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, 2013
OR
| _ | Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period from ___ to ___
Commission file number 0-7642
PASSUR AEROSPACE, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 11-2208938
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
|
ONE LANDMARK SQUARE, SUITE 1900, STAMFORD, CONNECTICUT 06901
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: 203-622-4086
Securities registered pursuant to
Section 12(b) of the Act: NONE
Securities registered pursuant to
Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES [ ] NO [X]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
YES [X] NO [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See the definitions of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [X]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of the voting shares of the Registrant held by non-affiliates as of April 30, 2013 was $5,004,000
The number of shares of common stock, $0.01 par value, outstanding as of January 7, 2014 was 7,344,501
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 2014 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days of October 31, 2013, are incorporated by reference into Part III of this Form 10-K.
FORWARD LOOKING STATEMENTS
The consolidated financial information provided in this Annual Report on Form 10-K (including, without limitation, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and "Liquidity and Capital Resources", below) contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the Company's future plans, objectives, and expected performance. The words "believe," "may," "will," "could," "should," "would," "anticipate," "estimate," "expect," "project," "intend," "objective," "seek," "strive," "might," "likely result," "build," "grow," "plan," "goal," "expand," "position," or similar words, or the negatives of these words, or similar terminology, identify forward-looking statements. These statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks and uncertainties, and a number of factors could cause the Company's actual results to differ materially from those expressed in the forward-looking statements referred to above. These factors include, without limitation, the risks and uncertainties discussed under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," the uncertainties related to the ability of the Company to sell PASSUR(R) Network Systems information capabilities in its existing product and professional service lines, as well as in new products and professional services (due to potential competitive pressure from other companies or other products), as well as the current uncertainty in the aviation industry due to terrorist events, the continued war on terrorism, changes in fuel costs, airline bankruptcies and consolidations, economic conditions, and other risks detailed in the Company's periodic report filings with the SEC. Other uncertainties which could impact the Company include, without limitation, uncertainties with respect to future changes in governmental regulation and the impact that such changes in regulation will have on the Company's business. Additional uncertainties include, without limitation, uncertainties relating to: (1) the Company's ability to find and maintain the personnel necessary to sell, manufacture, and service its products; (2) its ability to adequately protect its intellectual property; (3) its ability to secure future financing; and (4) its ability to maintain the continued support of its significant shareholder. Readers are cautioned not to place undue reliance on these forward-looking statements, which relate only to events as of the date on which the statements are made and which reflect management's analysis, judgments, belief, or expectation only as of such date. The Company undertakes no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Readers are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-Q and 8-K.
PART I
ITEM 1. BUSINESS
PASSUR Aerospace, Inc. ("PASSUR(R)" or the "Company") is a leading aviation business intelligence company that provides predictive analytics and decision-support technology for the aviation industry based on its unique, proprietary technology and real-time accessible databases, supported by a number of leading industry experts, and a proven management team.
PASSUR(R) serves all of the 8 largest North American airlines, more than 60 airport customers, including 22 of the top 30 North American airports, approximately 150 corporate aviation customers, as well as the U.S. government, using a recurring-revenue subscription model.
PASSUR(R)'s products include a suite of web-based solutions that address the aviation industry's most intractable and costly challenges, including underutilization of airspace and airport capacity, delays, cancellations, and diversions, among other inefficiencies. Solutions offered by PASSUR(R) cover the entire flight life cycle, from gate to gate, and result in reductions in overall costs, fuel costs, and emissions, while maximizing revenue opportunities, as well as improving operational efficiency, and enhancing the passenger experience. The Company provides data consolidation, information, decision support, predictive analytics, collaborative solutions, and professional services.
PASSUR(R) owns and operates what the Company believes is the largest private commercial air traffic surveillance and passive radar network in the world, with one hundred and sixty-four passive radar locations, powering a unique, proprietary database that is accessible in real time, on demand, for critical and timely decision-making with nationwide coverage to support network-wide systemic deployments. The Company's database contains over 10 years of archived data derived from the network. The Company's network provides a unique flight tracking data source available to the private sector, which is based on independent, non-U.S. government data, while also including all publicly available government feeds as well. The Company's unique data supplements the government feeds and offers faster updates, with flight tracks updated every 1 to 4.6 seconds, enabling better flight tracking and more cost effective decision-making during irregular operations.
PASSUR(R) has already implemented "Big Data" programs in aviation, helping to solve problems previously thought to be part of the cost of doing business; other new products/solutions are in process.
The PASSUR(R) Systems are equipped to monitor current and future surveillance technologies, including Automatic Dependent Surveillance-Broadcast (ADS-B), the deployment of which was initiated in 2003.
PASSUR(R) solutions provide its customers access to information that is not otherwise available, enabling them to make more informed decisions based on better data. The Company has a significant patent portfolio, with three more patents awarded in the last 12 months on surface management, one of the most promising areas of air traffic management today.
PASSUR(R) offers companies products that are commercially proven, with a demonstrated Return on Investment ("ROI") for airlines and airports - providing a critical bridge between the commercial and government opportunities of the Federal Aviation Administration's ("FAA") Next Generation Air Transportation System ("NextGen"), the new National Airspace System due for implementation across the United States in stages over the next 10 years. NextGen proposes to transform the U.S. air traffic control system from an aging ground-based system to a satellite-based system.
Industry experts have estimated that the problem of delays and cancellations costs the U.S. economy at least $30 billion annually. PASSUR(R)'s products are specifically designed to alleviate some of these problems, focusing on surface management, airspace optimization, departure metering, and fuel volume optimization.
PASSUR(R) CORE CAPABILITIES
PASSUR(R) Integrated Traffic Management PASSUR(R) Integrated Traffic Management ("PITM") is, in the Company's opinion, the industry's first, fully integrated air traffic management suite. The PITM platform provides an opportunity to sell a full, interconnected product suite, all at one time, to any one customer. PITM provides the ability to more easily sell additional solutions to existing PASSUR(R) customers, and is well-suited to the seamless introduction of enhancements.
PITM is a metrics-focused, Key Performance Indicator ("KPI") driven solution suite - allowing the customer to first view the most critical information for its operation, and then, as necessary, enabling the user to drill down for better visualization and analysis.
PITM focuses on the major operational constraints, from diversions, to airspace and surface optimization, to hub optimization. The platform connects multiple organizations onto one platform - providing a collaborative experience. It allows for problem resolution between organizations in areas such as departure metering or airspace and hub optimization. PITM is also a platform enabling PASSUR(R)'s partner companies to provide their solutions to PASSUR(R)'s customers. PITM is fully web-delivered - allowing easy access from any web-accessed location.
Integrated Surveillance Network and Integrated Aviation Database The Company operates what it believes to be the largest and most extensive private commercial aircraft and airspace passive surveillance networks in the world. The PASSUR(R) Network integrates additional key surveillance sources, to include (ADS-B, ASDE-X, Mode S, en Route Radar, Airline OOOI data, ACARS, fleet databases, as well as other sources). The PASSUR(R) Network creates a direct data feed of critical flight and airspace behavior and conditions, an essential precursor resource for predictive analytics, real-time decision support, and performance analysis tools.
All the surveillance data acquired by the PASSUR(R) Network is integrated and correlated into specialized databases to support predictive, real-time, and post operational requirements. PASSUR(R) databases consolidate multiple overlapping data sets to ensure completeness, accuracy, fulfillment of specific operational requirements, and the normalization of data for a single-source authoritative record of operational performance. The data processed in these master data repositories supports the key capabilities and attributes of the PASSUR(R) software.
PREDICTIVE ANALYTICS
PASSUR(R) decision support solutions are supported by predictive analytics
algorithms, which use extensive historical data mining and pattern recognition
to predict specific and detailed operating conditions, as well as dynamic
predictions based on the extrapolations of real-time surveillance data.
PASSUR(R) predictive analytics are built on several core capabilities:
o Real-time surveillance from the PASSUR(R) Network gives the necessary breadth and granularity of data to support detailed scenario building and pattern recognition. Includes "fast-time simulation" of the airport surface and terminal area operation, applying the necessary decisions and constraints that controllers will have to apply in managing the traffic, as well as, addressing the highly nonlinear and non-stationary nature of the airport operating environment.
o Archiving and accessing years of historical data in real-time; the detailed, granular data acquired by the PASSUR(R) Network, supplemented by many other data sources collected within the integrated aviation database, is stored and correlated, providing the large sample sizes required to accurately model future performance based on past performance under similar or identical conditions.
DECISION SUPPORT DASHBOARDS, KPIS, AND MANAGEMENT BY EXCEPTION Many PASSUR(R) solutions are delivered in "dashboard" format, simplifying and condensing extensive amounts of information into the most relevant operational and business metrics, thereby presenting them in a manner that supports immediate performance assessment and actionable decisions. PASSUR(R) solutions are designed so that users are alerted in real-time to specific conditions and recommended action, only when operations reach certain user-defined thresholds, thereby preventing information overload.
COLLABORATIVE CAPABILITIES AND INDUSTRIAL SOCIAL NETWORKS
Many PASSUR(R) solutions include a collaborative layer plus tools which allow
for instant information sharing, coordination of effort, and working with a
common operating picture across a wide range of users in the aviation community,
from the global, to the national, to the local airport environment. These
solutions include industrial social networking capabilities, which leverage new
social media technologies for business uses in the aviation sector, such as
PASSUR(R)'s Airport Information Network(TM) (a single North American-wide site
for real time airport conditions, diversion management, and delay mitigation,
used by hundreds of aviation professionals in real time) and IATA Tactical
Operational Portal (ITOP), which provides airlines worldwide the ability to
minimize arrival and departure problems in the U.S. by providing access to
critical information about US operations, expert traffic management support, and
updates on the U.S. National Airspace System (NAS).
PROFESSIONAL SERVICES TO SUPPORT BIG DATA
Many business intelligence and Big Data experts believe the most effective and
meaningful way to implement Big Data is to target the data to the appropriate
problem through the advice and recommendations by industry experts. The Company
has experienced airline, air traffic, airport intelligence, financial,
operational metrics, and business aviation professionals, with specific
expertise in the operational and business needs, requirements, objectives, and
constraints of the aviation industry. These individuals understand the external
environment in which they operate (the National Airspace System); and are able
to translate these internal requirements and external conditions into targeted
information solutions. These subject matter experts are complemented by a
technical team of software engineers, data analysts, radar engineers, database
architects, physicists, and statisticians, who have years of expertise in
managing complex surveillance networks (hardware and software), as well as
interpreting and converting complex, live aviation data feeds into robust
decision support software solutions.
SPECIFIC PRODUCTS AND SERVICES
The Company offers targeted solutions for specific customer requirements:
KEY GROWTH DRIVERS
CATEGORY SOLUTIONS PASSUR(R) SOLUTION DESCRIPTION
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[] Solutions that focus on the [] Collaboration within and between
SURFACE "throughput" rate of the operation - airports is a world-wide trend
MANAGEMENT, the efficiency with which planes cycle [] Surface Management, Departure Metering, and
EFFICIENCY DEPARTURE through the arrival-surface-departure-en- Airspace Optimization are key NextGen
METERING, route-arrival cycle capabilities, which the Company believes
AIRSPACE [] Improving traffic throughput in the will most likely be mandated at the top 20
OPTIMIZATION air and on the surface, addressing key airports in the coming years
bottle-necks in demand / capacity [] Worldwide opportunity for optimizing a
currently fragmented capability, addressing
required information through automation and
standardization
[] Drive to provide smarter flight deck
solutions
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ARRIVAL [] Solutions that address the hub [] An accurate estimated time of arrival
MANAGEMENT, management areas of aircraft arrivals, ("ETA") is essential for airline operation
HUB ETA SOLUTION, gate management resources, turn times - and is also one of the foundational
OPTIMIZATION HUB CONTROL and connections elements of Trajectory Based Operations,
CENTER SOLUTIONS [] Closely related to efficiency solutions a huge new market segment
(above) that focus on throughput, but with [] Optimizing the hub is a key revenue and cost
a specialized emphasis on the arrival focus for airlines -- and these solutions
component address many key hub business metrics for
airlines and airports
[] Drive to provide smarter fight deck
solutions
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[] Comprehensive solutions, including flight [] Diversion management is one of the top
DIVERSION DIVERSION deck solutions, addressing two related, high operational focus areas for airlines and
AND TARMAC MANAGEMENT, profile expensive and disruptive problems airports
DELAY TARMAC DELAY - diversions and extended on board tarmac [] Tarmac delay and possible related fines now
MANAGEMENT delays - which have the added complication have the added complication of are a major
of being directly associated with potential focus for airlines and airports
fines of millions of dollars per event [] Drive to provide smarter fight deck
along with very damaging negative publicity solutions
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7
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REVENUE
MANAGEMENT, [] Leveraging unique assets (including data from [] Similar to Smart Cities, Smart Airports,
BIG DATA/ COST MANAGEMENT, PASSUR(R)'s radar surveillance network) to through the use of Big Data, will be a very
DASHBOARD EXECUTIVE DECISION power other aviation systems, and into large opportunity
MAKING decision support dashboards, which aggregate, [] Integrating smart data solutions into bigger
correlate, and simplify many different data Enterprise Resource Planning solutions will
sets and information points and present them be essential for large airports and
in a way which supports management by airlines
exception and metric-driven management [] Governments want to know everything possible
about the threats posed by General Aviation
aircraft
[] Improving the fuel pricing and reducing
unnecessary staffing costs for fixed-based
operators ("FBO"s) is critical for their
margin growth
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[] Knowing everything there is to know about a [] Gate to gate tracking is the goal of all
specific flight throughout the entire "flight aviation organizations and flight and
lifecycle" from departure to arrival airspace visualization will always be a
SURVEILLANCE GATE TO GATE [] Consolidating / fusing multiple live data requirement
AND FLIGHT FLIGHT sources seamlessly to create a gate-to-gate [] Flight Data Object is a major NextGen
DATA OBJECT TRACKING AND visualization of live flight movement and Project
FULL FLIGHT airspace / surface conditions over
KNOWLEDGE integrated moving maps
[] Also referred to as "Flight / NAS Object"
[] Also forms the basis for many of our archived
/ historical data sets
[] This information is key for the government to
track multiple flight legs, e.g., for the
detection of narcotics movement
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The Company believes its products, solutions, and services help its aviation customers generate significant returns by:
(1) Improving financial performance and cutting costs;
(2) Improving operational efficiency and effectiveness;
(3) Increasing safety and security; and
(4) Improving the passenger experience.
The Company believes its business opportunities come from the following industry conditions and demand drivers:
[] CONTINUED SHIFT TO COLLABORATIVE DECISION-MAKING - Both within large airlines (who need common operating platforms and instant coordination between system operations, hubs, and regional operators) and between multiple airlines and airports (all of whom understand that certain expensive problems cannot be solved without extensive collaboration around complex operational procedures).
[] FOCUS ON DASHBOARDS AND EXCEPTION REPORTING - Because of the massive data available, the Company believes its solutions highlight the most important information which impacts the efficiency of operations and identifies deviations from the norm.
[] LARGE COMPANIES AND SYSTEM INTEGRATORS WANT BETTER CONTENT AND DATA - Large
companies and system integrators often have excellent systems, but the
systems are powered by sub-optimal information - either received from the
government or directly from the customer. As a result, the systems may fail
to perform to their full capabilities.
[] IMPROVED SECURITY FOR TIMELY RESPONSES - Governments are requiring that their systems be able to predict, monitor, and immediately respond to threats. Aviation is of particular interest and concern as detailed information on individual aircraft, and trends in aircraft behavior, including flight history, is difficult to access in time to evaluate a potential threat and prepare a timely response.
[] SHIFT FROM GOVERNMENT TO COMMERCIAL SPENDING - Governments in the U.S.,
Canada, and Europe are concentrating on core data infrastructure investments.
They are turning to private industry to develop many of the higher-level
capabilities that build on, and will interact with, those basic
infrastructure investments.
[] FUEL PRICES ARE DRAMATICALLY INCREASING AS A PROPORTION OF OVERALL COSTS -
Fuel has now surpassed labor as the single highest cost component as a
percentage of the overall cost of the flight. Many PITM solutions directly
mitigate fuel burn.
[] COMMON USE SYSTEMS FROM AIRLINE TO AIRPORT CENTRIC - Airports are
increasingly being tasked with providing more operational services previously
performed by each airline, so as to avoid redundant costs and inefficient
business and operational practices. With airports acting as the contracting,
service delivery, and in some cases operational coordination body, costs can
be reduced, spread among all the players equitably.
[] AUTOMATION VS. MANUAL PROCESSES - Many complex and expensive operational processes at airlines and airports are still manual, opening a large opportunity for automation for cost savings and efficiencies. Anything relating to irregular operations, airspace and surface management, and operations has a heavy requirement for collaboration among airlines and airports.
[] CARBON EMISSIONS ARE BECOMING A GREATER FOCUS - Airlines and large aviation solution providers are increasingly sensitive to the industry's carbon footprint. PITM solutions directly address carbon output by reducing fuel burn.
[] CONSUMERS WANT BETTER INFORMATION RELATING TO AVIATION - There is a demand
for more detailed, accurate, and timely information that will allow for
better predictability in the travel experience. That type of consumer service
requires access to a much higher level of aviation data and information
processing, predictive analytics, and information, independent of any one
particular carrier.
The Company currently owns nineteen issued patents, and has an additional sixteen patent applications which are pending with the United States Patent Office. The issued patents expire in various years through 2030.
The Company also owns a federal trademark registration in the mark PASSUR(R) for use with both the PASSUR(R) hardware system installation, and the software products which use the data derived from the PASSUR(R) Network and other sources; and allowed federal trademark applications for the marks NextGen2 and NextGen3, for use with PASSUR(R) Integrated Traffic Management modules and capabilities.
The Company had the exclusive license rights to use six patents in various foreign countries, relating to the Company's PASSUR(R) System and related technologies. During fiscal year 2013, the license agreement expired and the Company paid the final royalty owed. The Company does not anticipate any impact on its business due to the expiration of these license rights.
HOW PASSUR AEROSPACE, INC. GENERATES REVENUE
The Company's revenues are generated by selling: (1) subscription-based, real-time decision and solution information; (2) professional services; and (3) annual maintenance contracts for PASSUR(R) Radar Systems. Under the subscription model, the customer signs, at a minimum, a one-year contract for access to the information services. The agreement also provides that the information from the PASSUR(R) Network cannot be resold, used by others, or used for unauthorized purposes.
DISTRIBUTION METHOD
The Company's direct sales force sells its products.
COMPETITION
PASSUR(R) has developed a full suite of capabilities to reduce inefficiencies and improve performance across the markets it serves. There is no other company, to the best of PASSUR(R)'s knowledge, which offers these capabilities. There are, however, other forms of flight tracking, surveillance, and aviation business intelligence products. Depending on the end use of the Company's products, primary competitors include Sabre Systems, Inc., Airbus Industries, Lockheed Martin Corporation, Saab Sensis Corporation, and ITT Excelis. The Company also sells certain data solutions through systems integrators, including Bruel & Kjaer, some of whom may also sell products that are competitive with those offered by the Company. Most of these companies have larger sales forces and greater financial resources than the Company.
SOURCE OF MATERIALS
The Company obtains its components from distributors and manufacturers throughout the United States. The Company has multiple sources from which to obtain a majority of its components.
DEPENDENCE ON CERTAIN CUSTOMERS
One customer accounted for 11% or $1,269,000 of total revenues in fiscal year 2013 and two customers accounted for 24% or $3,045,000 of total revenues in fiscal year 2012. In fiscal year 2012, one customer, a U.S. government agency, accounted for 14% of total revenues, or $1,746,000, and another customer accounted for 10% of total revenues, or $1,299,000. During fiscal year 2012, the contract with the U.S. government agency was completed. There were no significant past due accounts receivable balances for these customers as of the fiscal year ended October 31, 2013.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts include activities associated with the enhancement, maintenance, and improvement of the Company's existing hardware, software, and information products. These expenses amounted to $635,000 and $482,000 in fiscal years 2013 and 2012, respectively.
ENVIRONMENTAL COSTS
The Company is not aware of any environmental issues which would have a material adverse effect on future capital expenditures or current and future business operations.
EMPLOYEES
The Company employed thirty-one employees, of which twenty-nine were full time, including nine officers, as of October 31, 2013. None of its employees are subject to any collective bargaining agreements.
ITEM 1A. RISK FACTORS
THE COMPANY'S SUCCESS IS DEPENDENT ON THE AVIATION INDUSTRY. IF THE COMPANY DOES NOT EXECUTE ITS BUSINESS PLAN, OR IF THE MARKET FOR ITS SERVICES FAILS TO DEVELOP DUE TO ECONOMIC AND OTHER FACTORS AFFECTING THE AVIATION INDUSTRY, THE COMPANY'S RESULTS OF OPERATIONS AND FINANCIAL RESULTS COULD BE ADVERSELY AFFECTED.
The Company's revenues are solely derived from the aviation industry. The Company's future revenues and results of operations are dependent on its continued execution of its subscription-based revenue strategy and development of new software solutions and applications for the aviation industry. Due to economic and other factors affecting the aviation industry, there is no assurance that the Company will be able to continue to report growth in its subscription-based business or sustain its current subscription business. If the Company is unable to sustain and/or increase its levels of revenues, and if it is not successful in reducing costs, its cash requirements may increase and results of operations will be adversely affected.
Additionally, the aviation industry has been impacted by budgetary constraints, as well as airline bankruptcies and consolidations due to the downturn in the economy, changes in fuel costs, the terrorist events of September 11, 2001, and the continued war on terrorism. The terrorist attacks of September 11, 2001 caused fundamental and permanent changes in the airline industry, including substantial revenue declines and cost increases, which resulted in industry-wide liquidity issues. Additional terrorist attacks, or fear of such attacks, even if not made directly, would negatively affect the airline industry (through, for example, increased security, insurance, and other costs, and lost revenue due to increased ticket refunds and decreased ticket sales), which would, in turn, negatively affect the Company.
The aviation industry is extensively regulated by government agencies, particularly the Federal Aviation Administration and the National Transportation Safety Board. New air travel regulations have been, and management anticipates will continue to be, implemented that could have a negative impact on airline and airport revenues. Since substantially all of the Company's current revenues are derived from either airport, airline, or related businesses, continued increased regulations of the aviation industry, or a continued downturn in the aviation industry's economic situation, could have a material adverse effect on the Company.
RELIANCE ON THE COMPANY'S QUARTERLY OPERATING RESULTS AS AN INDICATION OF FUTURE RESULTS IS INAPPROPRIATE DUE TO POTENTIAL SIGNIFICANT FLUCTUATIONS.
The Company's future revenues and results of operations may fluctuate significantly due to a combination of factors, including:
o Delays and/or decreases in the signing and invoicing of new contracts;
o The length of time needed to initiate and complete customer contracts;
o The introduction and market acceptance of new and enhanced products
and services;
o The costs associated with providing existing and new products and
services;
o Economic conditions and the impact on the aviation industry of the
terrorist events of September 11, 2001 and the continued war on
terrorism; and
o The potential of future terrorist acts against the aviation industry
and the adverse effects of any further terrorist attacks or other
international hostilities.
Accordingly, quarter-to-quarter comparisons of its results of operations should not be relied upon as an indication of performance. It is possible that in future periods, results of operations may be below those expected based upon previous performance.
THE COMPANY MAY BE UNABLE TO RAISE ADDITIONAL FUNDS TO MEET OPERATING CAPITAL REQUIREMENTS IN THE FUTURE.
While the Company's operations were cash flow positive for the fiscal years ended October 31, 2013 and 2012, the Company had an accumulated deficit of $3,007,000 as of October 31, 2013. The Company has obtained a commitment from its significant shareholder and Chairman to provide the resources necessary to meet working capital and liquidity requirements through January 16, 2015. However, future liquidity and capital requirements are difficult to predict, as they depend on numerous factors, including the maintenance and growth of existing product lines and service offerings, as well as the ability to develop, provide, and sell new products and services in an industry for which liquidity and resources are already adversely affected.
The Company has significant cash requirements, which are expected to continue in the future. The Company may need to raise additional funds in order to support discretionary capital expenditures and execute its business plan. These funds, in some cases, may be beyond the scope and normal operating requirements for which the Company has a commitment from its significant shareholder and Chairman and therefore, may not be approved and/or funded. In such case, the Company may be required to seek alternate sources of financing (which may not be available on favorable terms or at all) or abandon such activities by either: (1) terminating or eliminating certain operating activities; (2) terminating personnel; (3) eliminating marketing activities; and/or (4) eliminating research and development programs. If any of the aforementioned occurs, the Company's ability to expand could become adversely affected.
THE COMPANY, MORE THAN FIVE YEARS AGO, INCURRED OPERATING LOSSES AND NEGATIVE CASH FLOWS FROM OPERATIONS.
The Company was profitable for the current and previous five fiscal years. The Company had income before taxes of $637,000 and $1,085,000 for fiscal years ended October 31, 2013 and 2012, respectively. The Company's accumulated deficit was $3,007,000 as of October 31, 2013. The Company's ability to maintain profitability will depend upon its ability to generate significant increased revenues through new and existing customer agreements, additional services, and/or products offered to existing and new customers, as well as to deploy PASSUR(R) Systems in inventory and control costs associated with business operations. There can be no assurance that the Company will be able to execute on these requirements. The Company is profitable but may not be able to sustain or increase its profits on a quarterly or annual basis in the future.
If the Company's business plan does not generate sufficient cash flows from operations to meet the Company's operating cash requirements, the Company will attempt to obtain external financing, and if such external financing is not obtained, the Company has a commitment to receive the necessary continuing financial support to meet its obligations from its significant shareholder and Chairman through January 16, 2015. Such continuing financial support may be in the form of additional loans or advances to the Company, in addition to the deferral of principal and/or interest payments due on the outstanding loans, if deemed necessary.
A LIMITED NUMBER OF CUSTOMER CONTRACTS ACCOUNTS FOR A HIGH PERCENTAGE OF THE COMPANY'S REVENUES, AND THE INABILITY TO REPLACE A KEY CUSTOMER CONTRACT COULD ADVERSELY AFFECT ITS RESULTS OF OPERATIONS, BUSINESS, AND FINANCIAL CONDITION.
The Company relies on a small number of customer contracts for a large percentage of its revenues and expects that a significant percentage of its revenues will continue to be derived from a limited number of customer contracts. The Company's top five customers accounted for 40% of its revenue in fiscal year 2013. The Company's business plan is to obtain additional customers, but the Company anticipates that near-term revenues and operating results will continue to depend on large contracts from a small number of customers. Additionally, the aviation industry, particularly the airline sector, has experienced bankruptcies and consolidations recently. Bankruptcy filings or consolidations by our existing customers may adversely affect our ability to continue such services and collect payments due to the Company by such customers. As a result of this concentration of our customer base, an inability to replace one or more of these large customer contracts could materially adversely affect our business, financial condition, operating results, and cash flow.
THE SOFTWARE BUSINESS FOR THE AVIATION INDUSTRY IS HIGHLY COMPETITIVE, AND FAILURE TO ADAPT TO THE CHANGING INDUSTRY NEEDS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, BUSINESS, AND FINANCIAL CONDITION.
The industry in which we compete is marked by rapid and substantial technology change, the steady emergence of new companies and products, as well as evolving industry standards and changing customer needs. We compete with many established companies in the industry we serve, and some of these companies may have substantially greater financial, marketing, and technology resources, larger distribution capabilities, earlier access to potential customers, and greater opportunities to address customers' various information technology requirements. As the aviation industry seeks to be more cost effective, product pricing becomes increasingly important for our customers. As a result, we may experience increased competition from certain low-priced competitors. We continue to develop new products, professional services, and existing product enhancements, but may still be unsuccessful in meeting the needs of our industry in light of other alternatives available in the market. In addition, the pricing of new products, professional services, and existing product enhancements may be above what is required by the market place. Should the Company's investment in capitalized software development costs become impaired, there would be a negative impact on the Company's profitability. Our inability to bring new products, professional services, and existing product enhancements to the market in a timely manner, or the failure to achieve industry acceptance, could adversely affect our business, financial condition, operating results, and cash flow.
THE COMPANY DEPENDS UPON CERTAIN KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN THESE EMPLOYEES.
The Company's future performance depends on the continued services of its key sales, technical, and engineering personnel. The Company continues to depend on the efforts of a limited number of key personnel. The employment of any of the Company's key personnel could cease at any time, which could have an adverse affect on our business.
THE PASSUR(R) NETWORK COULD EXPERIENCE DISRUPTIONS, WHICH COULD AFFECT THE DELIVERY OF DATA.
AT&T hosts and maintains the Company's network infrastructure through an existing frame-relay and MPLS network and the Company's wireless network is hosted and maintained by Sprint. If AT&T or Sprint experiences system failures, or fails to adequately maintain the frame-relay MPLS and wireless networks, the Company may experience interruption of delivery of data/software services and customers may terminate or elect not to continue to subscribe to these services in the future. The Company's network infrastructure may be vulnerable to computer viruses, break-ins, denial of service attacks, and similar disruptive problems. Computer viruses, break-ins, denial of service attacks, or other problems caused by third parties, could lead to interruptions, delays, or cessation in service to customers. There is currently no existing technology that provides absolute security. Such incidents could deter potential customers and adversely affect existing customer relationships.
THE COMPANY MAY BE SUBJECT TO NEW GOVERNMENT REGULATIONS RELATING TO THE DISTRIBUTION OF FLIGHT-TRACKING DATA.
The Company currently maintains strict security regulations for its data in order to comply with current government regulations. Due to the continued growing safety needs and concerns of the aviation industry, new government regulations may be implemented. Such new regulations may, in some cases, hinder the Company's ability to provide current and/or additional services.
UNAUTHORIZED USE OF THE COMPANY'S INTELLECTUAL PROPERTIES BY THIRD PARTIES MAY DAMAGE AND/OR ADVERSELY AFFECT ITS BUSINESS.
The Company regards its trademarks, trade secrets, and all other intellectual property as critical to its future success. Unauthorized use of its intellectual property by third parties may damage and/or impair its business. The Company's intellectual property includes exclusive licenses to use patents held by third parties, as well as Company-owned patents. The Company relies on trademarks, trade secrets, patent protection, and contracts, including confidentiality and non-exclusive license agreements with its customers, employees, consultants, strategic partners, and others, to protect its intellectual property rights. Despite these precautions, it may be possible for third parties to obtain and use the Company's intellectual property without its prior knowledge and/or authorization. Prosecuting infringers could be time consuming and costly, and, irrespective of whether or not the Company is successful, could disrupt its business.
The Company currently owns nineteen issued patents, and has an additional sixteen patent applications which are pending with the United States Patent Office, some of which relate to newly developed internet-based software applications. The issued patents expire in various years through 2030. The Company intends to seek additional patents on its products, technological advances, and/or software applications, when appropriate. There can be no assurance that patents will be issued for any of its pending or future patent applications, or that any claims allowed from such applications will be of sufficient scope, or provide adequate protection or any commercial advantage to the Company. Additionally, competitors may be able to design around patents and possibly affect commercial interests.
The Company also owns a federal trademark registration in the mark PASSUR(R) for use with both the PASSUR(R) hardware system installation, and the software products which use the data derived from the PASSUR(R) Network and other sources; and allowed federal trademark applications for the marks NextGen2 and NextGen3, for use with PASSUR(R) Integrated Traffic Management modules and capabilities. The PASSUR(R) NextGen2 and NextGen3 federal registrations will allow the Company to enforce its rights in the marks in the federal court system. The registrations do not assure that others will be prevented from using similar trademarks in connection with related products and/or services.
The Company had the exclusive license rights to use six patents in various foreign countries, relating to the Company's PASSUR(R) System and related technologies. During fiscal 2013, the license agreement expired and the Company paid the final royalty owed. The Company does not anticipate any impact on its business due to the expiration of these license rights.
DEFENDING AGAINST INTELLECTUAL PROPERTY CLAIMS COULD POSE SIGNIFICANT LEGAL AND PROFESSIONAL COSTS, AND IF UNSUCCESSFUL, COULD ADVERSELY AFFECT THE COMPANY.
The Company cannot guarantee that its future products, technologies, and software applications will not inadvertently infringe valid patents or other intellectual property rights held by third parties. The Company may be subject to legal proceedings and claims from time to time relating to the intellectual property of others. Investigation of any such claims from third parties alleging infringement of their intellectual property, whether with or without merit, can be expensive and could affect development, marketing, selling, or delivery of its products. Defending against intellectual property infringement claims could be time consuming and costly, and, irrespective of whether or not the Company is successful, could disrupt its business. The Company may incur substantial expenses in defending against these third party claims, regardless of their merit. Successful infringement claims against the Company may result in significant monetary liability and could adversely affect its business, financial condition, operating results, and cash flow.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company's headquarters are located at One Landmark Square, Suite 1900, Stamford, Connecticut, in part of a six building, 800,000 square foot office park. Effective June 26, 2009, the Company entered into a five-year lease for 4,000 square feet of office space. This lease was modified during fiscal year 2010, extending the term of the original lease through January 31, 2018, and adding 1,300 square feet of office space, resulting in a total average annual rental rate of $227,000. Effective May 1, 2012, the Company entered into a one-year agreement to sublease space to Field Point Capital Management Company, owned 100% by G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, for 1,300 square feet of office space at an annual rental rate of $52,000, which is the same rate paid by the Company. In fiscal year 2012, the Company received payments of $27,000 from such sublease. In fiscal year 2013, the agreement was terminated as of February 28, 2013 and the Company received payments of $17,000 from such sublease.
The Company's software development and manufacturing facility is located in a one-story, 36,000 square foot building at 35 Orville Drive, Bohemia, New York. The Company, which renewed the lease through October 31, 2015, leases 12,000 square feet at an average annual rental rate of $124,000.
The Company has satellite offices in Reston, Virginia; Bloomington, Minnesota; and Orlando, Florida.
The Company believes these rates are competitive and are at or below market rates. The Company's headquarters and software development and manufacturing facility are suitable for its requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal proceedings to which the Company or its Subsidiary is a party or to which any of its properties are subject.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
(A) MARKET INFORMATION
The Company's Common Stock, par value $0.01 per share (the "Common Stock"), is traded on the over-the-counter bulletin board.
The following table sets forth the reported high and low sales prices for the Company's common stock for each quarterly period during the Company's last two fiscal years, as reported by the National Quotation Bureau, Inc.:
PRICES*
-------
PERIOD HIGH LOW
------------ ---- -----
FISCAL YEAR ENDED OCTOBER 31, 2013
FIRST QUARTER $4.45 $3.80
SECOND QUARTER $4.16 $3.10
THIRD QUARTER $3.59 $2.60
FOURTH QUARTER $3.25 $2.50
Fiscal year ended October 31, 2012
First quarter $5.00 $4.25
Second quarter $4.99 $4.40
Fourth quarter $5.00 $4.00
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* The quotations represent prices on the over-the-counter bulletin board between dealers in securities and do not include retail markup, markdown, or commission; and do not necessarily represent actual transactions.
(B) HOLDERS
The number of registered equity security holders of record as of January 7, 2014 was 240, as shown in the records of the Company's transfer agent.
(C) DIVIDENDS
The Company has never paid cash dividends on its shares. The Company does not anticipate paying cash dividends in the foreseeable future.
(D) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Information with respect to securities authorized for issuance under the Company's equity compensation plans as of October 31, 2013 is as follows:
WEIGHTED AVERAGE
NUMBER OF SECURITIES TO BE EXERCISE PRICE OF NUMBER OF SECURITIES REMAINING
PLAN CATEGORY ISSUED UPON EXERCISE OF OUTSTANDING STOCK AVAILABLE FOR FUTURE ISSUANCE UNDER
OUTSTANDING STOCK OPTIONS, OPTIONS, WARRANTS, EQUITY COMPENSATION PLANS (EXCLUDING
WARRANTS, AND RIGHTS (A) AND RIGHTS SECURITIES REFLECTED IN COLUMN (A))
-------------------------------------------------------------------------------------------------------------------------------
Equity compensation plan approved
by security holders 1,101,000 $2.07 983,000
Equity compensation plans not
approved by security holders -- -- --
--------------------------------------------------------------------------------------------
Total 1,101,000 $2.07 983,000
============================================================================================
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ITEM 6. SELECTED FINANCIAL DATA: Not Required
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures of contingent assets and liabilities based upon accounting policies management has implemented. The Company has identified the policies and estimates below as critical to its business operations and the understanding of its results of operations. The impact and any associated risks related to these policies on the Company's business operations are discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations, where such policies affect its reported financial results. The actual impact of these factors may differ under different assumptions or conditions.
OVERVIEW
PASSUR Aerospace, Inc. is a leading aviation business intelligence and Big Data company which provides predictive analytics and decision-support technology for the aviation industry using its unique, proprietary technology and real-time accessible databases, supported by a professional services and technology development staff of leading industry experts, and a proven management team.
PASSUR is also a pioneer and leading innovator in the use of the Industrial Internet to create collaborative networks among airlines, airports, and others who serve those markets.
The Company's principal focus is on helping its airline, airport, and business aviation customers lower their costs and enhance their efficiency by designing solutions that help reduce the costs of delays, diversions, and cancellations, many of which were once thought to be part of the cost of doing business.
PASSUR continues to develop business intelligence, Big Data, and collaborative decision making products and more complete solutions, with measurable results, for its customers around the world.
In fiscal year 2013, total revenue decreased $1,472,000, or 12%, to $11,035,000, from $12,507,000 in fiscal year 2012, as a result of the completion of a government contract and a professional services engagement during fiscal year 2012. The decline of $2,062,000 in revenues from these contracts was partially offset by a revenue increase of $590,000 from the Company's core North American airline and airport customers. The profit impact of this revenue decline was offset in part by cost reductions, resulting in an overall decline in income from operations of $453,000 to a level of $925,000 in fiscal year 2013, from $1,378,000 in the prior year.
Our five major objectives are:
1. Increase our emphasis on revenue growth in PASSUR's core airline and airport markets.
o 100% of the 8 major North American airlines, and over 125 of the world-wide airlines, and 73% of the top 30 airports use at least one of PASSURs products.
2. Develop strategic relationships with major companies to broaden the reach of PASSUR products in the world-wide commercial and government markets.
o PASSUR(R) is working with various companies to jointly provide integrated solutions to assist the airline, airport, and air traffic management community save money, enhance operational efficiency, increase safety and security, and foster a reduction in the impact on the environment, as well as enhance the passenger experience.
3. Further build PASSUR's market share internationally.
o In April 2013, PASSUR launched a partnership with the International Air Transport Association (IATA), which resulted in the building of the IATA Tactical Operations Portal (ITOP), PASSUR's introductory collaborative system for global airlines, now used by over 90 of IATA's international airline members.
4. Further develop our innovative and leadership capabilities in the Industrial Internet, focusing on our unique Aviation Industrial Network (AIN) and our collaborative decision making (CDM) products and capabilities.
o Our global collaborative decision making programs, when combined with our national collaborative system, Airport Information Network (AIN), our international system, IATA Tactical Operations Portal (ITOP) and the local collaborative network (PASSUR OPSnet), allowed us to further build market share, and scale our business, with minimal incremental costs.
5. Complete key projects and introduce products that can be sold into both our commercial and government markets.
o Several of our key development projects achieved commercial viability in 2013, including key components of our PASSUR Integrated Traffic Management (PITM), as well as key components of Airport Information Network (AIN), and the IATA Tactical Operations Portal (ITOP), and Departure Metering.
We believe these programs will continue to provide value to the Company and its shareholders.
The Company's revenues are generated by selling: (1) subscription-based real-time decision and solutions information; (2) professional services; and (3) annual maintenance contracts for PASSUR(R) Radar Systems.
The Company's major product development and marketing achievements during fiscal year 2013 are summarized below. The Company:
1. Expanded its surface management engagements with airlines and airports. Surface Management is a core enabling technology for traffic management efficiency programs provided to both commercial and government markets, including pending NextGen programs. Developments over the past year include:
o Extended deployment of surface management with several major U.S. airlines. There are now three major airlines using PASSUR(R) surface management at all key airports throughout their networks, and two more with less extensive but major deployments.
o Expanded Departure Metering deployments and capabilities. Departure metering is a core element in reducing fuel burn, emissions, and passenger disruption through collaboration capacity/demand mitigation for weather disruptions, periods of high-demand, or periods of limited runway availability. In 2013 PASSUR(R):
- Launched an innovative departure sequencing and gate de-confliction program (both variations of departure metering) at a major U.S. airport.
- Launched a deicing departure metering program at a major airport.
o Introduced new layers of metering automation to increase collaboration between airlines, airports, and ANSPs during metering operations.
2. Expanded the PASSUR(R) Collaborative Decision Making Program, an international industry platform for collaboration, communications, and coordination between airlines, airports, and Air Navigation Service providers (ANSPs) including:
o Growth of the PASSUR(R) North American airport network of field condition reporting for all participating airports onto a single screen, adds new levels of automation, incorporates traffic management and airport performance metrics from the PASSUR(R) fused data network, and is available to, and accessed by airlines system operation centers in the U.S. and internationally.
o Expanded the footprint of the International Airport Trade Association (IATA) Tactical Operations Portal (ITOP), which now has 98+ airline members worldwide. ITOP provides airlines worldwide the ability to minimize same-day constraints in the U.S. by providing access to critical information about US operations, expert traffic management support, and updates on the U.S. National Airspace System (NAS) - all on a single, live, collaborative portal.
o Linked all PASSUR(R) Field Condition Report and Airport Information Network (AIN) airport subscribers, and all ITOP airline subscribers, onto a real-time on screen and mobile messaging platform - creating a live airline-airport information exchange service for collaboration during critical events like weather disruptions, safety, and security incidents.
- AIN addresses the industry's need for more effective, coordinated, and collaborative response to diversions and tarmac delays by consolidating PASSUR(R)'s Tarmac Delay, Diversion Management, and Field Condition capabilities onto a single, national aviation industry platform. The program had more than 100 participating airports, 8 major airlines, and more than 500 individual aviation professional users.
3. Launched a major new airport efficiency program for one of the leading ground services companies in the industry. This includes software for arrival and turn-time management, as well as data for manpower efficiency solutions, to improve key performance metrics for the company.
4. Expanded the capabilities of PASSUR(R) Integrated Traffic Management, a web hosted integrated business intelligence platform that targets key constraints through the entire life cycle of the flight, to optimize fuel costs and emissions, schedule integrity, and the passenger experience, including:
o Enhanced forecasted weather capabilities, which drive the program's terminal airspace throughput optimization module.
o Added new "metroplex" demand predictions, critical for metering beyond the surface to the first departure fix.
5. Extended and enhanced PASSUR(R)'s flagship RightETA(TM) data feed to provide gate-to-gate time estimates, greater accuracy, and support management for new FAR 117 crew rest regulations.
6. Was awarded three additional patents, all related to Surface Management, bringing the total number of PASSUR(R) patents to nineteen, with several others filed and pending.
The Company's business plan is to continue to focus on increasing
subscription-based revenues from its suite of software applications, and to
develop new applications and professional services designed to address the needs
of the aviation industry and the U.S. government. The Company's strategy is to
help solve problems faced by its customers and is built on the following basic
objectives: (1) continue extending the reach of the PASSUR(R) Network, which
provides the proprietary backbone for many of its solutions; (2) continue
integrating multiple additional industry data sets into its integrated aviation
database, including data from a variety of additional aircraft, airspace, and
ground surveillance technologies, in order to ensure that PASSUR(R) is the
primary choice for data integration and management for large aviation
organizations; (3) continue developing decision support solutions built on
business intelligence, predictive analytics, and web-dashboard technology; and
(4) continue developing the Company's professional service capabilities, in
order to ensure that its solutions can be fully implemented in the customer's
work environment, with minimal demand on the customer's internal resources.
The Company shipped and installed nine Company-owned PASSUR(R) System during fiscal year 2013 (installations include systems shipped in the current and previous fiscal year). The shipped and installed PASSUR(R) Systems are capitalized as part of the Company-owned PASSUR(R) Network. The Company will continue to expand the PASSUR(R) Network by shipping and installing additional PASSUR(R) Systems throughout fiscal year 2014. Management anticipates that future PASSUR(R) sites will provide increased coverage for the PASSUR(R) Network by increasing the Company's ability to contract with new customers at such locations, and by providing existing customers with additional data solutions. The Company will continue to market the business intelligence, predictive analytics, as well as decision support applications and solutions derived from the PASSUR(R) Network, directly to the aviation industry and organizations that serve, or are served by, the aviation industry. There were one hundred and sixty-four Company-owned PASSUR(R) Systems located at airports worldwide at the end of fiscal year 2013. Redundant PASSUR(R) Systems have been installed at major customer locations.
REVENUES
Management concentrates its efforts on the sale of business intelligence, predictive analytics, and decision support product applications, utilizing data primarily derived from the PASSUR(R) Network. Such efforts include the continued development of new products, professional services, and existing product enhancements.
In fiscal year 2013, total revenue decreased $1,472,000, or 12%, to $11,035,000 in fiscal year 2013, from $12,507,000 in fiscal year 2012, as a result of the completion of a government contract and a professional services engagement in fiscal year 2012, which resulted in a decrease of $2,062,000 of such revenues, partially offset by higher revenue from the Company's North American airline and airport customers.
The Company provided services to all of the top 8 North American Airlines and 73% of the top 30 North American airports, in both fiscal years 2013 and 2012.
The Company continues to develop and deploy new software applications and solutions, as well as a wide selection of products which address customers' needs, easily delivered through web-based applications, as well as other new products which include stand-alone professional services.
COST OF REVENUES
Costs associated with subscription and maintenance revenues consist primarily of direct labor, depreciation of PASSUR(R) Network Systems, amortization of Capitalized software development costs, communication costs, data feeds, allocated overhead costs, travel and entertainment, and consulting fees. Also included in cost of revenues are costs associated with upgrades to PASSUR(R) Systems necessary to make such systems compatible with new software applications, as well as the ordinary repair and maintenance of existing PASSUR(R) Systems. Additionally, cost of revenues in each reporting period is impacted by: (1) the number of PASSUR(R) System units added to the Network, which include the production, shipment, and installation of these assets, which are capitalized to the PASSUR(R) Network; and (2) capitalized costs associated with software development and data center projects. Both of these are referred to as "Capitalized Assets", and are depreciated and/or amortized over their respective useful lives and charged to cost of revenues. The Company does not break down its costs by product.
Cost of revenues decreased $97,000, or 2%, in fiscal year 2013, as compared to fiscal year 2012, due in part to a decrease in communication costs of $358,000, due to the adaptation of a lower cost network infrastructure, as well as a decrease in consulting costs of $324,000, due to completion of a consulting engagement in fiscal year 2012, partially offset by lower capitalized costs of $171,000.
A reduction in capitalized manufacturing costs of $273,000 and lower capital expenditures at the second data center of $178,000, more than offset the increase in capitalized costs of $280,000 related to an increase in the number of PASSURS(R) shipped and installed in the field during the current fiscal year.
When the Company uses its employees to manufacture PASSUR(R) Systems, build capital assets, and ship and install PASSURS in the field, there is a reduction in cost of revenues due to the fact that the labor-related costs for these systems are capitalized, rather than expensed.
In addition, the capitalization of software development costs decreased $172,000. Compensation related costs of $121,000 and amortization of released software projects of $124,000 increased, as compared to fiscal year 2012.
Most of the Company's other costs of revenue are fixed, so the decline in revenue resulted in an increase in cost of sales as a percentage of revenue from 47% to 52% in the current fiscal year.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts include activities associated with new product development, as well as the enhancement and improvement of the Company's existing hardware, software, and information products. Research and development expenses increased $154,000, or 32%, in fiscal year 2013, as compared to fiscal year 2012, primarily due to an increase in payroll and related costs as a result of an increase in headcount.
The Company anticipates that it will continue to invest in research and development to develop, maintain, and support existing and newly developed applications for its customers. There were no customer-sponsored research and development activities during fiscal years 2013 or 2012. Research and development expenses are funded by current operations.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses decreased $1,076,000, or 23%, in fiscal year 2013, as compared to fiscal year 2012, due to a decrease in payroll and related costs of $915,000, as a result of a decrease in headcount, as well as decreases in consulting fees of $79,000 and marketing expenses of $61,000.
INCOME FROM OPERATIONS
Revenues decreased $1,472,000, or 12%, to $11,035,000, total costs and expenses decreased $1,019,000, or 9%, to $10,110,000, and income from operations decreased $453,000, or 33%, to $925,000 in fiscal year 2013 as compared to fiscal year 2012.
INTEREST EXPENSE - RELATED PARTY
Interest expense - related party decreased $5,000, or 2%, in fiscal year 2013, as compared to fiscal year 2012, due to a reduction in note payable of $400,000 during the fourth quarter of fiscal year 2013.
INCOME BEFORE INCOME TAXES
Income before income taxes decreased $448,000, or 41%, to $638,000 in fiscal year 2013, as compared to fiscal year 2012, primarily due to a decrease in income from operations of $453,000.
INCOME TAXES
Income tax expense increased $2,132,000, in fiscal year 2013, as compared to fiscal year 2012, primarily due to the reversal of the remaining valuation allowance of $2,306,000 in fiscal year 2012, and an increase of the NOL stock-compensation adjustment of $228,000, as well as a decrease in permanent differences of $225,000 and a decrease in the U.S. Statutory tax of $152,000.
The Company's provision for income taxes in each year consists of current federal, state, and local minimum taxes.
At October 31, 2013, the Company had available a federal net operating loss carry-forward of $10,224,000 for income tax purposes, which will expire in various tax years from fiscal year 2020 through fiscal year 2033. The Company evaluates whether a valuation allowance related to deferred tax assets is required each reporting period. A valuation allowance is established if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized. During fiscal year 2012, the Company reversed the remaining valuation allowance of $2,306,000 related to deferred tax assets, as it was determined that it is more likely than not these assets will be realized. This determination was primarily based on cumulative positive earnings in recent years and projected taxable income in the future. In evaluating whether or not to realize a deferred tax asset, the Company considered all available positive and negative evidence, including past operating results and a forecast of future taxable income.
NET INCOME
The Company had net income of $282,000, or $0.04 per diluted share, in fiscal year 2013 as compared to net income of $2,861,000, or $0.36 per diluted share, in fiscal year 2012.
IMPACT OF INFLATION
In the opinion of management, inflation has not had a material effect on the operations of the Company including selling prices, capital expenditures, and operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current liabilities exceeded current assets by $22,000 at October 31, 2013. The note payable to a related party, G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, was $4,365,000 at October 31, 2013, with a maturity of November 1, 2014. The Company's stockholders' equity was $10,563,000 at October 31, 2013. The Company had net income of $282,000 for fiscal year 2013.
Management is addressing the Company's working capital deficiency by aggressively marketing the Company's PASSUR(R) Network Systems information capabilities in its existing product and professional service lines, as well as in new products and professional services, which are continually being developed and deployed. Management believes that the continued development of its existing suite of software products and professional services, which address the wide array of needs of the aviation industry, will continue to lead to increased growth in the Company's customer-base and subscription-based revenues.
If the Company's business plan does not generate sufficient cash flows from operations to meet the Company's operating cash requirements, the Company will attempt to obtain external financing. However, the Company has received a commitment from G.S. Beckwith Gilbert, dated January 16, 2014, that if the Company, at any time, is unable to meet its obligations through January 16, 2015, G.S. Beckwith Gilbert will provide the necessary continuing financial support to the Company in order for the Company to meet such obligations. Such commitment for financial support may be in the form of additional advances or loans to the Company, in addition to the deferral of principal and/or interest payments due on the existing loans, if deemed necessary. The note payable is secured by the Company's assets.
On May 9, 2011, a new note payable was issued to G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, in the amount of $4,815,000. The note payable bears a maturity date of November 1, 2014 and has an annual interest rate of 6% payable in cash. Interest payments will be made annually on October 31 of each year.
During fiscal year 2012, the Company paid fiscal year 2012 interest to G.S. Beckwith Gilbert of $293,000, representing the entire fiscal year 2012 interest due, thereby meeting the payment requirements of the loan agreement. In August 2012, the Company made a $50,000 principal payment, bringing the principal amount of the note payable due to G.S. Beckwith Gilbert to $4,765,000 on October 31, 2012.
During fiscal year 2013, the Company paid fiscal year 2013 interest to G.S. Beckwith Gilbert of $288,000, representing the entire fiscal year 2013 interest due, thereby meeting the payment requirements of the loan agreement. In the fourth quarter of 2013, the Company made $400,000 in principal payments, bringing the principal amount of the note payable due to G.S. Beckwith Gilbert to $4,365,000 on October 31, 2013.
During the first quarter of fiscal year 2014, the Company made $300,000 in principal payments, bringing the principal amount of the note payable due to G.S. Beckwith Gilbert to $4,065,000.
The Company believes that its liquidity is adequate to meet operating and investment requirements through October 31, 2014. During such period the Company does not anticipate borrowing additional funds from G.S. Beckwith Gilbert, although it has received a commitment from G.S. Beckwith Gilbert to do so if the Company requires additional funds.
Net cash provided by operating activities was $3,623,000 for fiscal year 2013, and consisted of $282,000 of net income, depreciation and amortization of $2,590,000, stock-based compensation expense of $275,000, and the provision for deferred taxes of $354,000, with the balance consisting of a small increase in operating assets and liabilities. Net cash used in investing activities was $2,748,000 for fiscal year 2013, expended primarily for Capitalized software development costs, additions to the PASSUR(R) Network, and a second data center at an off-site location. Net cash used in financing activities was $681,000 for fiscal year 2013, and primarily consisted of a $400,000 repayment on the note payable - related party plus $284,000, for employee's cashless exercise of stock options.
The Company is actively addressing the increasing costs associated with supporting the business, and plans to identify and reduce any unnecessary costs as part of its cost reduction initiatives. Additionally, the aviation market has been impacted by budgetary constraints, airline bankruptcies and consolidations, current economic conditions, the continued war on terrorism, and fluctuations in fuel costs. The aviation market is extensively regulated by government agencies, particularly the Federal Aviation Administration and the National Transportation Safety Board, and management anticipates that new regulations relating to air travel may continue to be issued. Substantially all of the Company's revenues are derived from airports, airlines, and organizations that serve, or are served by, the aviation industry. Any new regulations or changes in the economic situation of the aviation industry could have an impact on the future operations of the Company, either positively or negatively.
Interest by potential customers in the information and decision support software products obtained from PASSUR(R) Network Systems and its professional services remains strong. As a result, the Company anticipates an increase in future revenues from its airline and airport business. However, the Company cannot predict if such revenues will materialize. If sales do not increase, losses may occur. The extent of such profits or losses will be dependent on sales volume achieved and Company cost reduction initiatives.
OFF-BALANCE SHEET ARRANGEMENTS
None.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL
The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities, based on accounting policies management has implemented. The Company has identified the policies and estimates below as critical to its business operations and the understanding of its results of operations. The impact and any associated risks related to these policies on the Company's business operations are discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations, where such policies affect its reported financial results. The actual impact of these factors may differ under different assumptions or conditions. The Company's accounting policies that require management to apply significant judgment and estimates include:
REVENUE RECOGNITION
The Company recognizes revenue in accordance with FASB ASC 605-15, ("Revenue
Recognition in Financial Statements") which requires that four basic criteria
must be met before revenues can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services have been rendered;
(3) the fee is fixed and determinable; and (4) collectability is reasonably
assured.
The Company's revenues are generated by selling: (1) subscription-based, real-time decision and solution information; (2) professional services; and (3) annual maintenance contracts for PASSUR(R) Radar Systems.
Revenues generated from subscription and maintenance agreements are recognized over the term of such executed agreements and/or customer's receipt of such data or services. In accordance with ASC 605-15, we recognize revenue when persuasive evidence of an arrangement exists which is evidenced by a signed agreement, the service has been deployed, as applicable, to its hosted servers, the fee is fixed and determinable, and collection of the resulting receivable is reasonably assured. The Company records revenues pursuant to individual contracts on a month-by-month basis, as outlined by the applicable agreement. In many cases, the Company may invoice respective customers in advance of the specified period, either quarterly or annually, which coincides with the terms of the agreement. In such cases, the Company will defer at the close of each month and/or reporting period, any subscription or maintenance revenues invoiced for which services have yet to be rendered, in accordance with ASC 605-15. Revenues generated by professional services are recognized over the term of such executed agreements.
From time to time, the Company will enter into an agreement with a customer to receive a one-time fee for rights including, but not limited to, the rights to use certain data at an agreed upon location(s) for a specific use and/or for an unlimited number of users. These fees are recognized as revenue ratably over the term of the agreement or expected useful life of such arrangement, whichever is longer, but typically five years.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company capitalizes costs related to the development of internal use software in accordance with ASC 350-40, "Internal-Use Software." The Company expenses all costs incurred during the preliminary project stage of its development, and capitalizes the costs incurred during the application development stage. Costs incurred relating to upgrades and enhancements to the software are capitalized if it is determined that these upgrades or enhancements add additional functionality to the software. Software costs are included in "Capitalized software development costs, net" on the Company's balance sheet and are depreciated using the straight-line method over their estimated useful life, generally five years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows the provisions of FASB ASC 360-10, "Impairment and Disposal of Long-Lived Assets." The Company reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. Impairment is recognized to the extent the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value. Assets to be disposed of are carried at the lower of their carrying value or fair value, less costs to sell. The Company evaluates the periods of amortization continually in determining whether later events and circumstances warrant revised estimates of useful lives. If estimates are changed, the unamortized costs will be allocated to the increased or decreased number of remaining periods in the revised life.
All of the Company's capitalized assets are recorded at cost (which may also include salaries and related overhead costs incurred during production and/or development) and depreciated and/or amortized over the asset's estimated useful life for financial statement purposes. The estimated useful life represents the projected period of time that the asset will be productively employed by the Company and is determined by management based on many factors, including historical experience with similar assets, technological life cycles, and industry standards for similar assets. Circumstances and events relating to these assets are monitored to ensure that changes in asset lives or impairments (see "Impairment of Long-Lived Assets" above) are identified and prospective depreciation or impairment expense is adjusted accordingly.
The Company's long-lived assets, which include the PASSUR(R) Network and Property, plant and equipment, totaled $6,685,000, and accounted for 37% of the Company's total assets as of October 31, 2013.
At each reporting period, management evaluates the carrying values of the Company's assets. The evaluation considers the undiscounted cash flows generated from current contractual revenue sources and the anticipated forecast revenue derived from each asset. The Company then evaluates these revenues on an overall basis to determine if any impairment issues exist. As of October 31, 2013, based upon management's evaluation of the above asset groups, no impairment of these asset groups exist. If these forecasts are not met, the Company may have to record impairment charges not previously recorded.
DEPRECIATION AND AMORTIZATION
The net PASSUR(R) Network, net Capitalized software development costs, and net Property, plant and equipment totaled $5,338,000, $6,127,000, and $1,347,000, respectively, at October 31, 2013. Total depreciation and amortization expense related to these capitalized assets was $2,590,000 in fiscal year 2013. In management's judgment, the estimated depreciable lives used to calculate the annual depreciation and amortization expense are appropriate.
Depreciation and amortization are provided on the straight-line basis over the estimated useful lives of the assets, as follows:
PASSUR(R) Network 7 years Capitalized software development costs 5 years Property, plant and equipment 3 to 10 years |
The PASSUR(R) Network is comprised of PASSUR(R) Systems, which include the direct and indirect production, shipping, and installation costs incurred for each PASSUR(R) System, which are recorded at cost, net of accumulated depreciation. Depreciation is charged to cost of revenues and is calculated using the straight-line method over the estimated useful life of the asset, which is estimated at seven years. PASSUR(R) Systems which are not installed, raw materials, work-in-process, and finished goods components are carried at cost and no depreciation is recorded.
Total depreciation and amortization expense was $2,590,000 in fiscal year 2013, and consisted of $1,222,000, $1,109,000, and $259,000 for the PASSUR(R) Network, Capitalized software development costs, and Property, plant and equipment, respectively.
STOCK-BASED COMPENSATION
The Company follows the provisions of FASB ASC 718, "Compensation-Stock Compensation", which requires measurement of compensation cost for all stock-based awards at fair value on date of grant, and recognition of stock-based compensation expense over the service period for awards expected to vest. The fair value of stock options was determined using the Black-Scholes valuation model. Such fair value is recognized as an expense over the service period, net of forfeitures. Stock-based compensation expense was $275,000 and $251,000 in fiscal years 2013 and 2012, respectively, and was primarily included in selling, general, and administrative expenses.
The Company's stock options vest over a period of five years. The fair value for these stock options was estimated at the date of grant using a Black-Scholes stock option pricing model, with the following weighted average assumptions for fiscal years 2013 and 2012; risk-free interest rate of 3.51%, volatility factor of the expected market price of the Company's common stock of 117%, no dividend yield, and a weighted average expected life of the stock options of 6.5 years.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2013, the FASB issued new accounting guidance which requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carry forward that would apply in settlement of the uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carry forwards that would be utilized, rather than only against carry forwards that are created by the unrecognized tax benefits. The new guidance is effective prospectively to all existing unrecognized tax benefits, but entities can choose to apply it retrospectively. The guidance will be effective for the Company in our first quarter of fiscal 2015, with early adoption permitted. The Company is currently assessing the impact this guidance will have on its consolidated statements of financial position and cash flows, although the Company has no uncertain tax positions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK: Not
Required
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 15(a)(1) of this Annual Report on Form 10-K for the Company's annual financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report on Form 10-K, management carried out an evaluation, under the supervision, and with the participation of, the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). The Company believes that a control system, no matter how well designed and operated, can provide only reasonable assurance, not absolute assurance, that the objectives of the control system are met. Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, the Company's Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were effective at a reasonable assurance level as of October 31, 2013.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company's internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting in accordance with accounting principles generally accepted in the United States. Management evaluates the effectiveness of the Company's internal control over financial reporting using the criteria set forth by the 1992 Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control--Integrated Framework. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as of October 31, 2013. Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of October 31, 2013.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this Annual Report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) within the fourth fiscal quarter ended October 31, 2013, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE OF THE REGISTRANT
(A) IDENTIFICATION OF DIRECTORS
The following table sets forth the names and ages of the Company's directors, as well as the year each individual became a director, and the position(s) with the Company, if any, held by each individual.
NAME AGE DIRECTOR SINCE DIRECTOR POSITION
AND OFFICERS
WITH COMPANY
--------------------------------------------------------------------------------
G.S. Beckwith Gilbert 71 1997 Chairman of the Board and
Director
John R. Keller 73 1997 Executive Vice President
and Director
Bruce N. Whitman 80 1997 Chairman of the Executive
Committee an Director
Paul L. Graziani 56 1997 Chairman of the Audit
Committee and Director
James T. Barry 52 2000 President, Chief
Executive Officer, and
Director
James J. Morgan 71 2005 Chairman of the
Compensation Committee
and Director
Kurt J. Ekert 43 2009 Director
Peter L. Bloom 56 2009 Director
Richard L. Haver 67 2010 Director
Robert M. Stafford 71 2013 Director
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Each director is elected to serve until the succeeding Annual Meeting of Stockholders and until his successor is duly elected and qualified.
(B) IDENTIFICATION OF EXECUTIVE OFFICERS
The following table sets forth the names and ages of the Company's executive officers, as well as the office(s) held by each individual, and the year in which each executive officer began to serve in such capacity.
NAME AGE OFFICER SINCE OFFICER POSITION
AND OFFICERS
WITH COMPANY
--------------------------------------------------------------------------------
James T. Barry 52 1998 President, Chief
Executive Officer, and
Director
Jeffrey P. Devaney 54 2004 Chief Financial Officer,
Treasurer, and Secretary
John R. Keller 73 1967 Executive Vice President
and Director
Dr. James A. Cole 73 1988 Senior Vice President of
Research and Development
Matthew H. Marcella 56 2003 Vice President of
Software Development
Ron A. Dunsky 51 2003 Senior Vice President of
Marketing
Thomas S. White 58 2011 Executive Vice President
of Operations
William S. Leber, Jr. 54 2012 Vice President, Air
Traffic Innovations
Keith D. Wichman 49 2012 Vice President, Airline
Solutions and Product
Management
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Each officer is elected to serve at the discretion of the Board of Directors.
(C) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES
None.
(D) FAMILY RELATIONSHIP
None.
(E) BUSINESS EXPERIENCE
The following sets forth the business experience of the Company's directors and executive officers:
G.S. Beckwith Gilbert Mr. Gilbert has continued to serve as the
Company's Chairman of the Board since his election
in 1997. Mr. Gilbert was appointed Chief Executive
Officer in October of 1998 and served as such until
his retirement from that post on February 1, 2003.
Mr. Gilbert is also President and Chief Executive
Officer of Field Point Capital Management Company,
a merchant-banking firm, a position he has held
since 1988. He is a Director of Davidson Hubeny
Brands. Mr. Gilbert is also Chairman Emeritus of
the Board of Fellows of Harvard Medical School, a
Director of the Yale Cancer Center, a Director of
the Cancer Research Institute, and a member of the
Council on Foreign Relations. Mr. Gilbert's current
service as Chairman of the Board of the Company and
prior service as Chief Executive Officer of the
Company, as well as his prior board and executive
management experience, allow him to provide
in-depth knowledge of the Company and other
valuable insight and knowledge to the Board.
Bruce N. Whitman Mr. Whitman has been a Director of the Company
since 1997 and is the Chairman of the Executive
Committee. Mr. Whitman joined FlightSafety
International in 1961 as Assistant to the President
after two years as Senior Executive Assistant with
the National Business Aircraft Association. Later
that year, he was elected Vice President and a
Director of the company. In 1962, he was named
Executive Vice President. He was promoted to his
present position of Chairman, CEO & President,
FlightSafety International in 2003. He served on
the Associate Membership Advisory Council of the
National Business Aircraft Association and Board of
Governors and Executive Committees of the
FlightSafety Foundation and the Civil Air Patrol.
He is also a former Director and Chairman of the
Audit Committee of Petroleum Helicopters and
chaired the Nominating, Compensation and Governance
Committees of the Aviall Board of Directors. He was
also a member of the Board of Directors of
FlightSafety Boeing Training International, the
Board of Governors of the Aerospace Industries
Association, a Director of the General Aviation
Manufacturers Association; and an Executive
Committee member of NATA's Air Charter Safety
Foundation. Bruce is currently Chairman of the
Board of the Congressional Medal of Honor
Foundation; Chairman of the Audit Committee and
member of the Executive Committee of ORBIS
International; and a Director Emeritus of the
Smithsonian National Air and Space Museum. He is
Vice Chairman of the Air Force Academy Falcon
Foundation; immediate past President and a Director
of The Wings Club; a Trustee and member of the
Executive Committee of the National World War II
Museum and Trustee of Kent School; member of the
Harvard Medical School Immunology Advisory Council;
member of the Boards of Business Executives for
National Security, Corporate Angel Network and the
USO of Metropolitan New York. Mr. Whitman's
knowledge of the Company through his service as a
Director and Chairman of the Executive Committee,
as well as his extensive participation as a member
of business and charitable organization boards,
enable him to bring valuable insights and knowledge
to the Board.
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Paul L. Graziani Mr. Graziani has been a Director of the Company
since 1997 and is the Chairman of the Audit
Committee. He currently serves as Chief Executive
Officer of Analytical Graphics, Inc. (AGI), a
leading producer of commercially available analysis
and visualization software for the aerospace,
defense, and intelligence communities, a position
he has held since January 1989. Until March 2009,
he also served as AGI's President. In recent times,
Mr. Graziani has been recognized as "CEO of the
Year" by the Philadelphia region's Eastern
Technology Council and the Chester County Chamber
of Business and Industry; "Entrepreneur of the
Year" regional winner by Ernst & Young; and
"Businessman of the Year" by the local Great Valley
Regional Chamber of Commerce. He sits on the Boards
of Directors of the United States Geospatial
Intelligence Foundation (USGIF) and Federation of
Galaxy Explorers (FOGE), and is a member of the
board of governors of the Civil Air Patrol (CAP).
He is an associate fellow of the American Institute
of Aeronautics and Astronautics (AIAA) and has
formerly served on the advisory board for Penn
State Great Valley. After fulfilling his board
tenure, he was recently elected to the honorary
position of Life Director of The Space Foundation.
In 2009 AGI was named a "Top Small Workplace" by
the Wall Street Journal and the non-profit
organization Winning Workplaces. Mr. Graziani's
knowledge of the Company through his service as a
Director of the Company, as well as his experience
as CEO of a software company, allow him to bring
valuable insight and knowledge to the Board.
James J. Morgan Mr. Morgan has been a Director of the Company since
September 12, 2005 and is the Chairman of the
Compensation Committee. Mr. Morgan is also a
partner in the New York City based private equity
firm Jacobson Partners, a position he has held
since September 2001. Mr. Morgan retired in 1997 as
President and Chief Executive Officer of Philip
Morris U.S.A. Mr. Morgan's knowledge of the Company
through his service as a Director of the Company,
as well as his prior experience as a CEO, allows
him to bring valuable insight and knowledge to the
Board.
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Kurt J. Ekert Mr. Ekert has been a Director of the Company since
September 10, 2009. Mr. Ekert is currently the
Chief Commercial Officer, Travelport (including
brands Galileo and Worldspan), a Blackstone
portfolio company, and has held this position since
2010, which includes global responsibility for
sales, customer engagement, product, marketing,
pricing, supplier services/content, and operations.
From 2006 to 2010, Mr. Ekert was Chief Operating
Officer, GTA by Travelport, a global, multi-channel
travel intermediary focused on hotels and travel
services, with 31 offices in EMEA, APAC, and the
Americas. Prior to joining GTA, he was Senior Vice
President, Travelport Supplier Services, where he
oversaw supplier sales, strategy, and content for
the Travelport Americas business and consumer
groups including Galileo and Orbitz Worldwide. At
Travelport, he also has held the positions of Group
Vice President, Strategy and Business Development,
and Chief Operating Officer, Travelport/Orbitz for
Business. Prior to joining Travelport, Mr. Ekert's
experience in the travel industry included a number
of senior finance roles at Continental Airlines.
Before Continental, he spent four years as an
active duty U.S. Army officer. Mr. Ekert received a
B.S. from the Wharton School of the University of
Pennsylvania and a MBA from the University of South
Carolina. Mr. Ekert's knowledge of the Company
through his service as a Director of the Company,
as well as his executive management and business
experience in the travel industry, allow him to
bring valuable insight and knowledge to the Board.
Peter L. Bloom Mr. Bloom has been a Director of the Company since
December 10, 2009. Mr. Bloom is currently an
Advisory Director at General Atlantic, where he has
worked since 1996. As a Managing Director at
General Atlantic, he was responsible for technology
due diligence on prospective investments and
assistance to the CEO and senior management teams
of portfolio companies on technology strategy and
guidance on emerging technology trends. Prior to
joining General Atlantic, Mr. Bloom spent thirteen
years at Salomon Brothers in a variety of roles in
both technology and fixed income sales and trading.
He received the Carnegie Mellon/AMS Achievement
Award in Managing Information Technology for his
work managing the technology implementation of a
new distributed computing architecture that
supported the company's global business operations.
He graduated from Northwestern University in 1978
with a B.A. in Computer Studies and Economics. He
is a member of Business Executives for National
Security and an Associate Founder of Singularity
University. He is also a member of the FCC
Technical Advisory Council. He is currently the
Chairman of DonorsChoose, which was named the most
innovative charity in America by Stanford Business
School and Amazon. Mr. Bloom is also the co-founder
and Chairman of Peak Rescue Institute. He is a
member of the board of The Food Bank for New York
City and the Cancer Research Institute and the
Connected Warrior Foundation. Mr. Bloom's knowledge
of the Company through his service as a Director of
the Company, as well as his executive management
and business experience and technology expertise,
allow him to bring valuable insight and knowledge
to the Board.
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Richard L. Haver Mr. Haver has been a Director of the Company since
October 8, 2010. Mr. Haver retired from Northrop
Grumman Corporation in December 2010 following 10
years of service with Northrop and the TRW
component acquired by Northrop in 2002. His
position at Northrop Grumman was Vice President for
Intelligence Programs. He earned a B.A. degree in
History from Johns Hopkins University in 1967. He
served on active duty in the U.S. Navy from 1967 to
1973. In 1973, Mr. Haver became a civilian
intelligence analyst in the Anti-Submarine Warfare
Systems branch at the Naval Intelligence Support
Center. In 1976, he was selected as a department
head at the Navy Field Operational Intelligence
Office (NFOIO), and the next year became the
Technical Director of the Naval Ocean Surveillance
Information Center. He subsequently held the senior
civilian position at NFOIO, serving as Technical
Director until assuming the position of Special
Assistant to the Director of Naval Intelligence in
1981. He was selected as Deputy Director of Naval
Intelligence in June 1985, a position he held until
1989. Mr. Haver was selected by Secretary of
Defense Dick Cheney in July 1989 to the position of
Assistant to the Secretary of Defense for
Intelligence Policy. From 1992 to 1995, he served
as the Executive Director for Intelligence
Community Affairs. In 1998, he assumed the duties
of Chief of Staff of the National Intelligence
Council and Deputy to the Assistant Director of
Central Intelligence for Analysis and Production.
In 1999, Mr. Haver joined TRW as Vice President and
Director, Intelligence Programs. He led business
development and marketing activities in the
intelligence market area for their Systems &
Information Technology Group. He also served as
liaison to the group's strategic and tactical C3
business units, as well as TRW's Telecommunications
and Space & Electronics groups. Mr. Haver was
selected by Vice President Cheney to head the
Administration's Transition Team for Intelligence
and then selected by Secretary of Defense Donald
Rumsfeld as the Special Assistant to the Secretary
of Defense for Intelligence. He returned to the
private sector in 2003. Mr. Haver is now consulting
to both government and private industry associated
with the National Security and Intelligence fields,
as well as volunteer work, and service on various
boards and panels. Mr. Haver's knowledge of the
Company through his service as a Director of the
Company, as well as his executive management and
business experience in the intelligence field,
allow him to bring valuable insight and knowledge
to the Board.
Robert M. Stafford Mr. Stafford has been a Director of the Company
since June 12, 2013. Mr. Stafford is currently the
Chairman and CEO of Stafford Capital Management,
where he has worked since 1986, and the Managing
Partner of Pacific Management Ltd., where he has
also worked since 1986. Mr. Stafford received a
bachelor's degree from Princeton University in 1963
and an MBA from Stanford Graduate School of
Business in 1968. Mr. Stafford's extensive
financial experience allows him to bring valuable
insight and knowledge to the Board.
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John R. Keller Mr. Keller serves as Executive Vice President of
the Company, a position he has held since the
Company's inception in 1967 as one of the
co-founders. Mr. Keller has also been a Director of
the Company since 1997. Mr. Keller received his
bachelor's and master degrees in electrical
engineering from New York University in 1960 and
1962, respectively. Mr. Keller's knowledge of the
Company through his service as a Director and
Executive Vice President of the Company allow him
to bring valuable insight and knowledge to the
Board.
James T. Barry Mr. Barry was named President of the Company on
April 14, 2003 and Chief Executive Officer on
February 1, 2003. Since Mr. Barry joined the
Company in 1998, he has held the positions of Chief
Operating Officer, Chief Financial Officer,
Secretary, and Executive Vice President. Mr. Barry
has also been a Director of the Company since 2000.
From 1989 to 1998, he was with DIANON Systems,
Inc., most recently as Vice President of Marketing.
Prior to DIANON, Mr. Barry was an officer in the
United States Marine Corps. Mr. Barry's knowledge
of the Company through his service as a Director,
President, and Chief Executive Officer of the
Company allow him to bring valuable insight and
knowledge to the Board.
Dr. James A. Cole Dr. Cole currently serves as Senior Vice President
and the Director of Research and Development of the
Company, a position he has held since July 1988.
Dr. Cole earned a Ph.D. in physics from Johns
Hopkins University in 1966. He is a current member
of the American Association for the Advancement of
Science, American Physical Society, Association for
Computing Machinery, Institute of Electrical and
Electronic Engineers and IEEE Computer Society. Dr.
Cole has been with the Company since 1974.
Jeffrey P. Devaney Mr. Devaney joined the Company as Chief Financial
Officer, Treasurer, and Secretary on June 14, 2004.
Prior to joining the Company, Mr. Devaney was the
Chief Financial Officer at Cierant Corporation from
2002 to 2004. From 2000 to 2001, he was a
Controller at SageMaker, Inc. From 1995 to 2000, he
was the Controller at Information Management
Associates, Inc.
Matthew H. Marcella Mr. Marcella was named Vice President - Software
Development on January 15, 2003. Mr. Marcella
joined the Company in 2001 from Cityspree Inc.,
where he served as lead software architect from
2000 to 2001. From 1996 to 2000, he was a Vice
President at Deutsche Bank and Nomura Securities.
From 1995 to 1996, he was a Technical Officer at
UBS Securities.
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Ron A. Dunsky Mr. Dunsky was named Senior Vice President and
General Manager, Worldwide Airports and Corporate
Aviation for PASSUR Aerospace, in January 2012. Mr.
Dunsky joined PASSUR Aerospace in February 2001, as
Director of Marketing and New Product Development.
In May of 2003, he was named Vice President,
Marketing and New Product Development. Prior to
joining PASSUR Aerospace, Mr. Dunsky was Senior
Editor with the New York bureau of ABCNews.com,
with a focus on aviation content. Prior to
ABCNews.com, he was a Senior Producer at CNN (New
York Bureau), with special responsibilities for
shaping and managing the network's coverage of the
aviation industry. Prior to CNN, Mr. Dunsky was a
business reporter for the PBS nightly newscast, The
McNeil-Lehrer Newshour, after having first served
as the program's communications director. He began
his career as creative director for one of the
pioneering social marketing firms, Manifest
Communications of Toronto, Canada.
Thomas S. White Mr. White was named Executive Vice President of
Operations on May 4, 2012. He joined the Company in
2007 as a consultant and in 2008 became an employee
and the Director of Air Traffic Management. He was
promoted to Vice President of Air Traffic
Management in 2010 and Senior Vice President of
Technology in 2011. Prior to joining the Company,
Mr. White spent 32 years in government service with
the FAA and the U.S. Military. Between 2002 and
2007 he was a Senior Manager for the FAA in New
York. Before the FAA, he was also a U.S. Army
Special Ops helicopter pilot serving with Task
Force 160th.
William S. Leber, Jr. Mr. Leber joined the Company as Vice President, Air
Traffic Innovations, in February 2012. His
responsibilities include strategy formulation
specifically in international expansion and
strategic alliances. He was formerly a Research
Analyst Principal and Senior Manager for Lockheed
Martin in their Collaborative ATM Practice. As an
airline operations expert, he has been a
participant and leader in Collaborative Decision
Making (CDM) development since the early 1990's. He
was a Chief Flight Dispatcher and worked for
Northwest Airlines and Delta Air Lines for 26
years. He is a member of the FAA's REDAC - NAS
Operations Subcommittee where he was Co-Chair of
the Weather - ATM Integration Work Group. Mr. Leber
is a former Chair of the CDM Future Concepts WG and
a former Co-Chair of ATA's overall CDM effort. He
is also the former President and Co-founder of the
Airline Dispatchers Federation, a non-union
professional association.
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Keith D. Wichman Mr. Wichman joined the Company as Vice President,
Airline Solutions and Product Management in
December 2012. In February 2013, he was promoted to
Vice President and General Manager, Global Airline
Solutions. Previously, he served at GE Aviation for
14 years as a technical expert and business leader
for avionics, airline operations, and Air Traffic
Management. He was Chief Engineer of GE's Flight
Management Systems product line and Director of ATM
and Airline Efficiency Services. Previously, Mr.
Wichman served 13 years as a lead Flight Controls
and Handling Qualities researcher at NASA-Dryden
Flight Research Center in California, followed by 3
years at Charles Stark Draper Laboratory in
Massachusetts. He holds Bachelor's and Master's
degrees in Aerospace Engineering from the
University of Cincinnati and the University of
Michigan, respectively. Mr. Wichman is an
instrument Rated Commercial Pilot and held a Flight
Instructor Certificate for 10 years.
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(F) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
The Company knows of no event which occurred during the past ten years and which is described in Item 401(f) of Regulation S-K relating to any director or executive officer of the Company.
(G) IDENTIFICATION OF AUDIT COMMITTEE
Our Board of Directors has appointed an Audit Committee, consisting of three directors. All of the members of the Audit Committee are independent of our Company and management, as independence is defined under applicable Financial Industry Regulatory Authority ("FINRA") rules. The Audit Committee consists of Mr. Graziani, Mr. Whitman and Mr. Ekert.
(H) AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Mr. Graziani, Chairman of the Company's Audit Committee, meets the Securities and Exchange Commission's criteria of an "audit committee financial expert" as set forth in item 407(d)(5)(ii) of Regulation S-K. Mr. Graziani acquired the attributes necessary to meet such criteria by holding positions that provided relevant experience. Mr. Graziani is independent, as defined under applicable FINRA rules.
(I) SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors, executive officers, and 10% stockholders to file reports of ownership and reports of change in ownership of the Company's Common Stock and other equity securities with the Securities and Exchange Commission. Directors, executive officers, and 10% stockholders are required to furnish the Company with copies of all Section 16(a) forms they file. Based on a review of the copies of such reports furnished, the Company believes that during the fiscal year ended October 31, 2013, the Company's directors, executive officers, and 10% stockholders filed on a timely basis all reports required by Section 16(a) of the Exchange Act.
(J) BOARD NOMINATIONS BY SHAREHOLDERS
There have not been any material changes to the procedures by which the Company's shareholders may recommend nominees to the Company's board of directors, as disclosed in the definitive proxy statement on Schedule 14A, filed on February 26, 2013 by the Company with the Securities and Exchange Commission in connection with the Company's 2013 Annual Meeting of Stockholders.
(K) CODE OF ETHICS
The Company hereby incorporates by reference into this Item the information contained under the heading "Code of Ethics" in the Company's definitive proxy statement that will be filed with the Securities and Exchange Commission within 120 days of October 31, 2013 (the "2014 Proxy Statement.")
ITEM 11. EXECUTIVE COMPENSATION
The Company hereby incorporates by reference into this Item the information contained under the heading "Executive Compensation" in the 2014 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The Company hereby incorporates by reference into this Item the information contained under the heading "Security Ownership of Certain Beneficial Owners and Management" in the 2014 Proxy Statement.
For information regarding securities authorized for issuance under the Company's equity compensation plans, see Item 5(d) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) TRANSACTIONS WITH RELATED PERSONS
On May 9, 2011, a new note payable was issued to G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, in the amount of $4,815,000. The note payable bears a maturity date of November 1, 2014 and has an annual interest rate of 6% payable in cash. Interest payments will be made annually on October 31 of each year.
During fiscal year 2012, the Company paid fiscal year 2012 interest to G.S. Beckwith Gilbert of $293,000, representing the entire fiscal year 2012 interest due, thereby meeting the payment requirements of the loan agreement. In August 2012, the Company made a $50,000 principal payment, bringing the principal amount of the note payable due to G.S. Beckwith Gilbert to $4,765,000 on October 31, 2012.
During fiscal year 2013, the Company paid fiscal year 2013 interest to G.S. Beckwith Gilbert of $288,000, representing the entire fiscal year 2013 interest due, thereby meeting the payment requirements of the loan agreement. In the fourth quarter of 2013, the Company made $400,000 in principal payments, bringing the principal amount of the note payable due to G.S. Beckwith Gilbert to $4,365,000 on October 31, 2013.
During the first quarter of fiscal year 2014, the Company made $300,000 in principal payments, bringing the principal amount of the note payable due to G.S. Beckwith Gilbert to $4,065,000.
The Company has received a commitment from G.S. Beckwith Gilbert, dated January 16, 2014, that if the Company, at any time, is unable to meet its obligations through January 16, 2015, G.S. Beckwith Gilbert will provide the necessary continuing financial support to the Company in order for the Company to meet such obligations. Such commitment for financial support may be in the form of additional advances or loans to the Company, in addition to the deferral of principal and/or interest payments due on the existing loans, if deemed necessary. The note payable is secured by the Company's assets.
Effective May 1, 2012, the Company entered into a one-year agreement to sublease space to Field Point Capital Management Company, owned 100% by G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, for 1,300 square feet of office space at an annual rental rate of $52,000, which is the same rate paid by the Company. In fiscal year 2012, the Company received payments of $27,000 from such sublease. In fiscal year 2013, the agreement was terminated as of February 28, 2013 and the Company received payments of $17,000 from such sublease.
(B) DIRECTOR INDEPENDENCE
The Board of Directors had determined, after considering all the relevant facts and circumstances, that all named directors, except for Mr. Gilbert, Mr. Barry, and Mr. Keller, are independent directors, as "independence" is defined in accordance with the FINRA standards.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Company hereby incorporates by reference into this Item the information contained under the heading "Principal Accounting Fees and Services" in the 2014 Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(A) LIST OF DOCUMENTS FILED AS A PART OF THIS ANNUAL REPORT ON FORM 10-K:
PAGE
(1) Index to Consolidated Financial Statements
Included in Part II of This Report:
Report of Independent Registered Public F-1
Accounting Firm - BDO USA, LLP
Consolidated Balance Sheets as of F-2
October 31, 2013 and 2012
Consolidated Statements of F-3
Income for the years ended
October 31, 2013 and 2012
Consolidated Statements of Stockholders' F-4
Equity for the years ended
October 31, 2013 and 2012
Consolidated Statements of F-5
Cash Flows for the years ended
October 31, 2013 and 2012
Notes to Consolidated Financial F-6
Statements
|
(2) Index to Financial Statement Schedule: N/A
Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(C) INDEX TO EXHIBITS
The following exhibits are required to be filed with this Annual Report on Form 10-K by Item 15(a)(3).
EXHIBITS
3.1 The Company's composite Certificate of Incorporation, dated as of
January 24, 1990, is incorporated by reference from our Annual Report
on Form 10-K for the fiscal year ended October 31, 1989.
3.2 The Company's By-laws, dated as of May 16, 1988, are incorporated by
reference to Exhibit 3-14 to our Annual Report on Form 10-K for the
fiscal year ended October 31, 1998.
10.1 The Company's 1988 Bonus Pool Plan is incorporated by reference to
Exhibit 10-1 to our Annual Report on Form 10-K for the fiscal year
ended October 31, 1998.
10.2 The Company's 1988 Stock Option Plan is incorporated by reference to
Exhibit 10-3 to our Annual Report on Form 10-K for the fiscal year
ended October 31, 1998.
10.3 The Company's Amended 1999 Stock Incentive Plan is incorporated by
reference to Exhibit 10.3 of our Report on Form 8-K filed on April
17, 2006.
10.4 Severance Agreement with Yitzhak N. Bachana effective October 2, 1998
is incorporated by reference from our Form 8-K, dated October 13,
1998.
10.5 Letter of Agreement for employment services, dated December 28, 1999,
between the Company and Ken J. McNamara is incorporated by reference
to Exhibit 10.5 to our Annual Report on Form 10-K for the fiscal year
ended October 31, 1999.
10.6 Letter of Agreement for employment services, dated September 5, 2002,
between the Company and Delon Dotson is incorporated by reference to
Exhibit 99.1 to our Form 8-K, dated September 12, 2002.
10.7 Debt Agreement, dated November 1, 2003, between the Company and G.S.
Beckwith Gilbert is incorporated by reference to Exhibit 10-1 to our
Form 8-K, dated January 23, 2004.
10.8 Debt Extension Agreement, dated as of November 1, 2004, between the
Company and G.S. Beckwith Gilbert is incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K on February 1, 2005.
10.9 Debt Extension Agreement, made as of November 1, 2005, between the
Company and G.S. Beckwith Gilbert, is incorporated by reference to
Exhibit 10.2 to our Current Report on Form 8-K filed on February 6,
2006.
10.10 Debt Extension Agreement, made as of November 1, 2006, between the
Company and G.S. Beckwith Gilbert, is incorporated by reference to
Exhibit 10.2 to our Current Report on Form 8-K filed on January 5,
2007.
|
10.11 Debt Extension Agreement, made as of November 1, 2007, between the
Company and G.S. Beckwith Gilbert is incorporated by reference to
Exhibit 10.3 to our Current Report on Form 8-K filed on January 17,
2008.
10.12 Debt Extension Agreement, made as of November 1, 2008, between the
Company and G.S. Beckwith Gilbert is incorporated by reference to
Exhibit 10.2 to our Current Report on Form 8-K filed on January 28,
2009.
10.13 Form of Securities Purchase Agreement, dated May 9, 2011 is
incorporated by reference to Exhibit 10.1 to our Current Report on
Form 8-K filed on May 9, 2011.
10.14 Debt Conversion Agreement and Secured Promissory Note, dated May 9,
2011 is incorporated by reference to Exhibit 10.2 to our Current
Report on Form 8-K filed on May 9, 2011.
10.15 Amendment No.1 to Secured Promissory Note, dated September 6, 2011 is
incorporated by reference to Exhibit 10.1 to our Current Report on
Form 8-K filed on September 7, 2011.
10.16 Commitment of G.S. Beckwith Gilbert, dated March 6, 2013 is
incorporated by reference to Exhibit 10.1 to our Quarterly Report on
Form 10-Q filed on March 14, 2013.
10.17 Commitment of G.S. Beckwith Gilbert, dated June 10, 2013 is
incorporated by reference to Exhibit 10.1 to our Quarterly Report on
Form 10-Q filed on June 13, 2013.
10.18 Commitment of G.S. Beckwith Gilbert, dated September 5, 2013 is
incorporated by reference to Exhibit 10.1 to our Quarterly Report on
Form 10-Q filed on September 13, 2013.
10.19* Commitment of G.S. Beckwith Gilbert, dated January 16, 2014.
21 List of Subsidiaries is incorporated by reference to our Annual
Report on Form 10-K report for the fiscal year ended October 31,
1981.
23.1* Consent of Independent Registered Public Accounting Firm.
31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
or 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
or 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2* Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
101.ins** XBRL Instance 101.xsd** XBRL Schema 101.cal** XBRL Calculation 101.def** XBRL Definition 101.lab** XBRL Label 101.pre** XBRL Presentation ---------------------- |
* Filed herewith. ** Furnished herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
PASSUR AEROSPACE, INC.
DATED: JANUARY 29, 2014 By: /s/ James T. Barry
------------------
James T. Barry
President and Chief
Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
DATED: JANUARY 29, 2014 /s/ James T. Barry
------------------
James T. Barry
President and Chief Executive
Officer
(Principal Executive Officer)
DATED: JANUARY 29, 2014 /s/ Jeffrey P. Devaney
----------------------
Jeffrey P. Devaney
Chief Financial Officer,
Treasurer, and Secretary
(Principal Financial and
Accounting Officer)
|
SIGNATURES (CONTINUED)
DATED: JANUARY 29, 2014 /s/ G.S. Beckwith Gilbert
-------------------------
G.S. Beckwith Gilbert
Chairman of the Board and Director
DATED: JANUARY 29, 2014 /s/ John R. Keller
------------------
John R. Keller
Executive Vice President and Director
DATED: JANUARY 29, 2014 /s/ Bruce N. Whitman
--------------------
Bruce N. Whitman
Chairman of the Executive Committee and
Director
DATED: JANUARY 29, 2014 /s/ Paul L. Graziani
--------------------
Paul L. Graziani
Chairman of the Audit Committee and
Director
DATED: JANUARY 29, 2014 /s/ James J. Morgan
-------------------
James J. Morgan
Chairman of the Compensation Committee
and Director
DATED: JANUARY 29, 2014 /s/ Kurt J. Ekert
-----------------
Kurt J. Ekert
Director
DATED: JANUARY 29, 2014 /s/ Peter L. Bloom
------------------
Peter L. Bloom
Director
DATED: JANUARY 29, 2014 /s/ Richard L. Haver
--------------------
Richard L. Haver
Director
DATED: JANUARY 29, 2014 /s/ Robert M. Strafford
-----------------------
Robert M. Stafford
Director
|
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
PASSUR Aerospace, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of PASSUR Aerospace, Inc. and Subsidiary as of October 31, 2013 and 2012 and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 PASSUR Aerospace, Inc. and Subsidiary at October 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP ------------------- Melville, New York January 29, 2014 |
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Balance Sheets
October 31, 2013 and 2012
2013 2012
---------------- ---------------
ASSETS
Current assets:
Cash $ 454,650 $ 261,053
Accounts receivable, net 1,637,844 1,475,665
Deferred tax asset, current 926,771 584,562
Prepaid expenses and other current assets 174,960 130,830
---------------- ---------------
Total current assets 3,194,225 2,452,110
PASSUR(R) Network, net 5,337,740 6,065,222
Capitalized software development costs, net 6,126,868 5,543,402
Property, plant and equipment, net 1,346,868 1,044,463
Deferred tax asset, non-current 2,121,136 2,817,144
Other assets 152,868 193,426
---------------- ---------------
TOTAL ASSETS $ 18,279,705 $ 18,115,767
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 561,559 $ 668,238
Accrued expenses and other current liabilities 722,898 727,647
Deferred revenue, current portion 1,931,374 1,478,141
---------------- ---------------
Total current liabilities 3,215,831 2,874,026
Deferred revenue, less current portion 135,722 189,944
Notes payable - related party 4,364,880 4,764,880
---------------- ---------------
7,716,433 7,828,850
COMMITMENT AND CONTINGENCIES
Stockholders' equity:
Preferred shares - authorized 5,000,000 shares,
par value $.01 per share; none issued
or outstanding -- --
Common shares - authorized 10,000,000 shares,
par value $.01 per share; issued 8,041,001 and
outstanding 7,344,501 in fiscal year 2013;
issued 7,889,640 and outstanding 7,193,140
in fiscal year 2012 80,410 78,896
Additional paid-in capital 15,113,495 15,120,556
Accumulated deficit (3,007,158) (3,289,060)
---------------- ---------------
12,186,747 11,910,392
Treasury stock, at cost, 696,500 shares
in fiscal years 2013 and 2012 (1,623,475) (1,623,475)
---------------- ---------------
Total stockholders' equity 10,563,272 10,286,917
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,279,705 $ 18,115,767
================ ===============
|
See accompanying notes to consolidated financial statements.
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended October 31, 2013 and 2012
2013 2012
-------------- -----------------
REVENUES $ 11,035,058 $ 12,507,382
COST AND EXPENSES:
Cost of revenues 5,751,450 5,848,657
Research and development 635,316 481,788
Selling, general, and administrative expenses 3,723,233 4,798,951
-------------- -----------------
10,109,999 11,129,396
-------------- -----------------
INCOME FROM OPERATIONS 925,059 1,377,986
Interest expense - related party 287,564 292,958
-------------- -----------------
Income before income taxes 637,495 1,085,028
Income tax expense (benefit), net 355,593 (1,776,449)
-------------- -----------------
NET INCOME $ 281,902 $ 2,861,477
============== =================
Net income per common share - basic $ .04 $ .40
============== =================
Net income per common share - diluted $ .04 $ .36
============== =================
Weighted average number of common
shares outstanding - basic 7,263,626 7,184,927
============== =================
Weighted average number of common
shares outstanding - diluted 7,765,937 7,994,261
============== =================
|
See accompanying notes to consolidated financial statements.
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
Years Ended October 31, 2013 and 2012
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
SHARES STOCK CAPITAL DEFICIT STOCK EQUITY
Balance at November 1, 2011 7,175,140 $ 78,716 $ 14,860,163 $ (6,150,537) $ (1,623,475) $ 7,164,867
Exercise of common stock options 18,000 180 9,720 9,900
Stock-based compensation expense 250,673 250,673
Net income 2,861,477 2,861,477
----------- ----------- -------------- ------------ ------------ -------------
Balance at October 31, 2012 7,193,140 $ 78,896 $ 15,120,556 $ (3,289,060) $ (1,623,475) $ 10,286,917
Exercise of common stock options,
net of surrender of shares to pay taxes 151,361 1,514 (282,431) (280,917)
Stock-based compensation expense 275,370 275,370
Net income 281,902 281,902
----------- ----------- -------------- ------------ ------------ -------------
Balance at October 31, 2013 7,344,501 $ 80,410 $ 15,113,495 $ (3,007,158) $ (1,623,475) $ 10,563,272
=========== =========== ============== ============ ============ =============
See accompanying notes to consolidated financial statements.
|
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended October 31, 2013 and 2012
2013 2012
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 281,902 $ 2,861,477
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,589,668 2,456,392
Provision (benefit) for deferred taxes 353,799 (1,811,487)
Recovery of doubtful accounts receivable (12,969) (13,447)
Stock-based compensation expense 275,370 250,673
Changes in operating assets and liabilities:
Accounts receivable (149,209) (59,697)
Prepaid expenses and other current assets (44,132) 190,513
Other assets 40,558 15,504
Accounts payable (106,679) (159,915)
Accrued expenses and other current liabilities (4,749) (113,083)
Deferred revenue 399,011 198,512
------------- ------------
Total adjustments 3,340,668 953,965
------------- ------------
Net cash provided by operating activities 3,622,570 3,815,442
CASH FLOWS FROM INVESTING ACTIVITIES
PASSUR(R) Network, net (494,123) (1,159,064)
Capitalized software development costs, net (1,692,599) (1,886,422)
Property, plant and equipment, net (561,334) (768,258)
------------- ------------
Net cash used in investing activities (2,748,056) (3,813,744)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable - related party (400,000) (50,000)
Surrender of shares to pay withholding taxes (283,747) --
Proceeds from exercise of stock options 2,830 9,900
------------- ------------
Net cash used in financing activities (680,917) (40,100)
------------- ------------
Increase (decrease) in cash 193,597 (38,402)
Cash - beginning of year 261,053 299,455
------------- ------------
Cash - end of year $ 454,650 $ 261,053
============= ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest - related party $ 288,000 $ 293,000
Income taxes $ 41,000 $ 31,000
See accompanying notes to consolidated financial statements.
|
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements
October 31, 2013
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company is a leading aviation business intelligence company that provides predictive analytics and decision-support technology for the aviation industry based on its unique, proprietary technology and real-time accessible databases, supported by a number of leading industry experts, and a proven management team, experienced in the use of Big Data. The Company believes it operates in one operating segment.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of PASSUR Aerospace, Inc. and its wholly-owned Subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation.
Certain financial information in the footnotes has been rounded to the nearest thousand for presentation purposes.
REVENUE RECOGNITION POLICY
The Company recognizes revenue in accordance with FASB ASC 605-15, ("Revenue
Recognition in Financial Statements") which requires that four basic criteria
must be met before revenues can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services have been rendered;
(3) the fee is fixed and determinable; and (4) collectability is reasonably
assured.
The Company's revenues are generated by selling: (1) subscription-based, real-time decision and solution information; (2) professional services; and (3) annual maintenance contracts for PASSUR(R) Radar Systems.
Revenues generated from subscription and maintenance agreements are recognized over the term of such executed agreements and/or customer's receipt of such data or services. In accordance with ASC 605-15, we recognize revenue when persuasive evidence of an arrangement exists which is evidenced by a signed agreement, the service has been deployed, as applicable, to its hosted servers, the fee is fixed and determinable, and collection of the resulting receivable is reasonably assured. The Company records revenues pursuant to individual contracts on a month-by-month basis, as outlined by the applicable agreement. In many cases, the Company may invoice respective customers in advance of the specified period, either quarterly or annually, which coincides with the terms of the agreement. In such cases, the Company will defer at the close of each month and/or reporting period, any subscription or maintenance revenues invoiced for which services have yet to be rendered, in accordance with ASC 605-15. Revenues generated by professional services are recognized over the term of such executed agreements or as provided.
From time to time, the Company will enter into an agreement with a customer to receive a one-time fee for rights including, but not limited to, the rights to use certain data at an agreed upon location(s) for a specific use and/or for an unlimited number of users. These fees are recognized as revenue ratably over the term of the agreement or expected useful life of such arrangement, whichever is longer, but typically five years.
Deferred revenue is classified on the Company's balance sheet as a liability until such time as revenue from services is properly recognized as revenue in accordance with ASC 605-15 and the corresponding agreement.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
SUBSEQUENT EVENTS
Management has evaluated subsequent events after the balance sheet date, through the issuance of the financial statements, for appropriate accounting and disclosure.
ACCOUNTS RECEIVABLE
The Company has a history of successfully collecting all amounts due from its customers under the original terms of its subscription agreements without making concessions. The Company records accounts receivables for agreements where amounts due from customers are contractually required and are non-refundable. Net accounts receivable is comprised of the monthly, quarterly, or annual committed amounts due from customers pursuant to the terms of each respective customer's agreement. Account receivable balances include amounts attributable to deferred revenues, as well as initial set-up fees.
The provision for doubtful accounts was $29,000 and $80,000 as of October 31, 2013 and 2012, respectively. The Company monitors its outstanding accounts receivable balances and believes the provision is reasonable.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of the related assets. Amortization of leasehold improvements is calculated on a straight-line basis over the estimated useful life of the improvements or the term of the lease, including renewal options expected to be exercised, whichever is shorter.
PASSUR(R) NETWORK
The PASSUR(R) Network is comprised of PASSUR(R) Systems, which include the direct and indirect production, shipping, and installation costs incurred for each PASSUR(R) System, which are recorded at cost, net of accumulated depreciation. Depreciation is charged to cost of revenues and is calculated using the straight-line method over the estimated useful life of the asset, which is estimated at seven years. PASSUR(R) Systems which are not installed, raw materials, work-in-process, and finished goods components are carried at cost and no depreciation is recorded.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company follows the provisions of ASC 350-40, "Internal Use Software." ASC 350-40 provides guidance for determining whether computer software is internal-use software, and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company expenses all costs incurred during the preliminary project stage of its development, and capitalizes the costs incurred during the application development stage. Costs incurred relating to upgrades and enhancements to the software are capitalized if it is determined that these upgrades or enhancements add additional functionality to the software. Costs incurred to improve and support products after they become available are charged to expense as incurred. The Company capitalized $1,693,000 as of October 31, 2013 and $1,886,000 as of October 31, 2012. The Company records amortization of the software on a straight-line basis over the estimated useful life of the software, typically five years.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. Impairment is recognized to the extent the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value. Assets to be disposed of are carried at the lower of their carrying value or fair value, less costs to sell. The Company evaluates the periods of amortization continually in determining whether later events and circumstances warrant revised estimates of useful lives. If estimates are changed, the unamortized costs will be allocated to the increased or decreased number of remaining periods in the revised life.
COST OF REVENUES
Costs associated with subscription and maintenance revenues consist primarily of direct labor, depreciation of PASSUR(R) Network Systems, amortization of Capitalized software development costs, communication costs, data feeds, allocated overhead costs, travel and entertainment, and consulting fees. Also included in cost of revenues are costs associated with upgrades to PASSUR(R) Systems necessary to make such systems compatible with new software applications, as well as the ordinary repair and maintenance of existing PASSUR(R) Systems. Additionally, cost of revenues in each reporting period is impacted by: (1) the number of PASSUR(R) Systems added to the Network, which include the cost of production, shipment, and installation of these assets, which are capitalized to the PASSUR(R) Network; and (2) capitalized costs associated with software development projects. Both of these are referred to as "Capitalized Assets", and are depreciated and/or amortized over their respective useful lives and charged to cost of revenues.
INCOME TAXES
The Company follows the liability method of accounting for income taxes. Deferred income taxes are recorded to reflect the temporary differences in the tax bases of the assets or liabilities and their reported amounts in the financial statements. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company's financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount currently estimated to be realized. The Company follows ASC 740, "Income Taxes", where tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in tax returns that do not meet these recognition and measurement standards. At October 31, 2013, the Company did not have any uncertain tax positions. As permitted by ASC 740-10, the Company's accounting policy is to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in its income tax provision.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
NET INCOME PER SHARE INFORMATION
Basic net income per share is computed based on the weighted average number of shares outstanding. Diluted net income per share is based on the sum of the weighted average number of common shares outstanding and common stock equivalents. Shares used to calculate net income per share for fiscal years 2013 and 2012 are as follows:
2013 2012
------------ --------------
Basic weighted average shares outstanding 7,263,626 7,184,927
Effect of dilutive stock options 502,311 809,334
------------ --------------
Diluted weighted average shares outstanding 7,765,937 7,994,261
============ ==============
Weighted average shares which are not included
in the calculation of diluted net income
per share because their impact is
anti-dilutive
Stock options 325,000 192,500
============ ==============
|
DEFERRED REVENUE
Deferred revenue includes amounts attributable to advances received on customer agreements, which may be prepaid either annually or quarterly. Revenues from such customer agreements are recognized as income ratably over the period that coincides with the respective agreement.
The Company recognizes initial set-up fee revenues and associated costs on a straight-line basis over the estimated life of the customer relationship period, typically five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts of the Company's cash, receivables, accounts payable, and accrued liabilities approximate their fair values principally because of the short-term nature of these items. The fair value of related party debt is not practicable to determine due primarily to the fact that the Company's related party debt is held by its Chairman and significant shareholder, and the Company does not have any third-party debt with which to compare.
Additionally, on a recurring basis, the Company uses fair value measures when analyzing asset impairments. Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present, and the review indicates that the assets will not be fully recoverable based on the undiscounted estimated future cash flows expected to result from the use of the asset, their carrying values are reduced to estimated fair value.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1.DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company follows FASB ASC 718 "Compensation-Stock Compensation", which requires measurement of compensation cost for all stock-based awards at fair value on date of grant, and recognition of stock-based compensation expense over the service period for awards expected to vest. The fair value of stock options was determined using the Black-Scholes valuation model. Such fair value is recognized as an expense over the service period, net of forfeitures. Stock-based compensation expense was $275,000 and $251,000 in fiscal years 2013 and 2012, respectively, and was primarily included in selling, general, and administrative expenses.
The Company's stock options vest over a period of five years. The fair value for these stock options was estimated at the date of grant using a Black-Scholes stock option pricing model, with the following weighted average assumptions for fiscal years 2013 and 2012; risk-free interest rate of 3.51%, volatility factor of the expected market price of the Company's common stock of 117%, no dividend yield, and a weighted average expected life of the stock options of 6.5 years.
COMPREHENSIVE INCOME
The Company's comprehensive income is equivalent to that of the Company's total net income for fiscal years 2013 and 2012.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of October 31, 2013 and 2012:
ESTIMATED USEFUL LIVES 2013 2012
---------------------------
Leasehold improvements 3-5 years $ 207,000 $ 207,000
Equipment 5-10 years 4,627,000 4,066,000
Furniture and fixtures 5-10 years 538,000 538,000
----------- -----------
5,372,000 4,811,000
Less accumulated depreciation and amortization 4,025,000 3,767,000
----------- -----------
Total $ 1,347,000 $ 1,044,000
=========== ===========
|
The Company recorded depreciation and amortization expense on the assets included in Property, plant and equipment of $259,000 and $95,000 for fiscal years 2013 and 2012, respectively.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. PASSUR(R) NETWORK
As of October 31, 2013 and 2012, the Company had $15,605,000 and $15,136,000 of Company-owned PASSUR(R) Systems capitalized, and $10,267,000 and $9,071,000 of accumulated depreciation related to such costs, resulting in a net asset of $5,338,000 and $6,065,000, respectively. Depreciation is charged to cost of revenues and is calculated using the straight-line method over the estimated useful life of the asset, which is estimated at seven years. PASSUR(R) Systems which are not installed in the PASSUR(R) Network are carried at cost and no depreciation is recorded. The cost of these uninstalled PASSUR(R) Systems amounted to $867,000 and $1,124,000 as of October 31, 2013 and 2012, respectively. The Company capitalized $494,000 and $1,159,000 of costs to the PASSUR(R) Network during fiscal years 2013 and 2012, respectively. Included in the PASSUR(R) Network as of October 31, 2013 and 2012, are $849,000 and $766,000 of costs pertaining to raw material, work-in-process, and finished goods components. Depreciation expense related to the Company-owned PASSUR(R) Network was $1,222,000 and $1,376,000 in fiscal years 2013 and 2012, respectively. The Company did not dispose of any PASSUR(R) Network assets in fiscal years 2013 or 2012.
4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
As of October 31, 2013 and 2012, the Company had $11,034,000 and $9,340,000 of Capitalized software development costs, and $4,907,000 and $3,797,000 of accumulated amortization related to such costs, resulting in a net asset of $6,127,000 and $5,543,000, respectively. Amortization related to capitalized software development projects was $1,109,000 and $985,000 in fiscal years 2013 and 2012, respectively. For the next five years, beginning in fiscal year 2014, future amortization expense for Capitalized software development costs where amortization has commenced, is estimated to approximate $1,176,000, $1,148,000, $1,136,000, $1,010,000, and $645,000. As of October 31, 2013, the Company had $1,012,000 of Capitalized software development costs relating to projects in development which are not yet subject to amortization.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following as of October 31, 2013 and 2012:
2013 2012
----------- -----------
Payroll, payroll taxes, and benefits $ 453,000 $ 438,000
Professional fees 157,000 149,000
License fees -- 50,000
Bonus & commissions 11,000 23,000
Travel expenses 53,000 19,000
Other liabilities 49,000 49,000
----------- -----------
Total $ 723,000 $ 728,000
=========== ===========
|
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. NOTES PAYABLE
On May 9, 2011, a new note payable was issued to G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, in the amount of $4,815,000. The note payable bears a maturity date of November 1, 2014 and has an annual interest rate of 6% payable in cash. Interest payments will be made annually on October 31 of each year.
During fiscal year 2012, the Company paid fiscal year 2012 interest to G.S. Beckwith Gilbert of $293,000, representing the entire fiscal year 2012 interest due, thereby meeting the payment requirements of the loan agreement. In August 2012, the Company made a $50,000 principal payment, bringing the principal amount of the note payable due to G.S. Beckwith Gilbert to $4,765,000 on October 31, 2012.
During fiscal year 2013, the Company paid fiscal year 2013 interest to G.S. Beckwith Gilbert of $288,000, representing the entire fiscal year 2013 interest due, thereby meeting the payment requirements of the loan agreement. In the fourth quarter of 2013, the Company made $400,000 in principal payments, bringing the principal amount of the note payable due to G.S. Beckwith Gilbert to $4,365,000 on October 31, 2013.
During the first quarter of fiscal year 2014, the Company made $300,000 in principal payments, bringing the principal amount of the note payable due to G.S. Beckwith Gilbert to $4,065,000.
The Company has received a commitment from G.S. Beckwith Gilbert, dated January 16, 2014, that if the Company, at any time, is unable to meet its obligations through January 16, 2015, G.S. Beckwith Gilbert will provide the necessary continuing financial support to the Company in order for the Company to meet such obligations. Such commitment for financial support may be in the form of additional advances or loans to the Company, in addition to the deferral of principal and/or interest payments due on the existing loans, if deemed necessary. The note payable is secured by the Company's assets.
7. LEASES
The Company's headquarters, located in Stamford, Connecticut, are subject to a lease through January 31, 2018, at an average annual rental rate of $227,000. The Company's software development and manufacturing facility, located in Bohemia, New York, is subject to a lease through October 31, 2015, at an average annual rental rate of $124,000. These leases provide for additional payments of real estate taxes and other operating expenses over the base amount in the rental agreement. Other short-term operating leases are included below. All other operating leases are under a month-to-month arrangement. Effective May 1, 2012, the Company entered into a one-year agreement to sublease space to Field Point Capital Management Company, owned 100% by G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, for 1,300 square feet of office space at an annual rental rate of $52,000, which is the same rate paid by the Company. In fiscal year 2012, the Company received payments of $27,000 from such sublease. In fiscal year 2013, the agreement was terminated as of February 28, 2013 and the Company received payments of $17,000 from such sublease. Rent expense was $386,000 and $396,000 for fiscal years 2013 and 2012, respectively.
CONTRACTUAL OBLIGATIONS
Fiscal Year Ended October 31: UNDER OPERATING LEASES
--------------------------------------------------------------------------------
2014 401,000
2015 388,000
2016 265,000
2017 270,000
2018 96,000
Thereafter --
-----------
Total minimum contractual obligations $ 1,420,000
===========
|
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES
The Company's provision for income taxes in each fiscal year consists of current federal, state, and local minimum taxes.
A reconciliation of the U.S statutory tax rate to the Company's effective tax rate for fiscal years 2013 and 2012 is as follows:
2013 2012
AMOUNT PERCENT Amount Percent
---------------------------------------------
U.S. statutory tax $ 217,000 34.0% $ 369,000 34.0%
Decrease in valuation allowance -- -- (2,306,000) (212.5)
Permanent differences (1) 77,000 12.1 74,000 6.8
State tax, net of federal benefit 62,000 4.7 64,000 5.9
Other, net -- -- 23,000 2.1
--------- ------ ------------ -------
Income tax expense (benefit), net $ 356,000 55.8% $ (1,776,000) (163.7)%
========= ====== ============ =======
|
(1) Permanent differences are comprised of stock compensation of $63,000 and $56,000, as well as other permanent differences of $14,000 and $18,000 in fiscal years 2013 and 2012, respectively.
The tax effect of temporary differences that give rise to deferred tax assets and liabilities as of October 31, 2013 and 2012 is as follows:
2013 2012
------------ --------------
Deferred tax assets and liabilities:
Net operating loss carry-forward $ 3,665,000 $ 4,263,000
AMT credits -- 15,000
Accrued vacation 115,000 112,000
Allowance for doubtful accounts receivable 11,000 32,000
Stock compensation-nonqualified 111,000 75,000
Depreciation (854,000) (1,095,000)
------------ --------------
Deferred tax assets and liabilities $ 3,048,000 $ 3,402,000
============ ==============
|
In accordance with accounting standards, the Company has not recorded a deferred tax asset related to the net operating losses resulting from the exercise of disqualifying stock options in the accompanying financial statements. The cumulative amount of unrecognized tax benefits from the exercise of stock options at October 31, 2013 was approximately $1,063,000, and if the Company is able to utilize this benefit in the future, it would result in a credit to additional paid-in capital.
F -13
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The income tax expense (benefit) for fiscal years ended October 31, 2013 and 2012 is as follows:
2013 2012
---------- -------------
Current:
Federal $ (14,000) $ 14,000
State 16,000 21,000
---------- -------------
Income tax provision-current 2,000 35,000
Deferred:
Federal 303,000 (1,369,000)
State 51,000 (442,000)
---------- -------------
Total income tax expense (benefit), net $ 356,000 $ (1,776,000)
========== =============
|
At October 31, 2013, the Company had available a federal net operating loss carry-forward of $10,224,000 for income tax purposes, which will expire in various tax years from fiscal year 2020 through fiscal year 2033. The Company evaluates whether a valuation allowance related to deferred tax assets is required each reporting period. A valuation allowance is established if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized. During fiscal year 2012, the Company reversed the remaining valuation allowance of $2,306,000 related to deferred tax assets, as it was determined that it is more likely than not these assets will be realized. This determination was primarily based on cumulative positive earnings in recent years and projected taxable income in the future. In evaluating whether or not to realize a deferred tax asset, the Company considered all available positive and negative evidence, including past operating results and a forecast of future taxable income.
The Company's tax return years that are subject to examination by taxing authorities are fiscal years 1996 through 2005 and fiscal years 2010 through 2013.
9. STOCK OPTIONS
In fiscal year 2009, the Company's Board of Directors approved the Company's 2009 stock option plan, which provides for the granting of stock options for up to 500,000 shares of the Company's common stock. During fiscal year 2010, the plan was amended to provide for the granting of another 500,000 stock option shares, for a total provision of 1,000,000 stock option shares of the Company's common stock as of October 31, 2010. During fiscal year 2011, the plan was amended for the granting of another 500,000 stock option shares, for a total provision of 1,500,000 stock option shares of the Company's common stock as of October 31, 2012 and 2013. The Company's prior stock option plan, which provided for the granting of stock options for up to 2,200,000 shares of the Company's common stock, expired during fiscal year 2009. The stock option's exercise price per share is typically the fair market value of the Company's common stock at the date of grant. Stock options granted may be exercised up to a maximum of ten years from the date of grant; however, individuals who own more than 10% of the Company's common stock must exercise their stock options within five years of the date of the grant, and are exercisable at 110% of the fair market value of the Company's common stock at the date of grant.
The Black-Scholes stock option valuation model was developed for use in estimating the fair value of traded stock options, which have no vesting restrictions and are fully transferable. In addition, stock option valuation models require the input of highly subjective assumptions including expected stock price volatility.
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. In addition, the Company's stock options have characteristics significantly different from those of traded options.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS (CONTINUED)
There were 983,000 shares of common stock reserved for future issuance under the Company's 2009 stock option plan as of October 31, 2013. For fiscal years 2013 and 2012, stock-based compensation expenses of $275,000 and $251,000 was primarily charged to selling, general, and administrative expense, consisting of $28,000 and $41,000 for stock options granted during fiscal year 2013 and $247,000 and $210,000 for stock options granted prior to October 31, 2012 and 2011, respectively. There was $774,000 of unrecognized stock-based compensation costs for book purposes, related to non-vested, stock-based compensation arrangements, expected to be recognized over a weighted average period of 3.05 years as of October 31, 2013. The Company had 287,000 unvested stock options as of October 31, 2013.
Information with respect to the Company's stock options for fiscal years 2013 and 2012 is as follows:
WEIGHTED WEIGHTED AVERAGE
NUMBER OF AVERAGE REMAINING CONTRACTUAL AGGREGATE
STOCK EXERCISE TERM INTRINSIC
OPTIONS PRICE (IN YEARS) VALUE
------------------------------------------------- --------------
Stock options outstanding at November 1, 2011 1,405,500 $ 1.49
Stock options granted in fiscal year 2012 95,000 $ 4.59
Stock options exercised in fiscal year 2012 (18,000) $ .55
Stock options forfeited and expired in fiscal year 2012 (141,000) $ 2.13
-----------
Outstanding at October 31, 2012 1,341,500 $ 1.63
Stock options granted in fiscal year 2013 70,000 $ 3.34
Stock options exercised in fiscal year 2013 (254,000) $ .32
Stock options forfeited in fiscal year 2013 (56,500) $ 1.09
-----------
Stock options outstanding at October 31, 2013 1,101,000 $ 2.07 4.3 $ 1,498,000
=========== ======== ===================== ==============
Stock options exercisable at October 31, 2013 813,700 $ 1.47 2.9 $ 1,457,000
=========== ======== ===================== ==============
|
The weighted average grant date fair value of the Company's stock options granted during fiscal years 2013 and 2012 was $2.94 and $4.04, respectively. The total intrinsic value of stock options exercised was $760,000 and $72,000 during fiscal years 2013 and 2012, respectively.
10. MAJOR CUSTOMERS
The Company's principal business is to provide its customers business intelligence and predictive analytics solutions serving the needs of the aviation industry, primarily airlines, airports, and other aviation related companies. The Company believes it operates in one operating segment. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Credit losses historically have been immaterial.
One customer accounted for 11% or $1,269,000 of total revenues in fiscal year 2013 and two customers accounted for 24% or $3,045,000 of total revenues in fiscal year 2012. In fiscal year 2012, one customer, a U.S. government agency, accounted for 14% of total revenues, or $1,746,000, and another customer accounted for 10% of total revenues, or $1,299,000. During fiscal year 2012, the contract with the U.S. government agency was completed. There were no significant past due accounts receivable balances for these customers as of the fiscal year ended October 31, 2013.
The Company had foreign sales of $245,000 and $139,000 in fiscal years 2013 and 2012, respectively. All sales, including foreign sales, are denominated in U.S. dollars.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. ROYALTY AGREEMENT
The Company was a party to a license agreement, as amended in fiscal year 2001, whereby the Company was granted the exclusive right and license worldwide to manufacture and sell PASSUR(R) Systems for use with airline dispatch systems and in other aircraft flight tracking systems. The Company was also granted an exclusive worldwide license to sell PASSUR(R) Systems and/or data subscriptions for noise applications, dispatch activities, and new applications based on modifications to existing designs. Under the terms of the agreement, the Company paid a royalty based on the number of PASSUR(R) Systems sold and/or installed and generating subscription revenues, subject to a minimum annual royalty of $75,000. During fiscal year 2009, the Company amended the agreement to a fixed fee royalty of $50,000 per year. During fiscal 2013, the remaining license rights to use six patents in various foreign countries, and those relating to the Company's PASSUR(R) System and related technologies expired and the Company paid the final royalty owed. The Company does not anticipate any impact on its business due to the expiration of this agreement since the Company has other issued patents relating to this technology.
EXHIBIT 10.19
FIELD POINT CAPITAL MANAGEMENT COMPANY
ONE LANDMARK SQUARE, SUITE 1900
STAMFORD, CT 06901
January 16, 2014
PASSUR Aerospace, Inc.
One Landmark Square, Suite 1900
Stamford, CT 06901
As Chairman of the Board, as well as the principal shareholder of PASSUR Aerospace, Inc. ("PASSUR Aerospace" or the "Company"), I make the following commitment to the Company with respect to the period from the date of this commitment through January 16, 2015.
Liquidity
I commit that if the Company at any time is unable to meet its obligations through January 16, 2015, that I will provide the necessary continuing financial support to the Company to ensure the Company's ability to operate as a going concern through the period ending January 16, 2015. Such continuing support may take the form of additional loans or advances to PASSUR Aerospace, in addition to the deferral of principal and/or interest payments due on outstanding loans to PASSUR Aerospace as referred to above.
These commitments are not conditional and are irrevocable through the period ending January 16, 2015.
I, G.S. Beckwith Gilbert, having the financial wherewithal to enter into this irrevocable commitment, make the above commitments to the Company and its shareholders.
/s/ G.S. Beckwith Gilbert --------------------------- G.S. Beckwith Gilbert President |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
PASSUR Aerospace, Inc. and Subsidiary
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-161791, 333-156657 and 333-172472) of PASSUR Aerospace, Inc. and Subsidiary of our report dated January 29, 2014, relating to the consolidated financial statements which appears in this Form 10-K.
/s/ BDO USA, LLP ------------------ Melville, New York January 29, 2014 |
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, James T. Barry, certify that:
1. I have reviewed this Annual Report on Form 10-K of PASSUR Aerospace, Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report;
4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.
Date: January 29, 2014
By: /s/ James T. Barry
-------------------
James T. Barry
Chief Executive Officer
|
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Jeffrey P. Devaney, certify that:
1. I have reviewed this Annual Report on Form 10-K of PASSUR Aerospace, Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report;
4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.
Date: January 29, 2014
By: /s/ Jeffrey P. Devaney
-----------------------
Jeffrey P. Devaney
Chief Financial Officer
|
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of PASSUR Aerospace, Inc. (the "Company")
on Form 10-K for the fiscal year ended October 31, 2013 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, James
T. Barry, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By: /s/ James T. Barry
-------------------
James T. Barry
Chief Executive Officer
January 29, 2014
|
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of PASSUR Aerospace, Inc. (the "Company") on Form 10-K for the fiscal year ended October 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey P. Devaney, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By: /s/ Jeffrey P. Devaney
-----------------------
Jeffrey P. Devaney
Chief Financial Officer
January 29, 2014
|