-----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, CLPNeo4g+tyu7m584Q+t+zLwbRWnID9BiuvSbztUxlt8kJzf+MrSzIu7QZ+XcBCF ynJ3R+B5rqREEs3qc2EOVQ== 0000909012-99-000037.txt : 19990204 0000909012-99-000037.hdr.sgml : 19990204 ACCESSION NUMBER: 0000909012-99-000037 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990129 DATE AS OF CHANGE: 19990203 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEGADATA CORP CENTRAL INDEX KEY: 0000225628 STANDARD INDUSTRIAL CLASSIFICATION: 3576 IRS NUMBER: 112208938 STATE OF INCORPORATION: NY FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-07642 FILM NUMBER: 99517590 BUSINESS ADDRESS: STREET 1: 35 ORVILLE DR CITY: BOHEMIA STATE: NY ZIP: 11716 BUSINESS PHONE: 5165896800 MAIL ADDRESS: STREET 1: 35 ORVILLE DR CITY: BOHEMIA STATE: NY 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 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K | X | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998 OR | _ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No fee required) for the transition period from ___ to ___ Commission file number 0-7642 MEGADATA CORPORATION - - -------------------------------------------------------------------------------- (Exact name of Company as specified in its charter) NEW YORK 11-2208938 - - -------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 66 FIELD POINT ROAD, GREENWICH, CT 06830 - - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) Company's telephone number, including area code: 203-629-8757 -------------- SECURITIES OF THE COMPANY REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE ---- SECURITIES OF THE COMPANY REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON SHARES, PAR VALUE $0.01 PER SHARE ---------------------------------------- INDICATE BY CHECK MARK WHETHER THE COMPANY (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE COMPANY WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] --- --- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN AND WILL NOT BE CONTAINED, TO THE BEST OF THE COMPANY'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K The aggregate market value of the voting shares of the Company held by non-affiliates as at January 20, 1999 was $468,034. The number of common shares, $0.01 par value, outstanding as at January 20, 1999 was 2,511,600 PART I ITEM 1. BUSINESS. - - ----------------------- (A) GENERAL DEVELOPMENT OF BUSINESS. - - --------------------------------------------------- The Company sells, manufactures, and is continuing to develop hardware and software enhancements for its aircraft flight tracking systems. The Company's product line includes the PASSUR (Passive Secondary Surveillance Radar) systems. These systems receive aircraft identification and altitude information from aircraft transponder transmissions which are interrogated by existing secondary surveillance radars without emitting any active signals. Received signals are processed in a standard workstation and displayed on a high resolution color graphics data display to provide real-time identification and tracking of aircraft in flight. The display presentation is similar to that provided to Air Traffic Controllers. The presentation of flight tracks can be in real time or can be switched to a mode that permits observance of historical data for selected time periods. A PASSUR system may be integrated to work with noise monitoring and measuring equipment in a configuration that will supply a correlation between aircraft location and noise levels generated by it. With this real-time information, an airport noise abatement officer can enforce the law regarding noise levels emitted by an aircraft. When used as part of an airport noise monitoring system, airport managers and noise control officers can correlate noise events in the local community with specific airline flight tracks. Another variation of the PASSUR system is called ATMS (Air Traffic Monitoring System) using the Company's proprietary Pastrack software. The ATMS was developed to address a request by a major U.S. airline for use in its flight and airport operations management. The ATMS provides tracks of all airborne aircraft within a 150 mile radius around the airport. It performs ETA (Estimated Time of Arrival) calculations that predict accurately when arriving aircraft are expected to land. It also detects any holding patterns, assessing the impact of Air Traffic Control on an airport operation complex. By using the information provided by the ATMS, an airline's Air Traffic Dispatcher can more accurately predict arrival times, enhancing customer service and gate management. Added benefits include more efficient scheduling of ground support operations, such as food, baggage, cleaning and refueling services. Continued R&D efforts conducted during the past several years led to the enhancement of the software that correlates real-time ASD (Aircraft Situation Display) data supplied by the Department of Transportation with flight tracks identified by the PASSUR. This correlation allows the PASSUR to identify the carrier and the flight number of each aircraft displayed. The Company also sells radio modems. To enhance the SA-9600 radio modem, the Company has implemented a new design for a faster modem increasing the speed of data communication to 28.8Kbps. The SA-9600 is part of the AGILE DATA product line for wireless communication of voice and data. The SA-9600 operates synchronously or asynchronously, half or full duplex, with any host computer with an RS-232C serial port. An optional data compression feature supports host system baud rates of 38,400 bps when in the asynchronous mode. (A data compression feature installed on an SA-9600 with the new 28.8 Kbps modem can support higher baud rates than 38,400 bps.) No software modification of the 2 host system is necessary. As a reliable means of both voice and data transfer, AGILE DATA is mainly being marketed in third-world countries, where existing telephone data services are either poor or non-existent. The new DC-powered SA-9600 enhances its suitability for mobile applications where 12/24/48vdc power is commonly available. The Company has received FCC approval for the marketing and sale of these products in the 450-470 Mhz business band. In order to appeal to a wider group of potential users who, due to government restrictions or unavailable frequencies, wish to utilize other radios transmitting on frequencies outside the standard SA-9600's range, the Company has developed the SA-9600/E. The SA-9600/E is a modem-only version of the SA-9600 which provides radio data transmission capability using commonly available, off-the-shelf, external radios of the customer's choice. The Company's experience with airline communication protocols such as SABRE, APOLLO, PARS, SITA, SYSTEM ONE, IPARS, DATAS II, PEGASUS, WORLDSPAN, GEMINI, and other airline network protocols led to the development of various reservation network access products for the airline industry. These include communication controllers and multiplexers which support multiple Interchange and Terminal Addresses (IAs & TAs) on a single host communication line, reducing CRS (Computerized Reservation System) host polling overhead and providing significant savings on telephone line charges and installation. Other communication products allow the use of public or private X.25 networks to transport reservation data to a computer reservation system. The Company has received certification for these products from the major airline reservation networks. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. - - ------------------------------------------------------------------- Not applicable. (C) NARRATIVE DESCRIPTION OF BUSINESS. - - ------------------------------------------------ The Company is a supplier of communication products intended to satisfy the needs of airports, airlines, and travel agents. Its principal business is the design, manufacture, sale and service of its product line consisting of a real time aircraft monitoring system, as well as wireless modems, and access equipment to airline reservation systems. In addition to the standard line of equipment, the Company provides its customers with customized software and hardware which provide passive detection of aircraft in flight. 1. PRODUCTS. --------------- The Company's software and hardware are utilized in the following applications: (i) Air Traffic Monitoring Systems -------------------------------------------- The Company, under a sublicense for patented technology owned by a third party, has implemented its proprietary hardware and software to develop an enhanced line of air traffic monitoring systems. These PASSUR (Passive Secondary Surveillance Radar) systems receive and process aircraft identification from aircraft transponder transmissions interrogated by existing secondary surveillance radars. With this information available in real time, the airport manager or an individual airline's Air Traffic Dispatcher can more accurately predict arrival times, enhancing customer service and gate management. Added benefits include more efficient scheduling of ground support operations, such as food, baggage, cleaning, and refueling services. When used as part of airport noise monitoring systems, airport managers and noise abatement officers can correlate noise events in the local community with specific airline flight tracks for appropriate action. 3 (ii) Wireless Modem Communications ------------------------------------------------ The SA-9600 is part of the AGILE DATA product line of wireless radio modems, which communicate voice and data at speeds up to 28.8K bps. The SA-9600 operates synchronously or asynchronously, half or full duplex, with any host computer with an RS-232C serial port. Compatibility with the "AT" command set is built in. No software modification of the host system is necessary for any of the operating modes. Encryption of transmitted data is available for security purposes. A data compression feature increases throughput up to four times (38,400 bps) depending on the type of data transmitted. The new DC-powered SA-9600 enhances its suitability for mobile applications where 12/24/48vdc power is commonly available. A modem-only version is also available, allowing the SA-9600 to be used with off-the-shelf radio equipment that meet existing local regulatory or customer requirements. The Company has received FCC approval for the marketing and sale of the SA-9600 in the 450-470Mhz business band. (iii) Airline Reservation Access Systems ---------------------------------------------------- The Company's experience with ALC protocols, such as SABRE, SYSTEM ONE, PARS, IPARS, GEMINI, APOLLO and other airline network protocols has led to the development of various reservation access products for the airline reservation industry. Offering multi-user workstations with dual-screen displays and pop-up windows, MURS and RESNET controllers provide the lowest per-user-station cost in the industry. They allow up to 32 workstations and 8 printers to be interfaced to a single reservation system host communication line. MIAC (Multiple Interchange Address Concentrator) supports many separate interchange addresses on a single communication line. This increases an airline's CRS (Computerized Reservation System) efficiency by reducing both host polling overhead and the number of separate communication lines needed. ALCX.25 allows the use of public or private X.25 networks to transport reservation data to a computer reservation system. Configurable for either premise or host site operation, ALCX.25 converts installed user sites to X.25 without modification to existing user equipment. (iv) Custom Hardware and Software Activities ----------------------------------------------------------- The Company is occasionally involved in specialized R&D projects sponsored and paid for by customers. These projects involve the customization of the Company's standard products to suit specific customer requirements. 2. SERVICES. --------------- The Company offers maintenance services pursuant to contractual arrangements or an "on-call" basis. "On-call" services are provided on a time and material basis. 3. SOURCES OF RAW MATERIALS. -------------------------------------- The Company obtains its raw materials from component distributors and manufacturers throughout the United States. The Company has multiple sources of supply for a majority of its components. 4 4. DEPENDENCE ON CERTAIN CUSTOMERS. --------------------------------------------------- During the fiscal year ended October 31, 1998, three (3) customers accounted for 52% of revenue. The loss of any of these customers would have an adverse effect on the Company's business. During the fiscal year ended October 31, 1998, those three customers accounted for 28%, 14%, and 10%. During the fiscal year ended October 31, 1997, three customers accounted for 63% of the Company's revenue. Those three customers accounted for 27%, 22%, and 14%. During fiscal year 1996 only one customer accounted for more than 10% of the Company's revenue, with that customer accounting for 25% of fiscal year 1996 revenues. 5. BACKLOG. --------------- The Company's backlog for products and services at October 31, 1998 amounted to approximately $211,000, all of which is scheduled for delivery or performance before October 31, 1999. The backlog at October 31, 1997 and 1996 amounted to approximately $286,000 and $278,000, respectively. Backlog consists of written purchase orders or contracts. 6. COMPETITION. --------------------- The Company is offering the PASSUR and ATMS systems for passive detection of aircraft in flight. These products are, to the best of its knowledge, relatively unique with little competition. Other products, such as the enhanced version of the wireless radio modems and some airline communication products offered by the Company fall into the category of highly competitive business. For these products, although price is a factor, the Company believes that design, technical and software capabilities in tailoring its products to customers' individualized needs are more important competitive factors in the market to which the Company directs its efforts. Depending on the end use of the products, the Company's primary competitors include Data Radio, Cylink, Dimensions International, Motorola, Memorex, and Videcom. The Company also sells to systems integrators, including Tracor Applied Sciences, Sabre Technologies, and Harris, Miller, Miller & Hanson, who also sell products which are competitive with those offered by the Company. All of these companies are significantly larger than the Company, and have larger sales forces and greater financial resources. 7. RESEARCH AND DEVELOPMENT. --------------------------------------- The Company's Research and Development ("R&D") group continues to enhance the Company's products primarily for software and hardware enhancements to PASSUR and ATMS products. During the fiscal year ended October 31, 1998 the Company incurred approximately $122,000 in expenditures for R&D. In fiscal year ended October 31, 1997 approximately $147,000 was expended on R&D and in fiscal year 1996 approximately $180,000 was expended on R&D. 8. EMPLOYEES. ------------------ The Company employs 13 full time employees including 5 officers. 5 (D)FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES - - --------------------------------------------------------- The following table sets forth the dollar amount and the percentages attributable to the sale by the Company of its products during the past three fiscal years in the United States and abroad:
Net Revenues 1998 1997 1996 - - -------- ------ ------ ------ Domestic $ 960,408 91.2% $1,306,345 88.3% $ 878,364 79.0% - - -------- Exports 92,835 8.8% 172,607 11.7% 233,597 21.0% - - ------- ---------- ----- ---------- ----- ---------- ----- Total Revenues: $1,053,243 100.0% $1,478,952 100.0% $1,111,961 100.0% - - ---------- ========== ===== ========== ===== ========== =====
ITEM 2. PROPERTIES. - - -------------------------- The Company's manufacturing, and research facility are located in a one-story building at 35 Orville Drive, Bohemia, New York. The Company owns the entire building which contains 36,000 square feet. The Company is currently utilizing approximately 40% of this building for its activities. The Company's executive offices are currently located in a modern four-story office building at 66 Field Point Road, Greenwich, Connecticut. At October 31, 1998, those offices were located at 104 Field Point Road. The Company is leasing space from Field Point Capital Management Company, a company 100% owned by the Company's President. From October 2, 1998 through January 31, 1999 the Company paid rental of $4,000 to Field Point Capital Management Company. Effective February 1, 1999, the Company will pay Field Point Capital Management Company $2,000 per month rent. The Company believes these rates are competitive and are at or below market rates. ITEM 3. LEGAL PROCEEDINGS. - - ------------------------------------- There are no material pending legal proceedings, other than routine litigation incidental to the Company's business, to which the Company or any of its subsidiaries is a party or to which any of their properties are subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - - -------------------------------------------------------------------------------- None. 6 PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. - - ----------------------------------------------------------------------------- (A) MARKET INFORMATION. -------------------------------- The Company's common shares are traded in the over-the-counter market. The following table sets forth the range of high and low bid and asked quotations of the Company's common shares for each quarterly period during the Company's last two fiscal years, as reported by the National Quotation Bureau, Inc.:
Period Bid Prices* Asked Prices* - - ------ ----------- ------------- High Low High Low ----- --- ---- --- Fiscal Year Ended October 31, 1998 First Quarter .562 .187 .687 .51 Second Quarter .562 .38 .625 .51 Third Quarter .625 .562 .875 .625 Fourth Quarter .625 .375 .875 .50 Fiscal Year Ended October 31, 1997 First Quarter .75 .375 1.062 .75 Second Quarter .437 .375 .75 .625 Third Quarter .531 .312 .625 .5625 Fourth Quarter .312 .187 .625 .50 - - ----------------------- * The quotations represent prices in the over-the counter market between dealers in securities, do not include retail markup, markdown, or commission, and do not necessarily represent actual transactions.
(B) HOLDERS. --------------- The number of equity security holders of record at January 20, 1999 was 354. (C) DIVIDENDS. ----------------- The Company has never paid cash dividends on its shares. The Company does not anticipate paying cash dividends in the foreseeable future. 7 ITEM 6. SELECTED FINANCIAL DATA. - - ---------------------------------------- Selected income statement data:
Year Ended October 31 - - ----------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Net Revenues $ 1,053,243 $ 1,478,952 $ 1,111,961 $ 1,684,525 $ 1,732,558 Net (Loss) (880,749) (54,500) (584,750) (576,553) (267,507) Net (Loss) Per Common Share -- Basic and diluted (1) ($ .35) ($ .03) ($ .36) ($ .36) ($ .17) Dividend Declared -- -- -- -- -- Selected balance sheet data: October 31 - - ----------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Total Assets $ 1,794,990 $ 2,595,296 $ 2,183,896 $ 2,303,722 $ 2,930,151 Long-Term Debt (2)(3)(4) $ 625,548 $ 721,036 $ 674,278 $ 770,663 $ 823,009 Total Share- holders' Equity $ 307,958 $ 1,193,625 $ 657,285 $ 1,242,035 $ 1,818,588 - - ----------------------------------------------------------------------------------------------- (1) Net loss per common share was computed using the weighted average number of common shares outstanding during the period. Conversion of the common equivalent shares was not assumed since the result would have been antidilutive. (2) Company's mortgage loan from the Roosevelt Savings Bank was due to expire on February 1, 1996 requiring a balloon payment of $756,000. As such, it was classified as a current liability. The Company was granted an extension to negotiate a refinancing of the balance due. On May 31, 1996, Roosevelt Savings Bank, the holder of the mortgage, and the Company, signed a mortgage agreement refinancing the mortgage for five additional years at an interest rate of 9.250%. (3) Long Term Debt for 1997 includes a $100,000 note payable, which is due after October 31, 1998. (4) Long term Debt for 1998 includes a $25,000 note payable, and a $37,894 installment note payable, which is due after October 31, 1998.
8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ------------------------------------------------------------------- RESULTS OF OPERATIONS - - --------------------- REVENUES - - -------- Revenue during the fiscal year ended October 31, 1998 ("fiscal 1998") decreased by approximately $426,000, or 29%, as compared to the fiscal year ended October 31, 1997 ("fiscal 1997"). The decrease was due to a reduction in revenue in most of the sales categories of the Company. Decreases in revenues occurred in the following sales categories, PASSUR Systems, Radio Modems, and Protocol Converters. Minor increases in revenue resulted from PASSUR System maintenance contracts and repairs, as well as UNIX Systems. Revenue during fiscal 1997 increased by approximately $367,000, or 33%, as compared to revenue during the year ended October 31, 1996 ("fiscal 1996"). The increase was mainly due to an increase in sales of PASSUR related products and services. The Company's PASSUR sales were limited during fiscal 1998. Management believes that with the increased sales and marketing effort for the PASSUR product line, additional revenues can be realized in the coming fiscal year. With the restructuring underway by the Company, and the move to a smaller, less expensive facility, fixed costs will be reduced. Management is reviewing product offerings and performance of product lines in which revenue has decreased over the last two fiscal years. Cost of Sales and Service - - -------------------------------- During fiscal 1998, cost of sales increased by approximately $90,000, or 12%, over fiscal 1997. The major component of that increase was an inventory write-down of approximately $196,000 to reflect management's decision to focus on the PASSUR Systems product line and eliminate inventory on hand from several other slower moving product lines. Cost of sales decreased by approximately $100,000 as a result of lower revenues during fiscal 1998 before giving effect to the inventory write-down. Cost of service was at about the same level for fiscal 1998 and fiscal 1997. These expenses were required in order to maintain key personnel. Research and Development - - ----------------------------------- The Company's research and development expenses decreased to approximately $122,000 in fiscal 1998 as compared to $147,000 in fiscal 1997 and $180,000 in fiscal 1996. The Company anticipates continuing to incur research and development expenditures at current levels. Research and development efforts include activities associated with maintenance, enhancement, and improvement of the Company's existing hardware and software coupled with customer sponsored research and development expenditures for new product development. No customer sponsored research and development was conducted during fiscal 1998 and fiscal 1997. During fiscal 1996, $40,000 of research and development expenditures were sponsored by a customer. 9 General and Administrative - - ----------------------------------- General and administrative expenditures increased by $172,301, or 37%, during fiscal 1998 as compared to fiscal 1997, as the Company significantly increased the sales and marketing budget for its major PASSUR System product line. Salaries, consulting, travel, and advertising expenses accounted for most of the increase. General and administrative expenses increased by $26,941 or 6.2% during fiscal 1997 compared to fiscal 1996. The increase in these costs are primarily attributable to changes in the level of expenditures for salaries and overhead costs. Restructuring Charge - - --------------------------- In October 1998, the Company announced a Restructuring Plan in which it will focus its attention primarily on its PASSUR line of passive radar systems. As part of this restructuring, the Company will move its corporate headquarters and national sales office to Greenwich, Connecticut. The Company has offered for sale its building in Bohemia, New York and will move its manufacturing and research and development facility to a more modern location in the same area. The Restructuring Charges include exit costs of $93,000 related to the building, severance costs of $53,000, asset write-downs of $24,000 relating to assets to be sold or abandoned, and inventory write-downs of $196,000 associated with the elimination of certain nonstrategic inventory and product lines (which costs are included in costs of sales). Income Taxes - - ------------------ The provisions for income taxes for each year relate to state and local minimum taxes. The Company has available approximately $5,300,000 in tax loss carryforwards to offset possible future income. The Company also has available $25,000 in general business tax credit carryforwards. These carryforwards expire in various amounts from 2006 through 2018. Impact of Inflation - - ----------------------- In the opinion of management, inflation has not had a material effect on the operations of the Company. Net Loss - - ------------ The Company incurred a net loss of $880,749, or $.35 per common share, during fiscal 1998. In fiscal 1997, the Company incurred a net loss of $54,500, or $.03 per common share. During the fiscal year ended October 31, 1998 ("fiscal 1998"), costs and expenses were higher than total revenue and resulted in a loss from operations of $802,947 after a restructuring charge of $170,140 and an inventory write-down of approximately $196,000. During fiscal 1997, costs and expenses other than interest related items were lower than total revenue, yielding income from operations of $29,603. After including finance related expenses, however, the Company had a net loss of $54,500, or $.03 per share as compared to a net loss of $584,750 or $.36 per share, in fiscal 1996. Total costs and expenses during fiscal 1997 decreased by $186,522 or 11.4% as compared to such costs during fiscal 1996. Cost reductions in fiscal 1997 were due to cutbacks in payroll expenses and reductions in some overhead expenses. 10 Liquidity and Capital Resources - - ----------------------------------------- At October 31, 1998, the Company's current liabilities exceeded current assets by approximately $483,000. Management will address this working capital deficiency by reducing operating expenses as outlined in its restructuring plan, by utilizing cash proceeds from the proposed sale of the building for working capital purposes and, if required, by obtaining external financing. A turnaround in the Company's prospects could lead to profitability, although no assurances can be provided in this regard. Since the increased sales effort began in August 1998, the Company has seen many positive signs that its PASSUR product line could provide additional revenue in fiscal 1999. However, increased competition, and continued budget restraints among its clients, could impact this potential revenue. Interest by potential customers in the Company's PASSUR systems remains strong and the Company anticipates an increase in future sales. However, the Company cannot predict if such sales will materialize. If sales do not increase, additional losses may occur and could continue. The extent of such profits or losses will be dependent on sales volume achieved. Private Investor - - -------------------- During the period between September 18, 1996 and June 6, 1997, the Company signed agreements with a private investor (the "Investor") that provided for three loans of $100,000 each, of which $200,000 was received in 1996 and $100,000 was received in 1997. The three notes bore interest at a rate of 9% per annum, and were payable by July 30, 1997. In addition, stock warrants were awarded for the purchase of up to 1,400,000 common shares. On June 6, 1997, the Investor and his affiliate purchased 700,000 shares for the amount of $500,000, paid by $400,000 in cash and cancellation of the first $100,000 note. On October 31, 1997, the Investor and two other directors purchased 200,000 shares for the amount of $150,000. The purchase of these shares validated the warrant that gives the Investor and his affiliates the right to purchase 500,000 shares at $1.25 per share. This warrant expires October 31, 2001, and is exercisable during the year preceding expiration. On July 30, 1997, the remaining notes totaling $200,000 were amended and restated by a new note bearing interest at 9% per annum, with quarterly payments of $25,000 plus accrued interest due on the last business day of each calendar quarter, commencing December, 1997, with any remaining balance due July 30, 1999. The note is secured by the Company's assets excluding its building. During 1997, the Investor was elected a director of the Company and Chairman of the Board, and on October 2, 1998, the Investor was elected to the additional post of President and Chief Executive Officer. In November, 1998, and on January 11, 1999, the Investor loaned the Company an additional $300,000 in the aggregate under promissory notes which are payable quarterly, bearing interest at 9% and maturing at various dates from June 30, 2000 to June 30, 2001. As of January 11, 1999, the total notes payable due to the Investor totaled $475,000. The Year 2000 Issue - - -------------------------- The Company has diligently studied the impact of the Year 2000 on the hardware and software it sells as well as its own internal systems. 11 The Company's top technical and development personnel have carefully reviewed the Company's PASSUR hardware product line and related software and are satisfied that they are Year 2000 compliant. A review of Year 2000 compliance for the other products sold by the Company, radio modems and protocol converters, is continuing and should be completed by the middle of 1999. A thorough review of the Company's internal systems is continuing. The Company is also working with suppliers and service providers with whom it does business to determine their Year 2000 compliance and to minimize any impact their noncompliance (if any) would have on the Company. These studies are also scheduled for completion by the middle of 1999. To date, the Company has not found any area where a Year 2000 compliance problem with either its internal systems or outside providers could have a material adverse impact on any part of the Company's business operations. Risk Factors; Forward Looking Statements - - ------------------------------------------------------ The Management's Discussion and Analysis and the information provided elsewhere in this Annual Report on Form 10-K (including, without limitation, in "Item 1. Business" as well as "Liquidity and Capital Resources" above) contain forward-looking statements regarding the Company's future plans, objectives, and expected performance. These statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks and uncertainties, and a number of factors could cause the Company's actual results to differ materially from those expressed in the forward-looking statements referred to above. These factors include, among others, the uncertainties related to the ability of the Company to make new sales of its PASSUR and other product lines due to potential competitive pressure from other companies or other products. Other uncertainties which could impact the Company are uncertainties with respect to future changes in governmental regulation affecting the product and its use in flight dispatch. Additional uncertainties are related to the Company's ability to find and maintain the personnel necessary to sell, manufacture, and service its products. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA. ------------------------------------------------------------------------ The response to this item is submitted in a separate section of this report. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. - - -------------------------------------------------------------------------------- None. 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. - - --------------------------------------------------------------------------- (a) Identification of Directors. -------------------------------------
Director Position and Offices Name Age Since With Company - - ----------------------------- --- ----- --------------------------- G.S. Beckwith Gilbert 56 1997 Chairman of the Board, President, Chief Executive Officer, and a Director Richard R. Schilling, Jr. 73 1974 Director Yitzhak N. Bachana 65 1976 Director John R. Keller 59 1997 Executive Vice President, and a Director Bruce N. Whitman 65 1997 Director Paul L. Graziani 41 1997 Director
Each director is elected to serve until the succeeding annual meeting of shareholders and until his successor is duly elected and qualifies. (b) Identification of Executive Officers. ---------------------------------------------------
Officer Position and Offices Name Age Since With Company - - ---------------------------- --- ----- ------------------------------------------- G. S. Beckwith Gilbert 56 1998 Chairman of the Board, President, Chief Executive Officer, and a Director John R. Keller 59 1970 Executive Vice President, Secretary, Treasurer, and a Director Dr. James A. Cole 58 1988 Senior Vice President of Research & Development James T. Barry 37 1998 Vice President, Marketing Herbert E. Shaver 44 1993 Controller and Assistant Secretary
13 Each officer is elected to serve at the pleasure of the Board of Directors. (c) Identification of Certain Significant Employees. -------------------------------------------------------------- None. (d) Family Relationship. -------------------------------- None. (e) Business Experience. --------------------------------- The following sets forth the business experience during the past five years of each director and executive officer; G.S. Beckwith Gilbert Mr. Gilbert was elected Chairman of the Board in 1997 and was elected to the additional posts of President and Chief Executive Officer in October of 1998. In addition, Mr. Gilbert has been President and Chief Executive Officer of Field Point Capital Management Company, a merchant banking firm, since 1988. He is a partner of Wolsey & Co., a merchant banking firm. Mr. Gilbert is also a Director and Chairman of the Executive Committee of DIANON Systems, Inc., as well as a Director of Davidson Hubeny Brands and Kionix, Inc. Richard R. Schilling, Mr. Schilling is a member of the law firm of Burns, Jr. Kennedy, Schilling & O'Shea, New York, New York . Yitzhak N. Bachana Mr. Bachana was President and Chief Executive Officer of the Company from 1980 to October 2, 1998. Mr. Bachana is the President, Chief Executive Officer and majority shareholder of Data Probe, Inc., a New York based computer service bureau. Mr. Bachana is also President and a director of Datatab, Inc. since 1983. Data Probe, Inc. and Datatab, Inc. are publicly-held corporations. Pursuant to an agreement between Data Probe, Inc. and the Company, dated May 7, 1976, the President of Data Probe, Inc. is to be nominated as a management nominee for director. Bruce N. Whitman Mr.Whitman has been Executive Vice President and a Director of FlightSafety International since 1962. He is also a Director of FlightSafety Boeing Training International, Petroleum Helicopters, Inc., and Aviall, Inc. 14 Paul L. Graziani Mr. Graziani is the President and Chief Executive Officer of Analytical Graphics, Inc., a leading producer of commercial analysis software for the space industry. Dr. James A. Cole Dr. Cole is a Senior Vice President and the Director of Research and Development of the Company. Dr. Cole earned a Ph.D. in physics from Johns Hopkins University in 1966. John R. Keller Mr. Keller has been with the Company since its inception in 1967 and currently serves as Executive Vice President of the Company. James T. Barry Mr. Barry has been a Vice President since 1998. He is also a Vice President of Field Point Capital Management Company. From 1989 to 1998, he was with DIANON Systems, Inc., most recently as Vice President of Marketing. Herbert E. Shaver Mr. Shaver has been Controller of the Company since 1993 and an employee since September 1998. From 1973 until 1998, Mr. Shaver was a Vice President and Controller of Datatab, Inc. He has been a Director of Datatab, Inc. since 1985, and from 1983 until 1998, was the Controller of Data Probe, Inc. (f) Involvement in Certain Legal Proceedings. ---------------------------------------------------------- The Company knows of no event which occurred during the past five years and which is described in Item 401(f) of Regulation S-K relating to any director or executive officer of the Company. 15 ITEM 11. EXECUTIVE COMPENSATION. - - --------------------------------------------- (a) Cash and Deferred Compensation. ------------------------------------------------ The following table sets forth all cash compensation paid to each of the Company's most highly compensated executive officers to whom cash compensation during the fiscal year ended October 31, 1998 exceeded $100,000, as well as the Company's President:
CASH AND DEFERRED COMPENSATION TABLE - - -------------------------------------------------------------------------------- (A) (B) (C) (D) (E) - - -------------------------------------------------------------------------------- Name and Principal Other Position Year Salary Bonus Compensation - - -------------------------------------------------------------------------------- G.S Beckwith Gilbert - President 1998 $ -- - $ 12,173(1) Yitzhak N. Bachana (7) 1998 $189,038(2) - $ 66,231(3) 1997 100,000(4) - $ 26,923(5) 1996 11,538(6) - -- John R. Keller - Executive Vice Pres. 1998 $119,423 - -- 1997 90,000 - -- 1996 93,462 - -- Dr. James Cole - Sr. Vice Pres. - R&D 1998 $120,000 - -- 1997 96,346 - -- 1996 93,462 - -- - - -------------------------------------------------------------------------------- (1) Represents earned but unpaid salary through October 31, 1998. Mr. Gilbert became the Company's President and Chief Executive Officer in October 1998. (2) Includes repayment of earned and previously accrued salary through date of his resignation on October 2, 1998. (3) Includes earned but unpaid salary as well as a severance settlement through October 2, 1998. (4) Does not include earned but unpaid salary of $ 84,615 as of October 31, 1997. (5) Represents partial repayment of earned and previously accrued salary. (6) Does not include earned but unpaid salary of $111,538 as of October 31, 1996. (7) Mr. Bachana resigned as President on October 2, 1998. - - --------------------------------------------------------------------------------
16 (b) (1) Compensation pursuant to plans. --------------------------------------------------- The current base salaries of Messrs. Gilbert, Cole, and Keller are $140,000, $120,000 and $120,000, respectively. All of the officers are employed on an at-will basis. (2) Pension Table. ----------------------- Not applicable. (3) Alternative pension plan disclosure. -------------------------------------------------- Not applicable. (4) Stock and stock appreciation right plans. -------------------------------------------------------- The Company's 1982 and 1988 incentive stock option plans provide for the granting of stock options for 100,000 shares of the Company's common stock for each plan. (i) 1982 Stock Option Plan. ---------------------------------- The Company's 1982 Stock Option Plan authorizes the granting of "incentive stock options" ("ISOs" - as defined under Section 422A of the Internal Revenue Code of 1986, as amended) in respect of a maximum of 100,000 shares to executives and key employees of the Company. Pursuant to the terms of the 1982 Stock Option Plan, ISOs in respect of a maximum of 40,000 shares can be granted during any one fiscal year. The 1982 Stock Option Plan is administered by the Stock Option Committee of the Board of Directors (the "Committee") which may grant non-assignable options to executive officers and key employees in such manner, and at such times, and in amounts, subject to a $100,000 limit, as the Committee may, in its absolute discretion, determine. The members of the Committee are Paul L Graziani, Bruce N. Whitman, and Richard R. Schilling, Jr. The option price per share is the fair market value of the shares on the date the option is granted and such option must be exercised by the optionee within ten years of the date of grant. However, options granted to individuals who own more than 10% of the shares of the Company must be exercised within five years of the date of the grant and are exercisable at 100% of the fair market value of the shares. No options were granted or exercised pursuant to the 1982 Stock Option Plan during the Company's fiscal year ended October 31, 1998. No options can be granted after 1992 under this plan. (ii) 1988 Stock Option Plan. ----------------------------------- The 1988 Stock Option Plan provides for the grant to employees of the Company and its subsidiaries of either (x) ISOs or (y) non-qualified options. A total of 100,000 common shares have been reserved for issuance under the 1988 Stock Option Plan. The 1988 Stock Option Plan terminates in 1998. 17 The 1988 Stock Option Plan is administered by the Committee, which determines the grantees and the exercise price, designates the exercise periods, not to exceed 10 years (5 years in the event that the grantee holds more than 10% of the Company's equity), the time, manner, and form of payment upon exercise of an option, designates whether the options are intended to be ISOs, and determines other terms and conditions. The 1988 Stock Option Plan provides that, in determining the participants to whom options shall be granted and the number of shares to be covered by each option, the Committee may take into account the nature of the services rendered by the participant, his or her own present and potential contributions to the Company's success, and such other factors as the Committee may deem relevant. The aggregate fair market value of shares for which ISOs are granted to any employee and exercisable for the first time by such employee during any calendar year (under all stock option plans of the Company and its subsidiaries) may not exceed $100,000. ISOs granted under the 1988 Stock Option Plan may not be granted at a price less than the fair market value of the common shares on the date of grant (or 110% of fair market value in the case of employees holding 10% or more of the shares of the Company). Non-qualified options will not be granted at exercise prices less than 85% of the fair market value of the common shares on the date of grant. An option granted under the 1988 Stock Option Plan is exercisable, during the optionholder's lifetime, only by the optionholder and is not transferable by the optionholder except by will or the laws of descent and distribution. If an ISO optionholder retires, the optionholder's ISOs may be exercised to the extent they were exercisable upon retirement, until the earlier of the ISOs specified expiration date or three months from the date of the optionholder's retirement. In the case of an ISO optionholder's cessation of employment by reason of disability or death, the applicable carryover periods are one year and two years, respectively. Upon the occurrence of a Change in Control (as defined below), outstanding options become immediately exercisable. During the six months after a Change in Control, in lieu of exercising an option, a holder may surrender such options to the Company in whole or in part and, upon such surrender, the Company must pay to the holder in exchange therefor an amount of cash per share equal to the aggregate of the excess of (i) the greater of (x) the average price per share paid or to be paid for shares actually acquired in connection with such Change in Control, (y) the price per share paid or payable in connection with any tender offer for the Company's common shares leading to the Change in Control, or (z) the mean between the high and low selling prices of such shares on the date of the Change of Control, over (ii) the exercise prices of the shares subject to such surrendered options. Officers of the Company may receive such a cash payment only during a restricted period immediately following the public release of information concerning the Company's earnings (but not within six months of the grant of such option). During all other periods they may only receive shares. A Change in Control means (i) consummation by any Person (as defined in the Securities Exchange Act of 1934, as amended [the "1934 Act"]) other than the Company of (or the first purchase by any Person [other than the Company] of any common shares under) a tender offer or exchange offer; (ii) the acquisition by any Person (other than the Company) which theretofore legally or beneficially (as defined in SEC Rule 13d-3) owned less than 20% of the then outstanding common shares of the Company in a transaction or series of transactions that results in such Person directly or indirectly owning legally or beneficially 20% or more of the then outstanding common shares of the Company; (iii) the consummation of any merger or consolidation with, or the sale of substantially all the assets of the Company to, any Person; or (iv) any other transaction pursuant to which any Person shall have the right to elect a majority of the directors of the Company or which would be required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the 1934 Act. Three options were granted pursuant to the 1988 Stock Option Plan during the Company's fiscal year ended October 31, 1998. These options were awarded on January 29, 1998 to Messrs. Bachana, Cole, and Keller in equal amounts of 20,000 options each at an exercise price of $.38 and are immediately exercisable for a period of 10 years, except for Mr. Bachana, whose exercise period is five years. No options granted under the 1988 plan were exercised during fiscal 1998, however Mr. Bachana's options expired as a result of his resignation on October 2, 1998. As of October 31, 1998 no further options are available for grant under the 1988 stock option plan. The table required by SK Item 402(c) will be included in the Company's definitive proxy material. 18 (c) Other Compensation. ------------------------------- None. (d) Compensation of Directors. --------------------------------------- 1. Standard Arrangements. --------------------------------- Non-officer directors are compensated by the Company for services rendered to the Company in connection with their directorial duties by the payment of $1,000 for each Board of Directors' meeting or Committee meeting actually attended. 2. Other Arrangements. ----------------------------- None. (e) Termination of employment and change of control arrangement. -------------------------------------------------------------- None. 19 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - - -------------------------------------------------------------------------------- (a) Security Ownership of Certain Beneficial Owners. -------------------------------------------------------------- The following table sets forth information with respect to the only persons who, to the best knowledge of the Company as derived from schedule 13d filed by such persons, beneficially owned more than 5% of the common stock of the Company as of January 20, 1999. Unless otherwise indicated below, each person included in the table has sole voting and investment power with respect to all shares included therein.
Name and Address Amount and Nature Percent of of Beneficial Owner of Ownership Class (1) - - -------------------------------------------------------------------------------- G.S. Beckwith Gilbert 846,000 (2) 32.99 66 Field Point Road Greenwich, CT 06830 Data Probe, Inc. 579,400 (3) 22.59 49 East 21 Street New York, NY 10010 - - -------------------------------------------------------------------------------- (1) For the purposes of this table, "percent of class" held by each person has been calculated based on a total class equal to the sum of (i) 2,511,600 shares of common stock issued and outstanding on January 20, 1999 plus (ii) for such person the number of shares of common stock subject to stock options or warrants presently exercisable, or exercisable within 60 days after January 20, 1999, held by that person. (2) Mr. Gilbert has shared voting and investment power with respect to 70,000 shares included in the table above. (3) Yitzhak N. Bachana, a Director of the Company, owns 57.22% of the outstanding shares of Data Probe, Inc. and by virtue thereof may be deemed to be the beneficial owner of more than 5% of the Company's outstanding shares. This amount does not include 10,000 shares personally held by Mr. Bachana.
20 (b) Security Ownership of Management. ---------------------------------------------------- The following chart sets forth the number of the Company's common shares, $0.01 par value, beneficially owned by all of the directors of the Company and by the directors and officers of the Company as a group as at January 20, 1999. Unless otherwise indicated below, each person indicated in the table has sole voting and investment power with respect to all shares included therein.
Name of Amount and Nature of Percent of Beneficial Owner Beneficial Ownership Class (1) - - -------------------------------------------------------------------------------- G.S. Beckwith Gilbert 846,000(2) 32.99 Yitzhak N. Bachana 10,000(3) .39 John R. Keller 124,500(4) 4.85 Richard R. Schilling,, Jr 3,000 0.11 James A. Cole 44,000(5) 1.71 Bruce N. Whitman 93,000 3.62 Paul L. Graziani 7,000 0.27 Officers and Directors as a Group (7 persons) 1,127,500 43.97 - - -------------------------------------------------------------------------------- (1) For the purposes of this table, "percent of class" held by each person has been calculated based on a total class equal to the sum of (i) 2,511,600 shares of common stock issued and outstanding on January 20, 1999 plus (ii) for such person the number of shares of common stock subject to stock options or warrants presently exercisable, or exercisable within 60 days after January 20, 1999, held by that person. (2) Mr. Gilbert has shared voting and investment power with respect to 70,000 shares included in the table above. (3) Mr. Bachana is President, Chairman of the Board, and majority shareholder of Data Probe, Inc. which owns 579,400 common shares of the Company which are excluded from the foregoing table. (4) Includes Mr. Keller's options to purchase an aggregate of 27,500 shares, all of which options are immediately exercisable. (5) Includes Dr. Cole's options to purchase an aggregate of 25,000 shares, all of which options are immediately exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - - ------------------------------------------------------------------------- (a) Transactions with management and others. ---------------------------------------------------------- During the period between September 18, 1996 and June 6, 1997 the Company signed agreements with a private investor (the "Investor") that provided for three loans of $100,000 each, of 21 which $200,000 was received in 1996 and $100,000 was received in 1997. The three notes bore interest at a rate of 9% per annum, and were payable by July 30, 1997. In addition, stock warrants were awarded for the purchase of up to 1,400,000 common shares. On June 6, 1997, the Investor and his affiliate purchased 700,000 shares for the amount of $500,000, paid by $400,000 in cash and cancellation of the first $100,000 note. On October 31, 1997, the Investor and two other directors purchased 200,000 shares for the amount of $150,000. The purchase of these shares validated a stock purchase warrant, that gives the Iinvestor and his affiliates the right to purchase 500,000 shares at $1.25 per share. This warrant expires October 31, 2001, and is exercisable during the year preceding expiration. On July 30, 1997, the remaining notes totalling $200,000 were amended and restated by a new note bearing interest at 9% per annum, with quarterly payments of $25,000 plus accrued interest due on the last business day of each calendar quarter, commencing December, 1997, with any remaining balance being due July 30, 1999. The note is secured by the Company's assets excluding its building. During 1997, the Investor was elected a director of the Company and Chairman of the Board and on October 2, 1998 the Investor was elected to the additional post of President and Chief Executive Officer. In November 1998, and on January 11,1999, the Investor issued promissory notes aggregating $300,000 which are payable quarterly, maturing at various dates from June 30, 2000 through June 30, 2001. As of January 11, 1999, the total notes payable due to the Investor totalled $475,000. The Company had contracted with Data Probe, Inc., which is majority owned by the Company's former president, to provide certain research and development and sales support services through July, 1996. The Company has incurred approximately $60,442 for the year ended October 31, 1996 in consideration for the aforementioned services. For the years ended October 31, 1998 and 1997, the Company reimbursed Datatab, Inc., a subsidiary of Data Probe, Inc., $47,683 and $65,763, respectively, for services rendered by an employee of Datatab, Inc. for the Company. On January 16, 1996, the Company signed a promissory note to an officer for a $30,000 loan, which was secured by certain test equipment. The note bore interest at 10% per annum, and was paid in full on July 16, 1997. Total interest payments for the year ended October 31, 1996 were $2,265. In addition, net loans of $6,883 were made by another officer which had no provision for interest and were paid on demand. In addition, during 1998 the Company reimbursed Field Point Capital Management Company, an entity affiliated with the Investor/President, for services rendered by an employee of Field Point Capital Management Company to the Company in the amount of $31,500. The Company is leasing space from Field Point Capital Management Company, a company 100% owned by the Company's President. From October 2, 1998 through January 31, 1999 the Company paid rental of $4,000 to Field Point Capital Management Company. Effective February 1, 1999, the Company will pay Field Point Capital Management Company $2,000 per month rent. (b) Certain business relationships. ------------------------------------------- None. 22 (c) Indebtedness of management. ------------------------------------------ None. (d) Transactions with promoters. ----------------------------------------- Not applicable. 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - - -------------------------------------------------------------------------------- (a) 1.Financial Statements Page ------------------------------------------------ ------- Included in Part II of this report: Independent Auditors' Reports F-1 Consolidated balance sheets as at October 31, 1998 and 1997 F-4 Consolidated statements of operations for the years ended October 31, 1998, 1997 and 1996 F-5 Consolidated statements of stockholders' equity F-6 Consolidated statements of cash flows for the years ended October 31, 1998, 1997 and 1996 F-7 Notes to consolidated financial Statements F-8 Schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (b) Reports Filed On Form 8-K ---------------------------------------- Form 8-K, changes in management, Dated October 6, 1998 Form 8-K/A, Changes in Certifying Accountant, dated October 28, 1998 24 (c) Exhibits --------------- Exhibits No. Footnote ------------------------------------------------------------------------- 3 - 1 Certificates of Incorporation filed January 3, 1967 1 3 - 2 Certificate of Amendment filed August 4, 1969 1 3 - 3 Certificate of Amendment filed September 30, 1969 1 3 - 4 Certificate of Amendment filed July 17, 1970 1 3 - 5 Certificate of Amendment filed September 27, 1972 1 3 - 6 Certificate of Amendment filed September 27, 1972 1 3 - 7 Certificate of Amendment filed April 22, 1974 1 3 - 8 Certificate of Amendment filed November 23, 1976 1 3 - 9 Certificate of Amendment filed April 18, 1977 1 3 - 10 Certificate of Amendment filed July 11, 1979 1 3 - 11 Certificate of Amendment filed on November 12, 1981 2 3 - 12 Composite of Certificate of Incorporation of the Company 2 3 - 13 Certificate of Amendment filed September 14, 1988 4 3 - 14 By-Laws 4 3 - 15 Certificate of Amendment filed August 16, 1983 5 3 - 16 Certificate of Change filed January 24, 1990 5 3 - 17 Composite Certificate of Incorporation through January 24, 1990 5 10 - 1 1988 Bonus Pool Plan 4 10 - 2 The Company's 1982 Stock Option Plan 3 10 - 3 The Company's 1988 Stock Option Plan 4 10 - 4 Employment Agreement with David T. Zeiter dated August 29, 1988 4 10 - 5 Severance Agreement with Yitzhak N. Bachana effective October 2, 1998 14(a)-1 Form 8-K Changes in Management 7 16 Change in Certifying Accountant 6 21 List of Subsidiaries 2 (1) Document filed with the Company's Form S-1 filed with the Securities and Exchange Commission on January 30, 1981 and incorporated herein by reference. (2) Document filed with the Company's Form 10-K for the fiscal year ended October 31, 1981 and incorporated herein by reference. (3) Document filed as Exhibit A to the Company's Notice of Annual Meeting of Shareholders and Proxy Statement dated November 2, 1982, and incorporated herein by reference. (4) Document filed with the Company's Form 10-K for the fiscal year ended October 31, 1988 and incorporated herein by reference. (5) Document filed with the Company's Form 10-K for the fiscal year ended October 31, 1989 and incorporated herein by reference. (6) Document filed with the Company's Form 8-K/A dated October 28, 1998 and incorporated herein by reference. (7) Document filed with the Company's Form 8-K dated October 6, 1998 and incorporated herein by reference. 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MEGADATA CORPORATION Dated: January 29, 1999. By: /s/ G. S. Beckwith Gilbert ------------------------------------- G. S. Beckwith Gilbert, Chairman, President, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated: Dated: January 29, 1999. /s/ G. S. Beckwith Gilbert -------------------------------------- G. S. Beckwith Gilbert, Chairman, President, and Chief Executive Officer Dated: January 29, 1999. /s/ Herbert E. Shaver -------------------------------------- Herbert E. Shaver, Controller (Principal Financial and Accounting Officer) Dated: January 29, 1999. /s/ John R. Keller -------------------------------------- John R. Keller, Executive Vice President and Director Dated: January 29, 1999. /s/ Richard R. Schilling, Jr. -------------------------------------- Richard R. Schilling, Jr., Director Dated: January 29, 1999. /s/ Yitzhak N. Bachana ----------------------------- Yitzhak N. Bachana, Director Dated: January 29, 1999. /s/ Bruce A. Whitman ----------------------------- Bruce A. Whitman, Director Dated: January 29, 1999. /s/ Paul L. Graziani ----------------------------- Paul L. Graziani, Director 26 Form 10-K--Item 14(a)(1) and (2) Megadata Corporation and Subsidiaries Index to Consolidated Financial Statements Reports of Independent Auditors.......................................... F - 2 Consolidated Financial Statements: Balance Sheets........................................................ F - 4 Statements of Operations.............................................. F - 5 Statements of Stockholders' Equity.................................... F - 6 Statements of Cash Flows.............................................. F - 7 Notes to Consolidated Financial Statements............................ F - 8 Schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. F-1 Report of Independent Auditors Board of Directors and Stockholders Megadata Corporation and Subsidiaries We have audited the accompanying consolidated balance sheet of Megadata Corporation and Subsidiaries as of October 31, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Megadata Corporation and Subsidiaries at October 31, 1998, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Melville, New York January 11, 1999 F-2 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Megadata Corporation: We have audited the accompanying consolidated balance sheets of Megadata Corporation and subsidiaries as of October 31, 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended October 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Megadata Corporation and subsidiaries at October 31, 1997 and the results of their operations and cash flows for each of the two years in the period ended October 31, 1997, in conformity with generally accepted accounting principles. /s/ Ghassemi, Phoel & Co. ----------------------------- Certified Public Accountants Lynbrook, New York January 21, 1998 F-3
Megadata Corporation and Subsidiaries Consolidated Balance Sheets OCTOBER 31 1998 1997 ---------------- ----------------- ASSETS Current assets: Cash $ 17,731 $ 318,595 Accounts receivable 35,341 299,586 Inventories 266,916 448,775 Prepaid expenses and other current assets 58,931 87,561 ----------- ----------- Total current assets 378,919 1,154,517 Property, plant and equipment, net 1,382,745 1,418,891 Other assets 33,326 21,888 =========== =========== $ 1,794,990 $ 2,595,296 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 136,016 $ 155,989 Accrued expenses and taxes 354,439 120,475 Accrued expenses--related parties 13,898 89,215 Notes payable--related party 175,000 100,000 Deferred income 90,519 150,122 Installment note payable 33,230 11,592 Current portion of long-term debt 58,382 53,242 ----------- ----------- Total current liabilities 861,484 680,635 Notes payable--related party, less current portion 25,000 100,000 Installment note payable, less current portion 37,894 Long-term debt 562,654 621,036 ----------- ----------- 1,487,032 1,401,671 Stockholders' equity: Common shares--authorized 5,000,000 shares, par value $.01 per share; issued 3,203,100 shares in 1998 and 1997 32,031 32,031 Additional paid-in capital 2,460,653 2,465,571 (Deficit) retained earnings (567,501) 313,248 ----------- ----------- 1,925,183 2,810,850 Less cost of 691,500 common shares held in treasury 1,617,225 1,617,225 ----------- ----------- Total stockholders' equity 307,958 1,193,625 =========== =========== $ 1,794,990 $ 2,595,296 =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4
Megadata Corporation and Subsidiaries Consolidated Statements of Operations YEAR ENDED OCTOBER 31 1998 1997 1996 --------------- ---------------- --------------- Revenues: Net sales $ 1,000,270 $ 1,406,231 $ 1,068,814 Service 52,973 72,721 43,147 --------------- ---------------- --------------- Total revenues 1,053,243 1,478,952 1,111,961 --------------- ---------------- --------------- Cost and expenses: Cost of sales 857,122 766,980 924,303 Cost of service 72,897 73,045 96,166 Research and development 121,789 147,383 119,960 Research and development--related party - - 60,442 General and administrative expenses 634,242 461,941 435,000 Restructuring charge 170,140 - - --------------- ---------------- --------------- 1,856,190 1,449,349 1,635,871 --------------- ---------------- --------------- (Loss) income from operations (802,947) 29,603 (523,910) Other income (expense): Interest income 7,301 5,932 902 Interest expense (61,714) (67,537) (67,933) Interest expense--related party (15,000) (21,475) - Other income - - 8,567 --------------- ---------------- --------------- Loss before income taxes (872,360) (53,477) (582,374) Provision for income taxes 8,389 1,023 2,376 =============== ================ =============== Net loss $ (880,749) $ (54,500) $ (584,750) =============== ================ =============== Net loss per common share--basic and diluted $ (.35) $ (.03) $ (.36) =============== ================ =============== Weighted average number of common shares outstanding--basic and diluted 2,511,600 1,903,267 1,611,600 =============== ================ ===============
F-5 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Megadata Corporation and Subsidiaries Consolidated Statement of Stockholders' Equity Years Ended October 31, 1998, 1997, 1996 COMMON SHARES AFTER DEDUCTING COMMON ADDITIONAL RETAINED LESS SHARES TOTAL TREASURY SHARES PAID-IN EARNINGS HELD IN SHAREHOLDER'S STOCK AMOUNT CAPITAL (DEFICIT) TREASURY EQUITY ------------ ------------- -------------- --------------- ---------------- ---------------- Balance at October 31, 1995 1,611,600 $ 23,031 $ 1,883,731 $ 952,498 $ 1,617,225 $ 1,242,035 Net loss for the year ended October 31, 1996 -- -- -- (584,750) -- (584,750) ------------ ------------- -------------- --------------- ---------------- ---------------- Balance at October 31, 1996 1,611,600 23,031 1,883,731 367,748 1,617,225 657,285 Proceeds from issuance of common stock 900,000 9,000 581,840 -- -- 590,840 Net loss for the year ended October 31, 1997 -- -- -- (54,500) -- (54,500) ------------ ------------- -------------- --------------- ---------------- ---------------- Balance at October 31, 1997 2,511,600 32,031 2,465,571 313,248 1,617,225 1,193,625 Fees in connection with issuance of common stock -- -- (4,918) -- -- (4,918) Net losses for the year ended October 31, 1998 -- -- -- (880,749) -- (880,749) ------------ ------------- -------------- --------------- ---------------- ---------------- Balance at October 31, 1998 2,511,600 $ 32,031 $ 2,460,653 $ (567,501) $ 1,617,225 $ 307,958 ============ ============= ============== =============== ================ ================
F-6 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Megadata Corporation and Subsidiaries Consolidated Statements of Cash Flows YEAR ENDED OCTOBER 31 1998 1997 1996 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (880,749) $ (54,500) $ (584,750) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation 68,103 63,335 63,268 Loss on disposal of fixed assets 11,594 - - Changes in operating assets and liabilities: Accounts receivable 264,245 (207,731) (54,050) Inventories 181,859 (49,133) 150,247 Prepaid expenses and other current assets 28,630 (18,979) 11,216 Other assets (11,438) - 2,164 Accounts payable (19,973) 18,622 38,431 Accrued expenses and other current liabilities 99,044 (54,271) 234,714 ----------- ----------- ----------- Total adjustments 622,064 (248,157) 445,990 ----------- ----------- ----------- Net cash used in operating activities (258,685) (302,657) (138,760) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (21,141) (5,633) (3,583) ----------- ----------- ----------- Net cash used in investing activities (21,141) (5,633) (3,583) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Decrease (increase) in other assets--deferred mortgage cost - 5,878 (25,539) (Payments of) proceeds from notes payable--related party - (36,883) 236,883 Proceeds from (payments of) installment note 37,122 (3,852) 2,725 Repayments of long-term debt (53,242) (48,556) (47,829) Proceeds from sale of shares, net - 590,840 - Payment of fees in connection with stock sale (4,918) - - ----------- ----------- ----------- Net cash (used in) provided by financing activities (21,038) 507,427 166,240 ----------- ----------- ----------- (Decrease) increase in cash (300,864) 199,137 23,897 Cash--beginning of year 318,595 119,458 95,561 =========== =========== =========== Cash--end of year $ 17,731 $ 318,595 $ 119,458 =========== =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Acquisition of equipment financed with notes payable $ 22,410 $ - $ - Cash paid during the year for: Interest $ 79,103 $ 84,412 $ 68,914 Income taxes 1,456 2,360 1,196
F-7 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Megadata Corporation and Subsidiaries Notes to Consolidated Financial Statements October 31, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Megadata designs and manufactures specialized computer equipment with applications in the aviation and communication industries. Its product line includes: PASSUR (Passive Secondary Surveilance Radar) systems which monitor air traffic in real time: SA9600 Wireless Radio Moderns: MURS, ALCX and RESNET airline reservation access systems; as well as customized hardware and software which enable the Company's products to fit its customers' specific requirements. BASIS OF PRESENTATION At October 31, 1998, the Company's current liabilities exceeded current assets by approximately $483,000 and reported a net loss of approximately $880,000, which includes restructuring related charges of $170,000 and an inventory write-down of $196,000. Management will address this working capital deficiency and operating losses by reducing operating expenses as outlined in its restructuring plan (see Note 8), by utilizing cash proceeds from the proposed sale of the building for working capital purposes and, if required, by obtaining external financing. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Megadata Corporation (the Company) and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the asset. F-8 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This standard establishes the accounting for the impairment of long-lived assets, certain identifiable intangibles and the excess of cost over net assets acquired, related to those assets to be held and used in operations, whereby impairment losses are required to be recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets and certain identifiable intangibles that are expected to be disposed of. REVENUE RECOGNITION POLICY The Company recognizes revenue when products are shipped. Service revenues are recognized on a straight-line basis over the service contract period. INCOME TAXES The Company and its subsidiaries file a consolidated Federal income tax return. The Company uses the liability method in accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to operations as incurred. F-9 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET LOSS/INCOME PER COMMON SHARE INFORMATION In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to the SFAS No. 128 requirements. Net loss per common share was computed using the weighted average number of common shares outstanding during the period. Conversion of the common equivalent shares was not assumed since the result would have been antidilutive. EMPLOYEE STOCK OPTIONS The Company has a stock option program which is more fully described in Note 12. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion ("APB Opinion") No. 25, "Accounting for Stock Issued to Employees." Under the Company's stock option program, options are granted with an exercise price equal to the market price of the underlying common stock of the Company on the date of grant. Accordingly, no compensation expense is recognized in connection with the grant of stock options. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." The new standard defines a fair value method of accounting for the issuance of stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to SFAS No. 123, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under APB Opinion No. 25, but are required to disclose in the financial statement footnotes, pro forma net (loss) income and per share amounts as if the Company had applied the new method of accounting for all grants made beginning with 1995. SFAS No. 123 also requires increased disclosures for stock-based compensation arrangements. F-10 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for years beginning after December 15, 1997. SFAS No. 131 established standards for the way the public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographical areas, and major customers. Since SFAS No. 131 is not required to be applied to interim financial statements in the initial year of adoption, the Company is not required to disclosure segment information in accordance with SFAS No. 131 until the fiscal year ending October 31, 1999, if applicable. In the Company's first quarter of fiscal 2000 report, and in subsequent quarters, it would present the interim disclosures required by SFAS No. 131 for both fiscal 2000 and 1999, if applicable. Management does not expect that adoption of SFAS No. 131 will have a significant impact on the Company's determination that it operates in one business segment. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATION Certain items within the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. F-11 2. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consists of the following:
OCTOBER 31 1998 1997 ----------------- ---------------- Prepaid real estate taxes $ 32,206 $ 28,073 Prepaid insurance 22,215 18,478 Other current assets 4,510 41,010 ================= ================ $ 58,931 $ 87,561 ================= ================ 3. INVENTORIES Inventories are summarized as follows: OCTOBER 31 1998 1997 ----------------- ---------------- Parts and raw materials $ 69,071 $ 103,251 Work-in-process 74,632 282,352 Finished goods 123,213 63,172 ================= ================ $ 266,916 $ 448,775 ================= ================
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
ESTIMATED USEFUL OCTOBER 31 LIVES 1998 1997 ----------------- ----------------- ---------------- Land $ 200,000 $ 200,000 Building 31.5 years 1,780,000 1,793,805 Building improvements 3-5 years 66,670 65,420 Factory equipment 5-10 years 2,279,846 2,241,645 Furniture, fixtures and improvements 5-10 years 113,158 113,158 Automobile 3-5 years - 31,395 ----------------- ---------------- 4,439,674 4,445,423 Less accumulated depreciation 3,056,925 3,026,532 ================= ================ $ 1,382,745 $ 1,418,891 ================= ================
F-12 4. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) The Company recorded depreciation and amortization expense on the assets included in property, plant and equipment of $68,103, $63,335 and $63,268 for the years ended October 31, 1998, 1997 and 1996, respectively. 5. ACCRUED EXPENSES AND TAXES Accrued expenses and other current liabilities consist of the following:
OCTOBER 31 1998 1997 ----------------- --------------- Accrued payroll, payroll taxes and benefits $ 50,904 $ 51,673 Accrued professional fees 34,000 18,000 Accrued restructuring charge 167,485 - Other accrued liabilities 102,050 50,802 ================= =============== $ 354,439 $ 120,475 ================= ===============
6. NOTES PAYABLE--RELATED PARTY During the period between September 18, 1996 and June 6, 1997 the Company signed agreements with a private investor (the "Investor") that provided for three loans of $100,000 each, of which $200,000 was received in 1996 and $100,000 was received in 1997. The three notes bore interest at a rate of 9% per annum, and were payable by July 30, 1997. In addition, stock warrants were awarded for the purchase of up to 1,400,000 common shares. On June 6, 1997, the Investor and his affiliate purchased 700,000 shares for the amount of $500,000, paid by $400,000 in cash and cancellation of the first $100,000 note. On October 31, 1997, the Investor and two other directors purchased 200,000 shares for the amount of $150,000. The purchase of these shares validated a stock purchase warrant, that gives the investor and his affiliates the right to purchase 500,000 shares at $1.25 per share. This warrant expires October 31, 2001, and is exercisable during the year preceding expiration. On July 30, 1997, the remaining notes totalling $200,000 were amended and restated by a new note bearing interest at 9% per annum, with quarterly payments of $25,000 plus accrued interest due on the last business day of each calendar quarter, commencing December, 1997, with any remaining balance being due July 30, 1999. The note is secured by the Company's assets excluding its building. F-13 6. NOTES PAYABLE--RELATED PARTY (CONTINUED) During 1997, the Investor was elected a director of the Company and Chairman of the Board and on October 2, 1998 the Investor was elected to the additional post of President and Chief Executive Officer. In November 1998, and on January 11,1999, the Investor issued promissory notes aggregating $300,000 which are payable quarterly, maturing at various dates from June 30, 2000 through June 30, 2001. As of January 11, 1999, the total notes payable due to the Investor totalled $475,000. 7. DEFERRED INCOME Deferred income represents advances received on maintenance agreements and deposits from customers for equipment that will be shipped in the next fiscal year. 8. RESTRUCTURING RELATED CHARGES In October 1998, the Company announced a Restructuring Plan in which it will focus its attention primarily on its PASSUR line of passive radar systems. As part of this restructuring, the Company will move its corporate headquarters and national sales office to Greenwich, Connecticut. The Company has offered for sale its building in Bohemia, New York and will move its manufacturing and research and development facility to a more modern location in the same area. The Restructuring Charges include exit costs of $93,000 related to the building, severance costs of $53,000, asset write-downs of $24,000 relating to assets to be sold or abandoned, and inventory write-downs of $196,000 associated with the elimination of certain nonstrategic inventory and product lines (which costs are included in costs of sales). 9. INSTALLMENT NOTES PAYABLE Notes due on financing of insurance premiums and equipment purchases bearing interest at 8.25% and 12.5% per annum, with the final payments due November, 2000 and August 2001, respectively. F-14 10. LONG-TERM DEBT The Company has a mortgage on its building in Bohemia, New York with the Roosevelt Savings Bank. The mortgage matures on June 1, 2001 and requires annual payments based upon a 10-year amortization schedule. Interest is at a fixed rate of 9.25%. Annual principal repayments of long-term debt are as follows: October 31: 1999 $ 58,382 2000 64,017 2001 498,637 ================= Total $ 621,036 ================= 11. INCOME TAXES Components of the provision for income taxes are as follows:
YEAR ENDED OCTOBER 31 1998 1997 1996 ---------------- ---------------- -------------- Current: States and local $ 8,389 $ 1,023 $ 2,376 ================ ================ ============== Total $ 8,389 $ 1,023 $ 2,376 ================ ================ ==============
At October 31, 1998, the Company has available a federal net operating loss carryforward of approximately $5,300,000 for income tax purposes to offset future taxable income and which will expire in various years from 2006 through 2018. The Company has $25,000 of general business tax credit carryforwards available which expire in various years through 2008. The Company has provided a full valuation allowance on the net deferred tax asset which primarily consists of the net operating loss carryforwards and tax credit available. F-14 12. STOCK OPTIONS The Company's 1982 and 1988 stock option plans provide for the granting of stock options for up to 100,000 shares of the Company's common stock for each plan. The 1982 plan provides that only 40,000 options can be granted during any one fiscal year. The 1988 plan provides that no individual can receive in excess of $100,000, as determined by the fair market value of options during any calendar year. Under both plans, the option price per share is the fair market value at date of grant, except on the issuance of non-qualified options pursuant to the 1988 plan in which the option price is not less than 85% of the fair market value of the shares. Options granted may be exercised up to a maximum of ten years from the date of grant; however, individuals who own more than 10% of the Company's common stock must exercise their options within five years of the date of the grant and these options are exercisable at 110% of the fair market value of the shares. As of October 31, 1998 no further options are available for grant under the 1982 and 1988 stock option plans. The Company has elected to comply with APB Opinion No. 25, and related interpretations in accounting for its employee stock options because the alternate fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation" requires use of option valuation models which were not developed for use in valuing employee stock options. Under APB Opinion No. 25, no compensation expense is recognized in connection with the grant of stock options under the stock option plans. In accordance with SFAS No. 123, pro forma information regarding net (loss) and (loss) per common share has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these stock options was estimated at the date of grant, using a Black Scholes option pricing model with the following weighted average assumptions for 1998, 1997 and 1996, respectively; risk-free interest rates of 5.0%, no dividend yields on the Common Stock, volatility factors of the expected market price of the Company's Common Stock of 1.029 and the weighted average expected life of the options is approximately 8 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. In management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options due to changes in subjective input assumptions which may materially affect the fair value estimate, and because the Company's employee stock options have characteristics significantly different from those of traded options. F-15 12. STOCK OPTIONS (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows: COMMON 1998 ------------------ Pro forma net (loss) ($ 902,000) ================== Pro forma net (loss) per common share--basic and diluted $ (.36) ================== Information with respect to options during the years ended December 31, 1998, 1997 and 1996 under SFAS No. 123 is as follows:
1998 1997 1996 WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE - - ------------------------------- ------------- -------------- ------------- ------------- ------------- ------------- Options outstanding--beginning of year 25,000 $ 1.35 25,000 $1.35 55,000 $1.73 Options granted: - Incentive options 60,000 .38 - - - Options canceled and expired (32,500) (1.13) - - (30,000) (2.04) ------------- -------------- ------------- ------------- ------------- ------------- Options outstanding-- end of year 52,500 $.38 25,000 $1.35 25,000 $1.35 ============= ============== ============= ============= ============= ============= Options exercisable at end of year 52,500 $ .38 25,000 $1.35 25,000 $1.35 ============== ============= ============= ============= ============= ============= Weighted average fair value per share of options granted during the year $.35 =============
Exercise prices for stock options outstanding and for options exercisable as of October 31, 1998 were as follows: NUMBER RANGE OF NUMBER OF OPTIONS EXERCISE OF OPTIONS EXERCISABLE PRICES - - ------------------- --------------------- --------------------- 52,500 52,500 $ .38 =================== ===================== ===================== F-16 12. STOCK OPTIONS (CONTINUED) The weighted average remaining contractual life of the above-described stock options is 8 years. Shares of common stock reserved for future issuance as of October 31, 1998 are as follows: NUMBER OF SHARES ------------------ Stock options 52,500 Warrants issued 500,000 ================== 552,500 ================== 13. MAJOR CUSTOMERS During the fiscal year ended October 31, 1998, three customers accounted for approximately 28%, 14% and 10% of revenues. During the fiscal year ended October 31, 1997, three customers accounted for approximately 27%, 22% and 14% of revenues. During the fiscal year ended October 31, 1996, one customer accounted for approximately 25% of revenues. The Company had export sales of approximately $93,000, $173,000 and $234,000 in fiscal 1998, 1997 and 1996, respectively. 14. RELATED PARTY TRANSACTIONS The Company had contracted with Data Probe, Inc., which is majority owned by the Company's former president, to provide certain research and development and sales support services through July, 1996. The Company has incurred approximately $60,442 for the year ended October 31, 1996 in consideration for the aforementioned services. For the years ended October 31, 1998 and 1997, the Company reimbursed Datatab, Inc., a subsidiary of Data Probe, Inc., $47,683 and $65,763, respectively, for services rendered by an employee of Datatab, Inc. for the Company. On January 16, 1996, the Company signed a promissory note to an officer for a $30,000 loan, which was secured by certain test equipment. The note bore interest at 10% per annum, and was paid in full on July 16, 1997. Total interest payments for the year ended October 31, 1996 were $2,265. In addition, net loans of $6,883 were made by another officer which had no provision for interest and were paid on demand. F-17 14. RELATED PARTY TRANSACTIONS (CONTINUED) In addition, during 1998 the Company reimbursed Field Point Capital Management Company, an entity affiliated with the Investor/President, for services rendered in the amount of $31,500. The Company is leasing space from Field Point Capital Management Company, a company 100% owned by the Company's President. From October 2, 1998 through January 31, 1999 the Company paid rental of $4,000 to Field Point Capital Management Company. Effective February 1, 1999, the Company will pay Field Point Capital Management Company $2,000 per month rent. 15. ROYALTY AGREEMENT During March of 1997, the Company entered into a license agreement whereby the Company was granted the exclusive right and license worldwide to manufacture and sell PASSUR and ATMS systems for use with airline dispatch arrangements and in other aircraft flight tracking. The Company was also granted an exclusive license to sell PASSUR systems for noise applications in the United States. The company shall pay a royalty based on the number of PASSUR systems sold, subject to a minimum annual royalty of $50,000. This license agreement is in effect until the date of expiration of the last PASSUR patent to expire. 16. YEAR 2000 (UNAUDITED) The Company has diligently studied the impact of the Year 2000 on the hardware and software it sells as well as its own internal systems. The Company's top technical and development personnel have carefully reviewed the Company's PASSUR hardware product line and related software and are satisfied that they are Year 2000 compliant. A review of Year 2000 compliance for the other products sold by the Company, radio modems and protocol converters, is continuing and should be completed by the middle of 1999. A thorough review of the Company's internal systems is continuing. The Company is also working with suppliers and service providers with whom it does business to determine their Year 2000 compliance and to minimize any impact their noncompliance (if any) would have on the Company. These studies are also scheduled for completion by the middle of 1999. 16. YEAR 2000 (UNAUDITED) (CONTINUED) To date, the Company has not found any area where a Year 2000 compliance problem with either its internal systems or outside providers could have a material adverse impact on any part of the Company's business operations. F-18
EX-10.5 2 SEVERANCE AGREEMENT EXHIBIT 10-5 SEVERANCE AGREEMENT WITH YITZHAK N. BACHANA FORM 10K FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998 MEGADATA CORPORATION COMMISSION FILE NUMBER 0-7642 SEVERANCE AGREEMENT AND GENERAL RELEASE This SEVERANCE AGREEMENT AND GENERAL RELEASE ("Agreement") is entered into effective as of October 30, 1998 between MEGADATA CORPORATION (the "Company") and YITZHAK N. BACHANA (THE "Employee"). RECITALS A. The Employee and the Company desire to terminate the employment of the Employee by the Company and all other agreements that may exist between the Employee and the Company. B. The Company and the Employee wish to ensure for the future that there are no outstanding disputes between them pertaining to any matter arising prior to the date hereof. Now THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: AGREEMENT 1. RESIGNATION. The Employee hereby resigns his employment with the Company and all positions and titles he may have with the Company and its subsidiaries, including without limitations his position as President and Chief Executive Officer of the Company, effective as of October 2, 1998 (the "Termination Date"). Notwithstanding the foregoing, the Employee will continue to serve as a member of the board of directors of the Company through the remainder of his current term. 2. TERMINATION OF EXISTING AGREEMENTS. Except as expressly provided herein, all rights and obligations of the Company or the Employee under any employment agreement or other arrangement and any other agreements between the Company and the Employee are hereby canceled and terminated effective as of the Termination Date without liability of any party hereunder. 1 3. SEVERANCE. In consideration for Employee's past service to the Company, the Employee will receive $8,333.00 per month (the "Severance") from the Termination Date through and including March 31, 1999 for a maximum period of six months. The Severance will be payable on the last day of each month for the immediately succeeding month. Notwithstanding the foregoing, the Severance will not be payable until November 30, 1998 and the amounts accruing for the months of October 1998 and November 1998 will not be payable until March 31, 1999. Company agrees to report to the Internal Revenue Service those payments actually paid and received by Employee during any taxable year. These Severance payments may be terminated prior to March 31, 1999 by written notice upon breach by the Employee of his obligations under Section 4 below. 4. SERVICE AS CONSULTANT. From the Termination Date through and including March 31, 1999 (such period, as it may be earlier terminated by the Company by written notice upon breach of the Employee of his obligations under this Section 4, the "Consulting Period"), the Employee will offer his services, at no charge, as a consultant to the Company. During the Consulting Period, the Employee agrees to serve in an advisory function at the direction and control of the officers and directors of the Company. During the Consulting Period, the Employee agrees to: (a) cooperate diligently with the officers, employees and directors of the Company; and (b) devote reasonable time and effort, but not full-time, to fulfill his duties hereunder. 5. BENEFITS. a) The Company will transfer to Employee any rights it may have with respect to the life insurance policy currently maintained by the Company with respect to the life of the Employee in accordance with the terms thereof. As of the Termination Date, the Company will have no further responsibility for payments of any premiums or other fees, costs or expenses of any nature with respect thereto. b) The Employee acknowledges that, as of the Termination Date, he will no longer be entitled to any benefits under any of the Company's benefit plans or programs, including without limitations the Company's health benefit plan. The Employee further represents that he is entitled to coverage under the health benefit plans maintained by Data Probe, Inc. in accordance with the terms thereof. 6. AUTOMOBILE. The Employee will purchase the automobile currently provided for his use by the Company for $2,000. The purchase price for such automobile will be deducted by the Company from the balance due Employee on March 31, 1999. 7. BACK SALARY. The Employee acknowledges receipt from the Company, on September 10 and October 2, the aggregate sum of $6,000 in previously accrued and unpaid salary owed to the Employee by the Company. The Company agrees to pay to the Employee the balance of all accrued and unpaid salary, in the net sum of $18,230, currently owed the employee by the Company as of the Termination Date. Such payment will be made on March 31, 1999. 2 8. CORPORATE GOVERNANCE MATTERS. The Employee, in his capacity as a shareholder and director of the company agrees to support: (a) the election of G.S. Beckwith Gilbert as President and Chief Executive Officer of the Company; (b) the approval of fair compensation for Mr. Gilbert in such capacity payable by the Company; and (c) the approval of the payment of compensation and expenses by the Company of Mr. James T. Barry at levels approved by Mr. Gilbert. 9. GENERAL RELEASES. a) The Employee irrevocably and unconditionally releases, remits, acquits, and discharges the Company and its present and former officers, directors, partners, shareholders, legal representatives, agents, employees, contractors, successors and assigns (collectively, "Company Parties"), jointly and individually, from any and all claims, known or unknown, which the Employee, his heirs, executors, administrators, legal and personal representatives, successors or assigns (collectively, "Employee Parties") have or may have against the Company Parties and any and all liability which the Company Parties may have to him or other Employee Parties whether called claims, demands, causes of action, obligations, damages or liabilities arising from any basis and all bases, however called, from the beginning of time through and including the date hereof, except for claims or liabilities arising under this Agreement and all rights to indemnification pursuant to statute, certificate of incorporation, by-laws, insurance, or otherwise. The Company agrees that, for so long as it provides directors or officers liability insurance for any of its directors or officers, it will include Employee as part of such coverage on terms no less favorable than that provided to any of its then directors and officers. b) The Company irrevocably and unconditionally releases, remits, acquits, and discharges the Employee Parties, jointly and individually, from any and all claims, known or unknown, which the Company or any other Company Party have or may have against Employee Parties and any and all liabilities which the Employee Parties may have to the Company or the other Company Parties whether called claims, demands, causes of action, obligations, damages or liabilities arising from any basis and all bases, however called, from the beginning of time through and including the date hereof. 10. OTHER AGREEMENTS. This Agreement supersedes all prior agreements among the parties hereto (all copies of which (in the possession of any Employee Party) have been delivered by the Employee to the Company), and the Employee agrees by execution of this Agreement, he will have resigned from all positions with the Company (other than his position as a member of the board of directors) and that he makes no claim to any compensation, benefits or any other right or alleged right from the Company except as may be provided herein. Notwithstanding the forgoing, the Company agrees that any benefits given to its outside directors, in their capacity as directors, will also be given to Employee while acting as a director of the Company. 3 11. COUNSEL. Each party agrees that such party was able to consult with counsel about this Agreement and its provisions and that this Agreement is executed with such party's own free will and without duress. 12. AMENDMENTS. This Agreement may only be modified by a written amendment executed by both parties hereto. 13. COUNTERPARTS. This Agreement may be executed in one or more counterparts each of which will be deemed an original, but all of which will be deemed one instrument. Signatures delivered by facsimile will be deemed to be original signatures. 14. GOVERNING LAW. The provisions of this Agreement will be governed by the internal laws of the State of New York without regard to conflict of laws. Each party hereto agrees that the courts of the State of New York shall have the authority to interpret and enforce this Agreement and each party agrees to submit to the jurisdiction of such courts if any such dispute should arise. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. MEGADATA CORPORATION By: ______________________ Name: Title: ------------------------- YITZHAK N. BACHANA Address for notices: 361 Woodmere Boulevard Woodmere, New York 11598 Tel. No.: (516) 569-1109 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS YEAR OCT-31-1998 OCT-31-1998 17,731 0 35,341 0 266,916 378,919 4,439,674 3,056,925 1,794,990 861,484 0 0 0 32,031 275,927 1,794,990 1,053,243 1,060,544 930,019 1,856,190 0 0 76,714 (872,360) 8,389 (880,749) 0 0 0 (880,749) (.35) (.35)
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