------- G.S. Beckwith Gilbert 65 1997 Chairman of the Board and a Director Richard R. Schilling, Jr. 82 1974 Director John R. Keller 67 1997 Executive Vice President, and a Director Bruce N. Whitman 74 1997 Chairman of the Executive Committee and a Director Paul L. Graziani 50 1997 Director James T. Barry 46 2000 President, Chief Executive Officer, and a Director James J. Morgan 65 2005 Director Each director is elected to serve until the succeeding annual meeting of shareholders and until his successor is duly elected and qualifies. -27- (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 Name Age Since Officers With Company - -------------------------------------------------------------------------------- James T. Barry 46 1998 President, Chief Executive Officer, and a Director Jeffrey P. Devaney 48 2004 Chief Financial Officer, Treasurer, and Secretary John R. Keller 67 1970 Executive Vice President and a Director Dr. James A. Cole 67 1988 Senior Vice President of Research & Development Matthew H. Marcella 50 2003 Vice President of Software Development Ron A. Dunsky 45 2003 Vice President of Marketing Each officer is elected to serve at the discretion of the Board of Directors. (c) Identification of Certain Significant Employees None. (d) Family Relationship None. -28- (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 Yale Cancer Center, 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. He is the President, CEO, and a Director of FlightSafety International and has held other positions such as Executive Vice President since 1961. He is currently a Director and Chairman of the Executive Committee of Megadata, a Director and Chairman of the Nominating Committee of the Congressional Medal of Honor Foundation, a Director of the General Aviation Manufacturers Association, and a Director of the Wings Club, and a Director Emeritus of the Smithsonian National Air and Space Museum. He is a member of the Board of Governors of The Aerospace Industries Association, the Civil Air Patrol and a member of its Audit Committee, a trustee of the Falcon Foundation, the Kent School, and the National World War II Museum. Paul L. Graziani Mr. Graziani has been a Director of the company since 1997. He 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 the Chester County Chamber of Business and Industry; "Entrepreneur of the Year" regional winner by Ernst & Young; and "Businessman of the Year" by the local Great Valley Regional Chamber of Commerce. An associate fellow of the American Institute of Aeronautics and Astronautics (AIAA), he sits on the Boards of Directors of The Space Foundation, Megadata, and the United States Geospatial Intelligence Foundation; serves on the advisory boards for the Galaxy Explorers, the Joint Military Intelligence College Foundation, and Penn State Great Valley; and is a member of the Enduring Value Advisory Council for Zanett Inc. Mr. Graziani, after fulfilling his board tenure, was recently elected to the honorary position of life director of the Space Foundation. -29- 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 Bertucci's Inc. Mr. Morgan retired in 1997 as President and Chief Executive Officer of Philip Morris Incorporated. 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. 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. Mr. Dunsky joined the Company in 2001, and initially 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. -30- (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 NASD 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 NASD rules. The Audit Committee consists of Mr. Graziani, Mr. Schilling and Mr. Whitman. (i) Section 16(a) Beneficial Ownership Reporting Compliance 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, 2007, 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, 2007 by the Company with the Securities and Exchange Commission in connection with the Company's 2007 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, 2007 (the "2008 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 2008 Proxy Statement. -31- 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 2008 Proxy Statement. Portions of the Registrant's Definitive Proxy Statement for the 2008 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days of October 31, 2007, are incorporated by reference into Part III of this Form 10-K. 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 related persons. During fiscal 2007, G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, loaned the Company an additional $1,400,000 in exchange for promissory notes bearing interest payable in cash at 4.5% per annum and maturing on November 1, 2008, bringing the principal amount of notes due to Mr. Gilbert to $12,614,880 on October 31, 2007. During fiscal 2006, Mr. Gilbert lent the Company an additional $1,225,000, bringing the total loan to $11,214,880, before accrued interest of $247,867 was added to the principal, resulting in a total of $11,462,747 owed to Mr. Gilbert on October 31, 2006. During fiscal 2005, Mr. Gilbert lent the Company an additional $1,123,415, resulting in a total of $9,989,880 owed to Mr. Gilbert on October 31, 2005. The notes are secured by the Company's assets. The notes payable are classified as long-term as of October 31, 2007, 2006 and 2005. (b) Review, approval or ratification of transactions with related persons. The Company considers any transaction that would require disclosure under Item 404(a) of Regulation S-K to be a related-party transaction. To date, the Company has not adopted a formal written policy with respect to related-party transactions. However, an informal, unwritten policy has been in place whereby all such related-party transactions are reported to, and approved by, the full Board of Directors (other than any interested director). (c) Director independence. The Board of Directors had determined, after considering all the relevant facts and circumstances, that all named directors, except for Mr. Gilbert, Mr. Barry and Mr. Keller, are independent directors, as "independence" is defined in accordance with the National Association of Security Dealers ("NASD") standards. 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 2008 Proxy Statement. -32- 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 Consolidated balance sheets as of October 31, 2007 and 2006 F-2 Consolidated statements of operations for the years ended October 31, 2007, 2006 and 2005 F-3 Consolidated statements of stockholders' deficit for the years ended October 31, 2007, 2006 and 2005 F-4 Consolidated statements of cash flows for the years ended October 31, 2007, 2006 and 2005 F-5 Notes to consolidated financial statements F-6 (2) Index to Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts S-1 Schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. -33- (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 Amended 1999 Stock Incentive Plan is incorporated by reference to Exhibit 10.3 of our Report on Form 8-K filed on April 17, 2006. 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 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. 10.7 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. 10.8 Debt Extension Agreement, dated as of November 1, 2004, between the Company and G.S. Beckwith Gilbert is incorporated by reference from Exhibit 10.1 of our Current Report on Form 8-K on February 1, 2005. 10.9 Debt Extension Agreement, made as of November 1, 2005, between the Company and G.S. Beckwith Gilbert, is incorporated by reference from Exhibit 10.2 of our Current Report on Form 8-K filed on February 6, 2006. 10.10 Debt Extension Agreement, made as of November 1, 2006, between the Company and G.S. Beckwith Gilbert, is incorporated by reference from Exhibit 10.2 of our Current Report on Form 8-K filed on January 5, 2007. 10.11 Debt Extension Agreement, made as of November 1, 2007 between the Company and G.S. Beckwith Gilbert is incorporated by reference from Exhibit 10.2 of our Current Report on Form 8-K filed on January 17, 2008. 16 Change in Certifying Accountant is incorporated by reference from our Form 8-K/A, dated October 28, 1998. -34- 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. 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. -35- 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 29, 2008 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 29, 2008 /s/ James T. Barry -------------------------------------------- James T. Barry President, Chief Executive Officer and Director (Principal Executive Officer) DATED: JANUARY 29, 2008 /s/ Jeffrey P. Devaney -------------------------------------------- Jeffrey P. Devaney Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) -36- SIGNATURES (CONTINUED) DATED: JANUARY 29, 2008 /s/ G.S. Beckwith Gilbert ----------------------------------- G.S. Beckwith Gilbert Chairman and Director DATED: JANUARY 29, 2008 /s/ John R. Keller -------------------------------------------- John R. Keller Executive Vice President and Director DATED: JANUARY 29, 2008 /s/ Richard R. Schilling, Jr. -------------------------------------------- Richard R. Schilling, Jr. Director DATED: JANUARY 29, 2008 /s/ Bruce N. Whitman -------------------------------------------- Bruce N. Whitman Chairman of the Executive Committee and Director DATED: JANUARY 29, 2008 /s/ Paul L. Graziani -------------------------------------------- Paul L. Graziani Director DATED: JANUARY 29, 2008 /s/ James J. Morgan -------------------------------------------- James J. Morgan Director -37- Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Megadata Corporation and Subsidiary We have audited the accompanying consolidated balance sheet of Megadata Corporation and Subsidiary as of October 31, 2007 and 2006 and the related consolidated statements of operations, stockholders' deficit, and cash flows for the three years then ended. We have also audited the schedule as listed in Part IV, Item 15(a)(2) for the three years ended October 31, 2007. These financial statements and schedules 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 Subsidiary at October 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2007, 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 16, 2008 F1
Megadata Corporation and Subsidiary Consolidated Balance Sheets OCTOBER 31, 2007 2006 ------------ ------------ ASSETS Current assets: Cash $ 286,992 $ 215,366 Accounts receivable, net 794,487 669,108 Inventory, net 366,751 735,847 Prepaid expenses and other current assets 87,123 167,905 ------------ ------------ Total current assets 1,535,353 1,788,226 Property, plant and equipment, net 327,791 145,326 PASSUR(R) network, net 4,517,736 2,839,519 Software development costs, net 1,499,813 1,198,520 Other assets 48,611 57,225 ------------ ------------ Total Assets $ 7,929,304 $ 6,028,816 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 381,262 $ 311,213 Accrued expenses and other current liabilities 660,495 697,098 Deferred income, current portion 911,394 805,389 Accrued expenses--related parties -- 247,867 Note payable, current portion -- 4,815 ------------ ------------ Total current liabilities 1,953,151 2,066,382 Deferred income, less current portion 128,529 41,340 Notes payable--related party 12,614,880 11,214,880 ------------ ------------ 14,696,560 13,322,602 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 4,787,948 in 2007 and 2006 47,879 47,879 Additional paid-in capital 4,263,212 4,191,264 Accumulated deficit (9,454,872) (9,909,454) ------------ ------------ (5,143,781) (5,670,311) Treasury Stock, at cost, 696,500 shares in 2007 and 2006 (1,623,475) (1,623,475) ------------ ------------ Total stockholders' deficit (6,767,256) (7,293,786) ------------ ------------ Total liabilities and stockholders' deficit $ 7,929,304 $ 6,028,816 ============ ============ SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F2
Megadata Corporation and Subsidiary Consolidated Statements of Operations YEARS ENDED OCTOBER 31, 2007 2006 2005 ----------- ----------- ----------- Revenues: Subscriptions $ 5,246,468 $ 3,842,156 $ 3,270,098 Maintenance 408,116 419,774 434,175 Other 43,652 52,292 104,500 ----------- ----------- ----------- Total revenues 5,698,236 4,314,222 3,808,773 ----------- ----------- ----------- Cost and expenses: Cost of revenues 1,875,320 1,265,428 2,002,335 Research and development 307,323 419,078 392,496 Selling, general and administrative expenses 2,511,672 2,051,341 1,920,008 ----------- ----------- ----------- 4,694,315 3,735,847 4,314,839 ----------- ----------- ----------- Income (loss) from operations 1,003,921 578,375 (506,066) Other income (expense): Interest income 10,500 6,492 1,928 Interest expense--related party (543,179) (475,263) (414,576) ----------- ----------- ----------- Income (loss) before income taxes 471,242 109,604 (918,714) Provision for income taxes 16,660 6,689 5,158 ----------- ----------- ----------- Net income (loss) $ 454,582 $ 102,915 $ (923,872) =========== =========== =========== Net income (loss) per common share - basic $ .11 $ .03 $ (.23) =========== =========== =========== Net income (loss) per common share - diluted $ .08 $ .02 $ (.23) =========== =========== =========== Weighted-average number of common shares outstanding - basic 4,091,448 4,091,448 4,088,115 Weighted-average number of common shares outstanding - diluted 5,481,031 5,327,052 4,088,115 =========== =========== =========== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F3
Megadata Corporation and Subsidiary Consolidated Statements of Stockholders' Deficit Years Ended October 31, 2007, 2006, and 2005 COMMON SHARES AFTER DEDUCTING COMMON ADDITIONAL TOTAL TREASURY SHARES PAID-IN ACCUMULATED TREASURY STOCKHOLDERS' STOCK AMOUNT CAPITAL DEFICIT STOCK DEFICIT ----------- ----------- ----------- ----------- ----------- ----------- 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) ----------- ----------- ----------- ----------- ----------- ----------- Exercise of common stock options 3,333 33 766 799 ----------- ----------- ----------- ----------- ----------- ----------- Stock Based compensation 96,316 96,316 ----------- ----------- ----------- ----------- ----------- ----------- Net income 102,915 102,915 ----------- ----------- ----------- ----------- ----------- ----------- Balance at October 31, 2006 4,091,448 47,879 4,191,264 (9,909,454) (1,623,475) (7,293,786) ----------- ----------- ----------- ----------- ----------- ----------- Stock Based compensation 71,948 71,948 ----------- ----------- ----------- ----------- ----------- ----------- Net income 454,582 454,582 ----------- ----------- ----------- ----------- ----------- ----------- Balance at October 31, 2007 4,091,448 47,879 4,263,212 (9,454,872) (1,623,475) (6,767,256) ----------- ----------- ----------- ----------- ----------- ----------- ===================================================================================== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F4
Megadata Corporation and Subsidiary Consolidated Statements of Cash Flows YEARS ENDED OCTOBER 31, 2007 2006 2005 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 454,582 $ 102,915 $ (923,872) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,051,446 887,572 774,945 Provision for (recovery of) doubtful accounts receivable (2,068) 32,851 12,000 Non cash stock compensation expense 71,948 96,316 -- Changes in operating assets and liabilities: Accounts receivable (123,311) (218,343) (72,976) Inventory 369,096 (569,729) (27,470) Prepaid expenses and other current assets 80,782 2,286 (135,736) Other assets 8,614 (30,800) (13,850) Accounts payable 70,049 (10,024) 28,264 Deferred income 193,194 27,891 (171,538) Accrued expenses and other current liabilities (284,471) 303,493 136,762 ----------- ----------- ----------- Total adjustments 1,435,279 521,513 530,401 ----------- ----------- ----------- Net cash provided by (used in) operating activities 1,889,861 624,428 (393,471) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES PASSUR(R) network (2,337,573) (1,176,990) (332,382) Software development costs (585,433) (468,115) (358,000) Capital expenditures (290,414) (73,971) (73,382) ----------- ----------- ----------- Net cash used in investing activities (3,213,420) (1,719,076) (763,764) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable--related party 1,400,000 1,225,000 1,123,415 Payments on note payable (4,815) (4,814) -- Proceeds from exercise of stock options -- 799 -- ----------- ----------- ----------- Net cash provided by financing activities 1,395,185 1,220,985 1,123,415 ----------- ----------- ----------- Increase (decrease) in cash 71,626 126,337 (33,820) Cash--beginning of year 215,366 89,029 122,849 ----------- ----------- ----------- Cash--end of year $ 286,992 $ 215,366 $ 89,029 =========== =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Interest-related party $ 791,034 $ 227,396 $ 414,576 Income taxes $ 13,381 $ 6,689 $ 5,159 Capital expenditures financed -- -- $ 14,000 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F5 Megadata Corporation and Subsidiary Notes to Consolidated Financial Statements October 31, 2007 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Megadata Corporation's, (the "Company") principal business is the delivery from its proprietary PASSUR(R) network of live, unique flight information, decision support software, analytics, and web-delivered collaborative decision solutions to the aviation industry and organizations that serve, or are served by, the aviation industry. BASIS OF PRESENTATION At October 31, 2007, the Company's current liabilities exceeded current assets by $418,000, it had a stockholder's deficit of $6,767,000, and it earned net income of $455,000 for the year ended October 31, 2007. Management is addressing the Company's working capital and stockholders' deficiencies 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 may need 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 10, 2009. 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. F6 Megadata Corporation and Subsidiary 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. 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 the term of the license agreement, which typically does not exceed five years. The Company recognizes initial set up fee revenues and associated costs on a straight-line basis over the estimated life of the customer relationship period, typically 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. INVENTORY Inventory is valued at the lower of cost or market with cost being determined using the first-in, first-out (FIFO) method. Costs included in inventory consist of materials, labor, and manufacturing overhead that are related to the purchase and production of inventory. F7 Megadata Corporation and Subsidiary 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 part of its standard business practice. The Company has a history of successfully collecting all amounts due under the original payment terms, without making concessions on payments, software products, maintenance, or other services. Net accounts receivable are 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 recognized as revenue over the respective license agreement term, which typically does not exceed five years. Accounts receivable balances also include initial set up fees billed when the service is performed and revenues are recognized on a straight-line basis over the estimated life of the customer relationship period, typically five years. For the fiscal year ended October 31, 2007, the provision for doubtful accounts was approximately $7,000 compared to $9,000 recorded as of the fiscal year ended October 31, 2006. The Company monitors its outstanding accounts receivable balance and believes the $7,000 provision is reasonable. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is 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 repairs and maintenance are expensed when incurred. PASSUR(R) 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 $3,156,000 and $2,496,000 as of October 31, 2007 and 2006, respectively. Depreciation is charged to cost of revenues 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, 2007 total of 27 units) are not depreciated until they are placed in service. During fiscal 2007, 2006, and 2005, the Company capitalized $1,664,000, $1,263,000, and $475,000 of costs related to additions to the PASSUR(R) Network, respectively. The Company incurred depreciation expense related to PASSUR(R) Network installations during fiscal 2007, 2006, and 2005 of $659,000, $614,000, and $538,000, respectively. During fiscal 2007, the amount capitalized to the PASSUR(R) Network includes transfers from inventory of approximately $1,651,000. In fiscal 2007 and 2006 the Company did not dispose of any PASSUR(R) Network assets. F8 Megadata Corporation and Subsidiary Notes to Consolidated Financial Statements (continued) 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 until the product is available for release to customers. Once the software products become available for general release to the public, the Company begins 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, 2007 are recoverable through anticipated future sales of such applicable products. During fiscal 2007 and 2006, the Company capitalized approximately $585,000 and $468,000, respectively. During fiscal year 2007, 2006, and 2005, the Company recorded approximately $284,000, $217,000, and $190,000 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 of each year end. In fiscal 2007 and 2006 the Company did not write off any capitalized software projects. LONG-LIVED ASSETS The Company reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. 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. F9 Megadata Corporation and Subsidiary Notes to Consolidated Financial Statements (continued) 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COST OF REVENUES The Company has not segregated its cost of revenues between cost of system revenues and cost of subscription and maintenance revenues, as it is not practicable to segregate such costs. Costs associated with system revenues consist primarily of purchased materials, direct labor, and overhead costs. Costs associated with subscription and maintenance revenues consist 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 revenues 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 PASSUR(R) network systems. Additionally, cost of revenues in each reporting period is impacted by: (1) the number of PASSUR(R) Network units added, which include the production, shipment, and installation of these assets which are capitalized to the PASSUR(R) Network; and (2) capitalized costs associated with software development programs which are expensed in cost of revenues. INCOME TAXES The Company and its subsidiary file a consolidated Federal income tax return. The Company uses the liability method in accounting for income taxes in accordance with SFAS No. 109, "ACCOUNTING FOR INCOME TAXES." Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. F10 Megadata Corporation and Subsidiary Notes to Consolidated Financial Statements (continued) 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME (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. Basic net income (loss) per share is computed based on the weighted average number of shares outstanding. Diluted net income (loss) per share is based on the sum of the weighted average number of common shares outstanding and common stock equivalents. For all periods in 2005, basic net loss per share equaled diluted net loss per share because the effect of common stock equivalents was anti-dilutive, and therefore excluded from the calculation of diluted net loss per share. Shares used to calculate net income (loss) per share are as follows: 2007 2006 2005 --------- --------- --------- Basic weighted average shares 4,091,448 4,091,448 4,088,115 outstanding Effect of dilutive stock options 1,389,583 1,235,604 -- --------- --------- --------- Diluted weighted average shares outstanding 5,481,031 5,327,052 4,088,115 ========= ========= ========= Weighted average shares which are not included in the calculation of diluted net income (loss) per share because their impact is anti-dilutive Stock options 325,917 676,771 1,561,000 DEFERRED INCOME Deferred income includes advances received on subscription services and/or maintenance agreements 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 subscription and maintenance services are recognized as income ratably over the subscription and/or maintenance period that coincides with the respective agreement. The Company recognizes license fees revenues on a straight-line basis over the term of the license agreement, which typically does not exceed five years. The Company recognizes initial set up fee revenues and associated costs on a straight-line basis over the estimated life of the customer relationship period, typically five years. F11 Megadata Corporation and Subsidiary Notes to Consolidated Financial Statements (continued) 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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. Prior to November 1, 2005, the Company accounted for employee stock option plans based on the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations and had adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No.123). Accordingly, compensation cost for stock options was measured as the excess, if any, of the quoted market price of the Company's stock at the grant date over the amount an employee must pay to acquire the stock. The Company granted stock options with exercise prices equal to the market price of the underlying stock on the date of grant; therefore, the Company did not record stock-based compensation expense under APB Opinion No. 25. 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 9. Stock Options) for the fiscal year ended October 31, 2005: Reported net loss $(924,000) Pro-forma stock compensation expense (72,000) --------- Pro-forma net loss $(996,000) ========= Reported basic and diluted net loss per common share $ (.23) ========= Pro-forma basic and diluted net loss per common share $ (.24) ========= Effective November 1, 2005, the Company adopted SFAS No. 123R, "Share-Based Compensation" using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options was determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for stock options in footnote disclosures required under SFAS No. 123. Such fair value is recognized as expense over the service period, net of estimated forfeitures. The adoption of SFAS No.123R resulted in no cumulative change in accounting as of the date of adoption. For the fiscal years ended October 31, 2007 and 2006, stock compensation expense of $72,000 and $96,000, respectively, was primarily charged to Selling, General and Administrative expenses. F12 Megadata Corporation and Subsidiary Notes to Consolidated Financial Statements (continued) 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION (CONTINUED) The weighted average fair value of options outstanding during the year ended October 31, 2007 was $.51. These options vest over a period of three and five years. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for the fiscal years ended October 31, 2007, 2006, and 2005; risk-free interest rates of 4.47%, 4.47%, and 3.92%, respectively: volatility factor of the expected market price of the Company's common stock of 142% in fiscal year 2007, 135% in fiscal year 2006, and 111% in fiscal year 2005; no dividend yield: and a weighted-average expected life of the option of 6.5, 6.3, and 8 years in fiscal 2007, 2006, and 2005, respectively. COMPREHENSIVE INCOME (LOSS) For the fiscal years ended October 31, 2007 and 2006, the Company's comprehensive income is equivalent to that of the Company's total net income. For the fiscal year ended October 31, 2005, the Company's comprehensive loss is equivalent to that of the Company's total net loss. Certain reclassifications have been made to the prior year financial statements to conform to the current period presentation. RECENT ACCOUNTING PRONOUNCEMENTS In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("FAS 159"). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. FAS 159 does not apply to the Company's fiscal 2007 financial statements since it is effective only for fiscal years beginning after November 15, 2007. The Company has determined that the adoption of FAS 159 will not have a material impact on future Financial Statements. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 clarifies that fair value is the amount that would be exchanged to sell an asset or transfer a liability in an orderly transaction between market participants. Further, the standard establishes a framework for measuring fair value in generally accepted accounting principles and expands certain disclosures about fair value measurements. SFAS 157 does not apply to the Company's fiscal 2007 financial statements since it is effective only for fiscal years beginning after November 15, 2007. The Company does not expect that the adoption of SFAS 157 will have a material impact on its future consolidated financial position, results of operations, or cash flows. F13 Megadata Corporation and Subsidiary Notes to Consolidated Financial Statements (continued) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) On July 13, 2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on de-recognition, classification, interest, and penalties, accounting in interim periods, disclosure, and transition. FASB Interpretation (FIN) No. 48 takes effect for years beginning after December 15, 2006, which for the Company will be the fiscal year beginning November 1, 2007. The Company is in the process of evaluating the impact that the adoption of this accounting pronouncement will have on its future financial statements. Certain reclassifications have been made to prior year amounts to conform with the current year presentation. 2. INVENTORY Inventory is summarized as follows: OCTOBER 31, 2007 2006 ----------------- ---------------- Parts and raw materials $ 137,000 $ 141,000 Work-in-process 162,000 384,000 Finished goods 68,000 211,000 ----------------- ---------------- $ 367,000 $ 736,000 ================= ================ 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: ESTIMATED USEFUL OCTOBER 31, LIVES 2007 2006 ------------- ---------------- -------------- Leasehold improvements 3-5 years $ 138,000 $ 109,000 Equipment 5-10 years 2,719,000 2,460,000 Furniture and fixtures 5-10 years 418,000 415,000 ---------------- -------------- 3,275,000 2,984,000 Less accumulated depreciation and amortization 2,947,000 2,839,000 ---------------- -------------- $ 328,000 $ 145,000 ================ ============== The Company recorded depreciation and amortization expense on the assets included in property, plant and equipment of $108,000, $57,000, and $47,000 for the years ended October 31, 2007, 2006, and 2005, respectively. F14 Megadata Corporation and Subsidiary 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 enhancements to software features of the existing products to be sold or otherwise marketed, after technological feasibility is established and which end when the product is available for release to customers. As of October 31, 2007 and 2006, the Company had approximately $2,417,000, and $1,831,000 of such costs capitalized, and $917,000 and $633,000 of accumulated amortization, respectively. The weighted average amortization period of the Company's software development costs as of October 31, 2007 is approximately 2.8 years. Amortization expense on these assets for the fiscal years ended October 31, 2007, 2006, and 2005 was approximately $284,000, $217,000, and $190,000, respectively. Future amortization expense for software development costs capitalized as of October 31, 2007 for the years ended October 31, 2008, 2009, 2010, 2011, and 2012 is estimated to approximate $272,000, $193,000, $145,000, $117,000, and $33,000, respectively. 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following: OCTOBER 31, 2007 2006 ---- ---- Payroll, payroll taxes and benefits $ 276,000 $ 324,000 Professional fees 139,000 132,000 License fees 86,000 75,000 Commissions 49,000 43,000 Travel expenses 14,000 40,000 Advertising and marketing 21,000 27,000 Other liabilities 75,000 56,000 ----------------- ---------------- $ 660,000 $ 697,000 ================= ================ 6. NOTES PAYABLE--RELATED PARTY During fiscal 2007, G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, loaned the Company an additional $1,400,000 in exchange for promissory notes bearing interest payable in cash at 4.5% per annum and maturing on November 1, 2008, bringing the principal amount of notes due to Mr. Gilbert to $12,614,880 on October 31, 2007. During fiscal 2006, Mr. Gilbert lent the Company an additional $1,225,000, bringing the total to $11,214,880 and then accrued interest of $247,867 was added to the principal, resulting in a total of $11,462,747 owed to Mr. Gilbert on October 31, 2006. During fiscal 2005, Mr. Gilbert lent the Company an additional $1,123,415, resulting in a total of $9,989,880 owed to Mr. Gilbert on October 31, 2005. The notes are secured by the Company's assets. The notes payable are classified as long-term as of October 31, 2007, 2006 and 2005. F15 Megadata Corporation and Subsidiary Notes to Consolidated Financial Statements (continued) 7. LEASES AND NOTE PAYABLE The Company's research and manufacturing facility is located in Bohemia, New York, and is subject to a lease that was extended for an additional three years commencing November 1, 2006 through October 31, 2009. Minimum rent under this agreement for the period ended October 31, 2007 approximated $93,000. 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 is rented for the period ending June 30, 2009 at an amount of $90,000 per year. All other operating leases are under a month-to-month arrangement. Contractual Obligations Under Fiscal Year Ended October 31: Operating Leases ---------------- 2008 $ 187,000 2009 161,000 ---------- Total Minimum Contractual Obligations $ 348,000 ========== 8. INCOME TAXES The Company's provision for income taxes in each year consists of current state and local minimum taxes. At October 31, 2007, the Company has available a federal net operating loss carry-forward of approximately $12,989,000 for income tax purposes which will expire in various tax years from 2008 through 2025. The Company has provided a full valuation allowance on the net deferred tax asset of approximately $4,855,000 which primarily consists of the net operating loss carry-forwards. 9. STOCK OPTIONS The Company's stock option plans provide for the granting of stock options for up to 2,240,000 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. 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. F16 Megadata Corporation and Subsidiary Notes to Consolidated Financial Statements (continued) 9. STOCK OPTIONS (CONTINUED) 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. Information with respect to options during the years ended October 31, 2007, 2006 and 2005 is as follows:
2007 2006 2005 ----------------------- ----------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ----------------------------------------------------------------------------- Options outstanding--beginning 1,675,500 $ .46 1,561,000 $ .49 1,210,000 $.56 of year Options granted 40,000 2.63 172,000 .47 351,000 .25 Options forfeited and expired -- -- (54,167) 1.42 -- -- Options exercised -- -- (3,333) .24 -- -- ----------------------------------------------------------------------------- Options outstanding-- end of year 1,715,500 $ .51 1,675,500 $ .46 1,561,000 $.49 ============================================================================= Options exercisable at end of year 1,509,185 $ .39 1,248,130 $ .49 909,900 $.62 ============================================================================= Weighted average fair value per share of options granted during the year $2.48 $.47 $.25 ===== ==== ====
F17 Megadata Corporation and Subsidiary Notes to Consolidated Financial Statements (continued) 9. STOCK OPTIONS (CONTINUED) The following table summarizes information about stock options outstanding at October 31, 2007:
- -------------------- ----------------- ----------------------- ---------------------- ------------- --------------------- OPTIONS OPTIONS OUTSTANDING EXERCISABLE - -------------------- ----------------- ----------------------- ---------------------- ------------- --------------------- Weighted-Average Remaining Range of Contractual Weighted-Average Weighted-Average Exercise Prices Shares Life Exercise Price Shares Exercise Price - -------------------- ----------------- ----------------------- ---------------------- ------------- --------------------- $ .15 - $ .24 323,500 4.6 years $ .20 323,500 $ .20 - -------------------- ----------------- ----------------------- ---------------------- ------------- --------------------- $ .25 - $ .38 569,000 6.0 years .29 512,900 .29 - -------------------- ----------------- ----------------------- ---------------------- ------------- --------------------- $ .40 - $ .55 480,500 6.5 years .49 370,285 .50 - -------------------- ----------------- ----------------------- ---------------------- ------------- --------------------- $ .63 - $ .84 265,000 2.9 years .79 265,000 .79 - -------------------- ----------------- ----------------------- ---------------------- ------------- --------------------- $ 1.63 - $ 3.19 77,500 6.0 years 2.58 37,500 2.53 ------------- ---------- - -------------------- ----------------- ----------------------- ---------------------- ------------- --------------------- 1,715,500 1,509,185 ============== ========== - -------------------- ----------------- ----------------------- ---------------------- ------------- ---------------------
As of October 31, 2007, there were 2,220,000 shares of common stock reserved for future issuance under the Company's stock option plan. For the year ended October 31, 2007, stock compensation expense of approximately $72,000 was primarily charged to Selling, General and Administrative expense, consisting of $10,000 for options granted during fiscal year 2007 and $62,000 for non vested options granted prior to October 31, 2006. As of October 31, 2007, there was $132,000 of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 2.8 years. Stock option activity during the year ended October 31, 2007, was as follows:
- ------------------------------------------- ---------------- ------------- --------------- ------------------ Weighted Weighted average average remaining Aggregate Number of exercise contracted intrinsic options price term (years) value - ------------------------------------------- ---------------- ------------- --------------- ------------------ Outstanding at November 1, 2006 1,675,500 $ 0.49 - ------------------------------------------- ---------------- ------------- --------------- ------------------ Options granted 40,000 2.63 - ------------------------------------------- ---------------- ------------- --------------- ------------------ Options exercised - - - ------------------------------------------- ---------------- ------------- --------------- ------------------ Options forfeited - - - ------------------------------------------- ---------------- ------------- --------------- ------------------ Options outstanding at October 31, 2007 1,715,500 .51 5.4 $872,000 ========= - ------------------------------------------- ---------------- ------------- --------------- ------------------ Options exercisable at October 31, 2007 1,509,185 .39 5.0 $593,000 - ------------------------------------------- ---------------- ------------- --------------- ------------------
The weighted average grant-date fair value of options granted during fiscal year 2007 was $2.48. F18 Megadata Corporation and Subsidiary Notes to Consolidated Financial Statements (continued) 9. STOCK OPTIONS (CONTINUED) A summary of our non-vested shares as of October 31, 2007 and changes during the fiscal year are presented below: - ---------------------------------- ------------------------ -------------------- Weighted average grant date Shares fair value - ---------------------------------- ------------------------ -------------------- Nonvested at November 1 , 2006 427,370 $ .37 - ---------------------------------- ------------------------ -------------------- Granted 40,000 2.63 - ---------------------------------- ------------------------ -------------------- Vested (261,055) .36 - ---------------------------------- ------------------------ -------------------- Forfeited ( -- ) -- - ---------------------------------- ------------------------ -------------------- Nonvested at October 31, 2007 206,315 .83 - ---------------------------------- ------------------------ -------------------- 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, 2007, 2006 and 2005 one customer (Continental Airlines) accounted for approximately 13%, 16%, and 18% of total revenues, respectively. The Company had export sales of approximately $241,000, $226,000, and $174,000 in fiscal 2007, 2006, and 2005, respectively. All sales, including export sales, are denominated in U.S. dollars. 11. RELATED PARTY TRANSACTIONS For the years ended October 31, 2007, 2006, and 2005 the Company paid approximately $246,000, $98,000, and $24,000 respectively, to Surf-Tech Manufacturing, Inc. (a non-public corporation) for materials and labor in connection with the production of various replacement, new, and upgraded equipment for PASSUR(R) systems. The Company believes that these rates are competitive and are at or below market rates. A Company Executive Vice President and Director was a 50% shareholder of the aforementioned company through July 31, 2007, at which time such shares were sold. Accrued expenses - related parties consists of interest on notes payable-related party (note 6) for the year ended October 31, 2006. F19 Megadata Corporation and Subsidiary Notes to Consolidated Financial Statements (continued) 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 systems 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. As of October 31, 2007 and 2006, the Company had $86,000 and $75,000 accrued respectively, as a component of accrued expenses and other accrued liabilities, respectively. This license agreement is in effect until the date of expiration of the last licensed patent to expire, which occurs in 2013. During October 1999, the license agreement was amended primarily with respect to when additional royalties would be payable by the Company for new installations of Company-owned systems assuming the minimum annual royalty payment requirement had been earned. Under the amended agreement, these additional royalties are payable based only upon a percentage of the revenue received from each Company-owned installation. 13. QUARTERLY RESULTS OF OPERATIONS The following table provides unaudited quarterly consolidated results of operations for each quarter of fiscal years 2007 and 2006. The Company believes this unaudited information has been prepared substantially on the same basis as the annual audited financial statements and all necessary adjustments, consisting of any normal recurring adjustments, have been included in the amounts stated below to present fairly the Company's results of operations. The operating results for any quarter are not necessarily indicative of the operating results for any future period. Certain balances have been reclassified to conform to the presentation of balances as stated in this Annual Report on Form 10-K.
THREE MONTHS ENDED ---------------------------------------------------------------------------------------------------------------- OCT. 31, JULY 31, APRIL 30, JAN. 31, OCT. 31, JULY 31, APRIL 30, JAN. 31, 2007 2007 2007 2007 2006 2006 2006 2006 ---------------------------------------------------------------------------------------------------------------- TOTAL REVENUES $ 1,537,588 $ 1,466,793 $ 1,392,175 $ 1,301,680 $ 1,206,214 $ 1,074,277 $ 1,015,967 $ 1,017,764 INCOME (LOSS) FROM OPERATIONS 280,280 291,418 245,983 186,240 459,237 141,779 (12,604) (10,037) NET INCOME (LOSS) 143,464 142,264 114,973 53,881 334,278 22,390 (126,740) (127,013) NET INCOME (LOSS) PER COMMON SHARE - BASIC $ .04 $ .03 $ .03 $ .01 $ .08 $ .01 $ (.03) $ (.03) NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ .03 $ .03 $ .02 $ .01 $ .06 $ .01 $ (.03) $ (.03) ----------------------------------------------------------------------------------------------------------------
F20
Megadata Corporation and Subsidiary Schedule II - Valuation and Qualifying Accounts ADDITIONS BALANCE AT CHARGED TO CHARGED BEGINNING COSTS AND TO OTHER BALANCE AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ------------------------------------------------------------------------------------------------------- Year Ended October 31, 2007; - ------------------------------------------------------------------------------------------------------- Reserves and allowances deducted from asset accounts: - ------------------------------------------------------------------------------------------------------- Reserve for estimated doubtful accounts - accounts receivable. 8,612 32,653 (34,720) 6,545 - ------------------------------------------------------------------------------------------------------- Valuation allowance on deferred tax asset 5,589,000 (734,000)(a) 4,855,000 - ------------------------------------------------------------------------------------------------------- 5,597,612 32,653 (734,000) (34,720) 4,861,545 - ------------------------------------------------------------------------------------------------------- Year Ended October 31, 2006; - ------------------------------------------------------------------------------------------------------- Reserves and allowances deducted from asset accounts: - ------------------------------------------------------------------------------------------------------- Reserve for estimated doubtful accounts - accounts receivable. 6,275 32,851 (30,514) 8,612 - ------------------------------------------------------------------------------------------------------- Valuation allowance on deferred tax asset 6,365,000 (776,000)(a) 5,589,000 - ------------------------------------------------------------------------------------------------------- 6,371,275 32,851 (776,000) (30,514) 5,597,612 - ------------------------------------------------------------------------------------------------------- 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 ============================================================================ (a) Valuation allowance for deferred tax assets.
S1 EX-31.1 2 exh31-1.txt EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James T. Barry, certify that: 1. I have reviewed this annual report on Form 10-K of Megadata Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and (c) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 29, 2008 By: /s/ James T. Barry ------------------ James T. Barry Chief Executive Officer (Principal Executive Officer) EX-31.2 3 exh31-2.txt EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jeffrey P. Devaney, certify that: 1. I have reviewed this annual report on Form 10-K of Megadata Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and (c) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 29, 2008 By: /s/ Jeffrey P. Devaney ---------------------- Jeffrey P. Devaney Chief Financial Officer (Principal Financial and Accounting Officer) EX-32.1 4 exh32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of Megadata Corporation (the "Company") on Form 10-K for the fiscal year ended October 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James T. Barry, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ James T. Barry ---------------------- James T. Barry Chief Executive Officer January 29, 2008 EX-32.2 5 exh32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of Megadata Corporation (the "Company") on Form 10-K for the fiscal year ended October 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey P. Devaney, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Jeffrey P. Devaney ------------------------- Jeffrey P. Devaney Chief Financial Officer January 29, 2008 -----END PRIVACY-ENHANCED MESSAGE-----