Attached files
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, 2010
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 [ ] 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, 2010 was $3,330,000
The number of shares of common stock, $0.01 par value,
outstanding as of January 12, 2011 was 4,691,448
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 2010 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange Commission
within 120 days of October 31, 2010, 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 data subscriptions from its PASSUR(R) Proprietary
Surveillance Network and to make new sales of its PASSUR(R) and other product
lines (due to potential competitive pressure from other companies or other
products), as well as the current uncertainty in the aviation industry due to
terrorist events, the continued war on terrorism, changes in fuel costs, airline
bankruptcies and consolidations, and economic conditions. 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.
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PART I
ITEM 1. BUSINESS
COMPANY BACKGROUND
PASSUR Aerospace, Inc. (the "Company", "PASSUR(R)", "we", or "our") is a New
York corporation founded in 1967. The Company conducts its business in the
United States, Canada, Europe, and Asia. The Company's offices are located at
One Landmark Square, Stamford, Connecticut, 06901 and 35 Orville Drive, Bohemia,
New York, 11716.
PASSUR Aerospace, Inc. is a business intelligence company which develops
predictive analytics built on proprietary algorithms and on concurrent
integration and simultaneous mining of multiple databases. The Company offers
vertical expertise in the aviation market - providing data consolidation,
information, decision support, predictive analytics, collaborative solutions,
and professional services for aviation operations worldwide.
The Company's principal business is to provide business intelligence and
predictive analytics solutions which save money, enhance operational efficiency,
increase safety and security, and improve the passenger experience. These
analytics are derived from the Company's PASSUR(R) Proprietary Surveillance
Network (the "PASSUR(R) Network") of live flight information, updated every 4.6
seconds, and include decision support software, predictive analytics, and
web-delivered collaborative decision solutions, enhanced by professional
services provided by industry experts.
The Company serves most major airlines (including five of the top six North
American airlines, as well as the top five hub and spoke airlines),
approximately fifty airport customers (including twenty-two of the top thirty
North American airports), and approximately two hundred corporate aviation
customers, as well as the U.S. government.
The Company believes its predictive analytics save its customers substantial
costs annually by enabling preemptive decision making and more effective
operational planning. The PASSUR(R) System simultaneously scans, correlates, and
pulls information from the Company's PASSUR(R) Network together with multiple
additional government and private databases.
The PASSUR(R) Network has one hundred and fifty-four Company-owned PASSUR(R)
Radar Systems, covering ninety-eight of the top one hundred North American
airports. Other PASSUR(R)s are located in Europe and Asia. Flight tracks are
updated every 4.6 seconds, thereby providing a system which is user-friendly and
useful for decision-making.
The Company delivers these tools primarily on "web-dashboards," - a single page
or screen which aggregates many different sets of information into a simplified
presentation of performance indicators and exception alerts to support quick
decisions and information useful in predicting future situations. Almost all of
the PASSUR(R) solutions have a live or real-time component, and most also
include alerts, decision support, collaborative components, immediate playback
or review, as well as analysis. The PASSUR(R) products are protected by multiple
patents and patent pending applications.
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PASSUR(R) CORE CAPABILITIES
INTEGRATED SURVEILLANCE NETWORK
The Company operates one of the most extensive private aircraft and airspace
surveillance networks in the world. The 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.
INTEGRATED AVIATION DATABASE
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. 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.
o Archiving of years of historical data: 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 to specific conditions and required
action only when operations reach certain user-defined thresholds - thereby
preventing information overload.
COLLABORATIVE CAPABILITIES
Many PASSUR(R) solutions include a collaborative layer - tools which allow for
instant information sharing, coordination of effort, and a common operating
picture across a wide range of users in the aviation community.
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SUBJECT MATTER EXPERTS
The Company has a deep bench of experienced airline, air traffic, airport
intelligence, 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
processing complex, live aviation data feeds into robust decision support
software solutions.
SPECIFIC PRODUCTS AND SERVICES
The Company offers a wide array of products and services, including:
1. Collaborative Web Solutions:
These solutions provide instant access to critical information within and
between organizations, and offers capabilities designed to facilitate
communication and coordinated action from common situational awareness. These
organizations form the foundation of our PASSUR(R) Customer Network.
a. PASSUR(R) OPSnet(TM), patent pending, is an internet-based application
designed to improve airport/airline/Federal Aviation Administration
coordination through instant communication, information sharing, and
collaborative decision making among all parties during all weather
conditions, and especially during costly disruptions caused by weather,
security events, and emergencies.
b. PASSUR(R) Departure Metering, multiple patents pending, is a collaborative
software platform incorporating a number of related business practices,
used for managing departure demand in a Virtual Queue ("VQueue(TM)") in
order to reduce fuel burn and on-board tarmac delays.
c. PASSUR(R) Field Condition Reporting ("FCR"), patent pending, provides
accurate airport field conditions to operators, helping to improve
operational efficiency and safety of flight. PASSUR(R) FCR electronic
Notice to Airmen ("NOTAM") integration module creates a seamless link to
the Federal Aviation Administration's Flight Services NOTAM's office,
allowing airport customers to file their NOTAM's electronically directly
from the FCR page, creating a single point of entry and distribution - in
the form of onscreen updates and e-mail alerts - for all NOTAM and
non-NOTAM information.
d. PASSUR(R) Tarmac Delay Module(TM), patent pending, provides alert tools to
manage stranded aircraft experiencing extended delays on the ground.
e. PASSUR(R) Corporate Portal(TM), patent pending, provides a single platform
from which information about critical elements of a corporate flight can
be reviewed, managed, and shared among key players.
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2. Application Software Services:
a. ATC Portal(TM), patented with other patents pending, is an outcomes-based
airspace efficiency program that enables airlines to determine, in
real-time, the most effective airport arrival and departure rates based on
a variety of current and historical operational factors, using onscreen
alerts, trend analysis, and decision support tools.
b. ATC Portal Predictive(TM), patent pending, is a module of ATC Portal(TM),
which provides an 8-hour look ahead at the demand and capacity within an
airspace operational environment, providing advance alerts and decision
support to enable proactive prevention of diversions and changes in
airspace management to increase arrival rates.
c. PASSUR(R) Portal(TM), patent pending, provides a dashboard of real-time
flight and airport information, and instant two-way communications.
d. PASSUR(R) Pulse(TM) Revenue, patented with other patents pending, and
which includes the Pulse Revenue AODB data feed, provides a web-based live
and archived detailed, accurate landing report for airlines, airports, and
FBOs, creating maximum revenue efficiency, as well as transparency and
equity in the distribution of landing fees among airport users.
i. PASSUR(R) Pulse Audit(TM), patented with other patents pending -
include key modules that give airports access to the most complete,
accurate, and timely activity reports of arrivals and departures, based
on the PASSUR(R) radar record and integrated database of flight
information, including detailed owner/operator information, maximum
certified weights by tail number, seat configurations, runway
utilization, dwell times, and other details in aggregate and by
individual flight.
ii. PASSUR(R) Pulse Proactive Billing(TM), patent pending, allows airlines
to log onto a secure website to view and download their landing fee
reports, automatically generated by the PASSUR(R) database of flight
information. The program is hosted by the Company and managed through
online tools by the airport, including detailed reporting and invoicing
tools, automatic aircraft weight calculations, and detailed
owner/operator and aircraft information by flight.
e. RapidResponse(TM), patented with other patents pending, provides the
ability to immediately replay flight events with a high level of
precision, specificity, and detail, thereby enabling customers to improve
the safety of operations. Real-time situational awareness and immediate
replay enable RapidResponse(TM) customers to be fully informed and
proactive in responding to emergencies.
f. PASSUR(R) Pulse(TM) Operations, patent pending, provides web-based access
to the PASSUR(R) database of operational information for activity
reporting and analysis.
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g. PASSUR(R) inSight(TM), patent pending, and is the next generation product
for PASSUR FlightPerform(TM), is a takeoff-to-landing, web-based tool that
provides PASSUR(R) terminal area information on a national flight tracking
platform. PASSUR(R) inSight(TM) is packaged with other PASSUR(R) web-based
applications to provide a premium flight tracking "airspace visualization"
capability.
h. AirportMonitor(TM), patented, is a web-based application that provides the
communities surrounding an airport with live flight tracking and
information as part of the airport's public relations, community outreach,
and noise mitigation programs.
i. Fuel Portal(TM), patent pending, provides customers with improved methods
to price and sell more fuel through data and analytics of aircraft fuel
requirements.
3. Flight Data Products:
These data feeds, which use different portions of the PASSUR(R) Network
depending on customer needs, feed directly to customer systems, or to
customers through third-party data integration systems. These feeds are
segmented into:
a. RightETA(TM), patent pending, provides estimated time of arrival ("ETA")
and flight status feeds for real-time airline schedule management, airport
flight information display systems ("FIDS"), gate and baggage information
display systems ("GIDS" and "BIDS"), and activity reports for operational
analysis.
b. FlightSure(TM), patent pending, provides information and software for
integrated aircraft noise operation monitoring systems ("NOMS").
c. Pulse Revenue(TM) Data Feed, patent pending, provides the data source for
calculating landing fee reports and invoices in airport statistical and/or
revenue management systems.
The Company believes its products help its aviation customers to:
(1) improve bottom line financial performance;
(2) improve operational efficiency and effectiveness;
(3) increase safety and security; and
(4) improve the passenger experience
Through the deployment of PASSUR(R) solutions and services, customers are
realizing measureable results in these areas.
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The Company believes its business opportunities come from addressing the
following specific problem areas in the aviation industry:
1. The aviation industry's need for a standardized information technology
platform for accessing information. The business community has come to
expect a sophisticated delivery of rich information in other pace-setting
industries such as banking, news, and health care. In aviation, valuable
information exists, but is compartmentalized among its various
constituencies, including government air traffic regulators, airlines,
airports, FBOs, corporate aviation departments, and passengers. As such,
any aviation-related organization must contend with multiple conflicting
sources of information (often within the same organization), or a lack of
access to the information at all. The Company's business opportunities
arise from its ability to market otherwise hard-to-access or
compartmentalized information through the unique PASSUR(R) integrated
database of flight and airspace data. The Company believes the information
provided by this database is unique, and makes available a standardized,
comprehensive data set, accessible to all aviation constituencies.
2. The need for standardized protocols and industry best practices, which can
provide an information platform to share those protocols collaboratively
among all stakeholders to manage the more complex and expensive problems in
the aviation industry. There are a number of identifiable aviation
conditions that are best addressed through tested, proven, operational
protocols. PASSUR(R) provides a platform not otherwise available for the
collaborative implementation of those protocols by key partners in aviation
operations. These conditions include winter de-icing operations, summer
thunderstorms, air traffic delays, security alerts, runway closure,
aviation incidents, and accidents. The Company's web-based protocols, which
codify and enhance practices developed by many leading experts in the
industry, are communicated to, and shared with, multiple parties through
PASSUR(R)'s collaborative solutions, in order to provide cost reductions
and improved customer service.
3. The need for an outcomes-based solutions database, which would help
aviation organizations determine the most appropriate and effective
actions. Aviation does not have an outcomes-based, historical database
which, when accessed, would allow users to take effective actions that are
appropriate for the exact conditions being experienced. The PASSUR(R)
outcomes database allows users to immediately determine the right actions
at the right time, based on actual historical performance and outcomes, to
help to ensure that the most effective solution is implemented. The
outcomes database helps to standardize and institutionalize aviation
organizations' response to air traffic control ("ATC") conditions,
scenarios, and problems which recur constantly in the operating
environment, thereby eliminating the improvisatory and anecdotal character
of today's airline-ATC interaction which causes significant unnecessary
costs. For example, if an airport has a weather system moving through, the
PASSUR(R) outcomes database will provide information to the user about the
optimal configuration of the airport to maximize arrivals and departures -
based on how the airport has performed under the same conditions over the
previous weeks, months, or years.
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4. The need for more specialized aviation expertise to help assimilate,
analyze, and implement aviation information solutions. Even with the best
information solutions, aviation organizations often require expertise to
help implement these solutions in their everyday operating environment. The
PASSUR(R) Professional Services Program provides experts who are
specialists in their respective fields, and have decades of relevant
experience, who assist aviation organizations in a variety of fields,
including air traffic management at an airline or landing fee management at
an airport.
5. The need for more predictive analytics. A critical growth area for the
industry will come from the ability to predict outcomes. PASSUR(R) tools
provide a "look ahead" capability, which delivers more significant savings
by enabling proactive, rather than reactive, decision making in areas of
major financial impact such as diversions, ground delay programs, fuel
planning, departure sequencing, and optimization of the national airspace.
The Company currently has the exclusive license rights to use thirteen patents
in the United States and various foreign countries, relating to the Company's
PASSUR(R) System and related technologies. The licensed patents expire in
various years through 2013.
The Company currently owns seven issued patents, and twenty-seven additional
patents are pending with the United States Patent Office. The issued patents
expire in various years through 2026.
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.
HOW PASSUR AEROSPACE, INC. GENERATES REVENUE
The Company's revenues are generated by selling: (1) subscription-based
information and software products; (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
The PASSUR(R) applications are, to the best of the Company's knowledge,
relatively unique; however there are other forms of flight tracking and aviation
business intelligence products. Depending on the end use of the Company's
products, the Company's primary competitors include Sabre Systems, Inc., ARINC
Incorporated, Sensis Corporation, and SITA. The Company also sells certain data
solutions through systems integrators, including Bruel & Kjaer and ITT
Corporation, 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.
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SOURCES OF RAW MATERIALS
The Company obtains its raw materials from component distributors and
manufacturers throughout the United States. The Company has multiple sources of
supply for a majority of its components.
DEPENDENCE ON CERTAIN CUSTOMERS
Two customers accounted for 23% and 22% of total revenues for fiscal years 2010
and 2009, respectively.
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
$291,000 and $278,000 in fiscal years 2010 and 2009, 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-four employees, of which thirty were full time,
including seven officers, as of October 31, 2010.
ITEM 1A. RISK FACTORS
THE COMPANY, IN THE PAST, INCURRED OPERATING LOSSES AND NEGATIVE CASH FLOWS FROM
OPERATIONS.
The Company was profitable for the current and previous four fiscal years, but
incurred significant net losses five years ago. The Company had net income of
$21,000 and $154,000 for fiscal years ended October 31, 2010 and 2009,
respectively. The Company's accumulated deficit was $8,784,000 as of October 31,
2010. The Company's ability to maintain profitability will depend upon its
ability to generate significant increased revenues through new and existing
customer agreements, additional services, and/or products offered to existing
customers, and to control 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.
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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 25, 2012. 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.
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 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
current 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 on the airline industry, would negatively affect the airline
industry (through, for example, increased security, insurance, and other costs,
and lost revenue from 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.
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RELIANCE ON THE COMPANY'S QUARTERLY OPERATING RESULTS AS AN INDICATION OF FUTURE
RESULTS IS INAPPROPRIATE DUE TO POTENTIAL SIGNIFICANT FLUCTUATIONS.
The Company's future revenues and results of operations may fluctuate
significantly due to a combination of factors, including:
o Delays and/or decreases in the signing and invoicing of new contracts;
o The length of time needed to initiate and complete customer contracts;
o Revenues recognized from one-time sales events (selling or upgrading
systems) versus subscription-based sales;
o The introduction and market acceptance of new and enhanced products
and services;
o The costs associated with providing existing and new products and
services;
o Economic conditions 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 on as an indication of performance. It is possible that in future
periods, results of operations may be below those expected based upon previous
performance.
THE COMPANY MAY BE UNABLE TO RAISE ADDITIONAL FUNDS TO MEET OPERATING CAPITAL
REQUIREMENTS IN THE FUTURE.
While the Company's operations were cash flow positive for the fiscal years
ended October 31, 2010 and 2009, the Company's debt increased by $900,000 in
fiscal year 2010. The Company had an accumulated deficit of $8,784,000 as of
October 31, 2010. 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 25, 2012. 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.
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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 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. Our inability to bring such 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
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.
The Company's network infrastructure is maintained and hosted by AT&T through an
existing frame-relay and MPLS network. If AT&T experiences system failures, or
fails to adequately maintain the frame-relay and MPLS network, 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.
14
THE COMPANY MAY BE SUBJECT TO NEW GOVERNMENT REGULATIONS RELATING TO THE
DISTRIBUTION OF FLIGHT-TRACKING DATA.
The Company currently maintains strict safety regulations for its data in order
to comply with current government regulations. Due to the continued growing
safety needs and concerns of the aviation industry, new government regulations
may be implemented. Such new regulations may, in some cases, hinder the
Company's ability to provide current and/or additional services.
UNAUTHORIZED USE OF THE COMPANY'S INTELLECTUAL PROPERTIES BY THIRD PARTIES MAY
DAMAGE AND/OR ADVERSELY AFFECT OUR BUSINESS.
The Company regards its trademarks, trade secrets, and all other intellectual
property as critical to its future success. Unauthorized use of our intellectual
property by third parties may damage and/or impair our business. Our
intellectual property includes exclusive licenses to use patents held by third
parties, as well as Company-owned patents. We rely on trademarks, trade secrets,
patent protection, and contracts, including confidentiality and non-exclusive
license agreements with our customers, employees, consultants, strategic
partners, and others, to protect our intellectual property rights. Despite our
precautions, it may be possible for third parties to obtain and use our
intellectual property without our prior knowledge and/or authorization.
Prosecuting infringers could be time consuming and costly, and, irrespective of
whether or not the Company is successful, could disrupt its business.
The Company currently owns seven issued patents, and twenty-seven additional
patents 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 2026. We also intend to seek additional patents
on our products and technological advances and/or software applications, when
appropriate. There can be no assurance that patents will be issued for any of
our pending or future patent applications, or that any claims allowed from such
applications will be of sufficient scope, or provide adequate protection or any
commercial advantage to the Company. Additionally, our competitors may be able
to design around our patents and possibly affect our commercial interests.
The Company currently has the exclusive license rights to use thirteen patents
in the United States and various foreign countries, relating to the Company's
PASSUR(R) System and related technologies. The licensed patents expire in
various years through 2013.
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. The PASSUR(R) federal registration will allow the Company to enforce
its rights in the mark in the federal court system. The registration does not
assure that others will be prevented from using similar trademarks in connection
with related products and/or services.
15
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 our future products, technologies, and
software applications will not inadvertently infringe valid patents or other
intellectual property rights held by third parties. We may be subject to legal
proceedings and claims from time to time relating to the intellectual property
of others. Investigation of any 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
our products. Defending against intellectual property infringement claims could
be time consuming and costly, and, irrespective of whether or not the Company is
successful, could disrupt our business. We may incur substantial expenses in
defending against these third party claims, regardless of their merit.
Successful infringement claims against the Company may result in significant
monetary liability and could adversely affect our business, financial condition,
operating results, and cash flow.
ITEM 1B. UNRESOLVED STAFF COMMENTS: NOT APPLICABLE
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 at an average annual rental rate of $157,000.
This lease was modified during fiscal year 2010, adding 1,300 square feet of
additional office space at an average annual rental rate of $52,000.
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, 2012, leases 12,000
square feet at an annual average rental rate of $109,000.
The Company has satelite sales offices in Reston, Virginia and Bloomington,
Minnesota.
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. REMOVED AND RESERVED
16
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, 2010
FIRST QUARTER $3.19 $1.01
SECOND QUARTER $3.00 $2.50
THIRD QUARTER $3.00 $2.00
FOURTH QUARTER $3.12 $2.70
Fiscal year ended October 31, 2009
First quarter $4.00 $1.25
Second quarter $3.35 $1.10
Third quarter $3.20 $2.00
Fourth quarter $2.90 $1.30
* 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 at January 12, 2011
was 252, 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.
17
(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, 2010 is as follows:
NUMBER OF SECURITIES NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED AVERAGE REMAINING AVAILABLE FOR
EXERCISE OF EXERCISE PRICE OF FUTURE ISSUANCE UNDER EQUITY
OUTSTANDING STOCK OUTSTANDING STOCK COMPENSATION PLANS
OPTIONS, WARRANTS, OPTIONS, WARRANTS, (EXCLUDING SECURITIES
PLAN CATEGORY AND RIGHTS (A) AND RIGHTS REFLECTED IN COLUMN (A))
----------------------------------------------------------------------------------------------------------------------
Equity compensation plan approved by
security holders 1,478,000 $1.40 535,500
Equity compensation plans not approved by
security holders -- -- --
----------------------------------------------------------------------------
Total 1,478,000 $1.40 535,500
============================================================================
18
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 business intelligence company which develops
predictive analytics built on proprietary algorithms and on concurrent
integration and simultaneous mining of multiple databases. The Company believes
it is positioned to provide the industry standard in business intelligence and
predictive analytics for both commercial and government applications.
The Company's revenues are generated by selling: (1) subscription-based
information and software products; (2) professional services; and (3) annual
maintenance contracts for PASSUR(R) Radar Systems.
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.
19
The Company shipped thirty-two and installed twenty-eight Company-owned
PASSUR(R) Systems during fiscal year 2010 (installations include systems shipped
in the current and previous fiscal year). Some units shipped in the current
fiscal year are scheduled to be installed during fiscal year 2011. 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
2011. 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 fifty-four Company-owned PASSUR(R) Systems
located at airports worldwide at the end of fiscal year 2010. 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.
Revenues increased by $1,998,000, or 22%, to $10,958,000 in fiscal year 2010
from $8,960,000 in fiscal year 2009. This increase was primarily due to new
customers subscribing to the Company's suite of software applications, as well
as new customers engaging the Company to perform professional services. 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
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) Network Systems
necessary to make such systems compatible with new software applications, as
well as the ordinary repair and maintenance of existing PASSUR(R) Network
Systems. Additionally, cost of revenues in each reporting period is impacted by:
(1) the number of PASSUR(R) Network units added 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 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.
20
Cost of revenues increased by $1,443,000 or 43%, in fiscal year 2010 as compared
to fiscal year 2009, primarily due to increases in communication costs, payroll
and related costs, depreciation and amortization, consulting fees, travel and
entertainment costs, as well as the absence of capitalization of manufacturing
costs as no PASSUR(R) Network Systems were manufactured during fiscal year 2010.
This increase was offset by the fact that the Company shipped and installed more
PASSUR(R) Network Systems during fiscal year 2010 as compared to fiscal year
2009, thus there was an increase in costs capitalized to these assets that would
have otherwise been charged to cost of revenues. Furthermore, the increase
described above was offset by an increase in the capitalization of software
development costs during fiscal year 2010 as compared to fiscal year 2009.
RESEARCH AND DEVELOPMENT
Research and development expenses remained consistent in fiscal year 2010 as
compared to fiscal year 2009. The Company's research and development efforts
include activities associated with the enhancement, maintenance, and improvement
of the Company's existing hardware, software, and information products.
The Company anticipates that it will continue to invest in research and
development to develop, maintain, and support existing and newly developed
applications for its customers. There were no customer-sponsored research and
development activities during fiscal years 2010 or 2009. Research and
development expenses are funded by current operations.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses increased by $371,000, or 9%, in
fiscal year 2010 as compared to fiscal year 2009, primarily due to an increase
in payroll and related costs, consulting fees, legal fees, facilities, and
travel and entertainment costs.
INCOME FROM OPERATIONS
Revenues increased by $1,998,000, or 22%, to $10,958,000 in fiscal year 2010
from $8,960,000 in fiscal year 2009. Total costs and expenses increased by
$1,827,000, or 24%, to $9,516,000 in fiscal year 2010 from $7,689,000 in fiscal
year 2009. Income from operations increased by $172,000, or 14%, to $1,443,000
in fiscal year 2010 from $1,271,000 in fiscal year 2009.
INTEREST EXPENSE - RELATED PARTY
The Company refinanced and extended the maturity of the Company's debt effective
November 1, 2008. In connection with this refinancing, the interest rate charged
by the related party increased from 4.5% to 9%, as of February 1, 2009. A higher
interest rate, as well as a higher principal balance, resulted in an increase in
interest expense - related party of $267,000, or 24%, in fiscal year 2010 as
compared to fiscal year 2009. The principal balance of the note increased by
$900,000 as of October 31, 2010 as compared to October 31, 2009.
21
INCOME TAXES
The Company's provision for income taxes in each year consists of current state
and local minimum taxes.
At October 31, 2010, the Company had available a federal net operating loss
carry-forward of $12,653,000 for income tax purposes, which will expire in
various tax years from 2011 through 2029. The Company has provided a full
valuation allowance on the net deferred tax asset of $4,399,000, which primarily
consists of net operating loss carry-forwards, which are not considered more
likely than not to be realizable. The most significant reconciling item between
the tax expense per the income statement and the expected tax using a statutory
rate of 34% is the change in the valuation allowance.
NET INCOME
The Company had net income of $21,000, or $.00 per diluted share, in fiscal year
2010 as compared to net income of $154,000, or $.03 per diluted share, in fiscal
year 2009. The Company's income from operations increased in fiscal year 2010 as
compared to fiscal year 2009, but this increase was more than offset by higher
interest costs to a related party in fiscal 2010, resulting in lower net income
in fiscal year 2010 as compared to fiscal year 2009.
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 $1,601,000 at
October 31, 2010. The notes payable to a related party of $14,815,000 at October
31, 2010, are due November 1, 2011. The Company's stockholders' deficit was
$5,595,000 at October 31, 2010. The Company had net income of $21,000 in fiscal
year 2010.
Management is addressing the Company's working capital and stockholders'
deficiencies 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. The Company intends to increase the size and
related airspace coverage of its Company-owned PASSUR(R) Network, by continuing
to install PASSUR(R) Systems throughout the United States and certain foreign
countries. In addition, management believes that expanding its existing suite of
software products and professional services, which address the wide array of
needs of the aviation industry, through the continued development of new product
and service offerings, will continue to lead to increased growth in the
Company's customer-base and subscription-based revenues. Additionally, if the
Company's business plan does not generate sufficient cash flows from operations
to meet the Company's operating cash requirements, the Company will attempt to
obtain external financing, and if such external financing is not 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 25, 2012. Such continuing financial support may be in the form of
additional loans to the Company, in addition to the deferral of principal and/or
interest payments due on the outstanding loans, if deemed necessary.
22
Effective November 1, 2008, the Company entered into a new agreement, renewing
and extending the term of the $13,815,000 note due to G.S. Beckwith Gilbert, the
Company's significant shareholder and Chairman, from one year to three years,
resulting in an increase in the interest rate from 4.5% to 9% as of February 1,
2009, with a maturity of November 1, 2011. During fiscal year 2009, Mr. Gilbert
loaned the Company an additional $100,000, bringing the principal amount of
notes due to Mr. Gilbert to $13,915,000 on October 31, 2009. The accrued
interest balance on the notes was $1,108,000 as of October 31, 2009, resulting
in a total of $15,023,000 due to Mr. Gilbert on October 31, 2009.
Under the agreement, interest remained at the annual rate of 4.5% from November
1, 2008 to January 31, 2009, payable in cash. Effective February 1, 2009 through
October 31, 2011, the interest rate was increased to 9% and is payable as
follows: interest at the annual rate of 6% will be payable in cash with the
remaining interest, at the annual rate of 3%, payable at the option of the
Company in cash or "paid in kind" and added to the principal of the note. Annual
interest payments are due at October 31 of each fiscal year. During October
2009, the Company entered into an agreement to extend the interest payment due
to Mr. Gilbert on October 31, 2009 to December 31, 2009. This interest payment
was paid in full by the Company prior to the extended due date.
In fiscal year 2010, Mr. Gilbert loaned the Company an additional $1,150,000,
used in part to fund the prior fiscal year's interest payment, increasing the
principal balance to $15,065,000. During fiscal year 2010, the Company paid
fiscal year 2010 interest to Mr. Gilbert of $914,000, representing the entire
cash portion of the fiscal 2010 interest due, thereby meeting the cash payment
requirements of the loan agreement. Total cash payments for interest made to Mr.
Gilbert in fiscal year 2010 were $2,037,000, including the remaining fiscal year
2009 interest payment. The balance of the fiscal year 2010 interest payable of
$446,000 was accrued. In October 2010, the Company made a $250,000 principal
payment, reducing loan principal to $14,815,000, resulting in a total of
$15,261,000 due to Mr. Gilbert as of October 31, 2010.
The Company has a commitment from Mr. Gilbert that if the Company, at any time,
is unable to meet its obligations through January 25, 2012, Mr. 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 notes are secured by the Company's assets.
Net cash provided by operating activities was $1,424,000 for fiscal year 2010,
and consisted of $2,047,000 non-cash items, primarily depreciation and
amortization, $21,000 of net income, and increases in accounts payable and
accrued expenses and other current liabilities, primarily due to the timing of
vendor invoice payments. This increase in net cash provided by operating
activities was partially offset by a decrease of $662,000 of accrued interest -
related party, as well as an increase in accounts receivable, primarily due to
significant new customers in fiscal year 2010, as well as the timing of customer
invoicing. Cash used in investing activities was $2,674,000 for fiscal year
2010, and consisted of investments in the Company's PASSUR(R) Network Systems,
capitalized software development costs, and property, plant and equipment. Cash
provided by financing activities was $1,106,000 for fiscal year 2010, and
consisted of $1,150,000 from notes payable - related party and $206,000 of
proceeds from the exercise of stock options. This increase in cash provided by
financing activities was partially offset by $250,000 of principal payments on
notes payable - related party.
23
The Company's revenue has increased as a result of its subscription-based
revenue model. The Company is actively addressing the increasing costs
associated with supporting the business, and plans to identify and reduce any
unnecessary costs as part of its cost reduction initiatives. Additionally, the
aviation market has been impacted by budgetary constraints, airline bankruptcies
and consolidations due to the downturn in the current economy, the terrorist
events of September 11, 2001, the continued war on terrorism, and changes 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 as well as professional
services remains strong, and the Company anticipates an increase in future
revenues. However, the Company cannot predict if such revenues will materialize.
If sales do not increase, 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 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. The Company's
accounting policies that require management to apply significant judgment and
estimates include:
24
REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 104, "Revenue Recognition in Financial Statements" ("SAB 104.") SAB 104
requires that four basic criteria must be met before revenues can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred or
services have been rendered; (3) the fee is fixed and determinable; and (4)
collectibility is reasonably assured. The Company also recognizes revenue in
accordance with FASB ASC 985-605 (SOP 97-2, "Software Revenue Recognition") as
amended, when applicable.
The Company's revenues are generated by selling: (1) subscription-based
information and software products; (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 985-605, we recognize revenue from the
licensing of our software products or performance of maintenance when all of the
following criteria are met: (1) we have evidence of an agreement with a
customer; (2) we deliver the products/services; (3) license or maintenance
agreement terms are deemed fixed or determinable and free of contingencies or
uncertainties that may alter the agreement, such that the sale may not be
complete and/or final; and (4) collection is probable. 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 985-605.
Our software licenses generally do not include acceptance provisions. An
acceptance provision generally allows a customer to test the software for a
defined period of time before committing to a binding agreement to license the
software. If a subscription agreement includes an acceptance provision, the
Company will not recognize revenue until the earlier of the receipt of a written
customer acceptance or, if not notified by the customer to cancel the
subscription agreement, the expiration of the acceptance period.
From time to time, the Company will receive one-time payments from customers for
rights, including but not limited to, the rights to use certain data at an
agreed upon location(s) for a specific use and/or for an unlimited number of
users. Such one-time payments are in the form of license fees. These fees are
recognized as revenue ratably over the term of the license agreement or expected
useful life of such license arrangement, whichever is longer, but typically five
years.
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 SAB 104 and/or ASC 985-605 and the corresponding agreement.
25
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company follows the provisions of FASB ASC 985-20 (SFAS 86, "Accounting for
the Costs of Software to be Sold, Leased, or Otherwise Marketed.") Capitalized
software development costs are comprised of costs incurred to develop and
significantly enhance software products to be sold or otherwise marketed. Once
technological feasibility is established, and the software product is available
for general release to the public, the Company begins to amortize such costs to
cost of revenues.
The Company's policy on capitalized software costs determines whether the costs
incurred are classified as capitalized costs (in accordance with ASC 985-20) or
as research and development expenses. In cases where the Company capitalizes
costs incurred with development of new hardware/software products, a product
specification is designed and/or a working model of the respective project is
developed as the guideline for the capitalization of costs associated with such
project in accordance with ASC 985-20.
Once a product has been made available for sale and/or released for sale to the
general public, the development costs of that product are no longer capitalized
and amortization is provided on a product-by-product basis based on the greater
of the ratio of current gross revenues to the total of current and anticipated
future gross revenues or the straight-line method over the estimated economic
life of the product beginning at the point the product becomes available for
general release, typically over five years. Costs incurred to maintain or
support such product are expensed as incurred. In some cases, the Company may
capitalize costs incurred in the development of enhanced versions of already
existing products, but will immediately expense any additional costs incurred to
maintain products which were completed and released to the general public, in
accordance with ASC 985-20. Determining and evaluating whether development costs
meet the criteria for immediate expense or capitalization requires the exercise
of judgment by management.
The Company's net capitalized software costs totaled $3,335,000 at October 31,
2010. The carrying value of capitalized software costs are evaluated for
impairment, based on the forecasted and actual future cash flows expected to be
generated from such assets, as determined and evaluated by management.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows the provisions of FASB ASC 360-10 (SFAS 144, "Accounting for
the Impairment or 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.
26
The Company's long-lived assets, which include the PASSUR(R) Network and
property, plant and equipment, totaled $7,460,000, and accounted for 56% of the
Company's total assets as of October 31, 2010.
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, 2010, 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 software development costs, and net property,
plant and equipment totaled $7,301,000, $3,335,000, and $159,000, respectively,
at October 31, 2010. Total depreciation and amortization expense related to
these capitalized assets was $1,946,000 in fiscal year 2010. 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
Software development costs 5 years
Property, plant and equipment 3 to 10 years
The PASSUR(R) Network includes PASSUR(R) Systems and the related software
workstations used for the data derived from PASSUR(R) Systems, as well as costs
pertaining to raw material, work-in-process, and finished goods components.
PASSUR(R) Network installations include the direct and indirect production and
installation costs incurred for each of the Company-owned PASSUR(R) Systems.
PASSUR(R) Network Systems which are not installed in the PASSUR(R) Network are
carried at cost and no depreciation is recorded. Once installed, the PASSUR(R)
Systems are depreciated over seven years.
All of the Company's capitalized assets are recorded at cost (which may also
include salaries and related overhead costs incurred during production and/or
development) and depreciated and/or amortized over the asset's estimated useful
life for financial statement purposes. The estimated useful life represents the
projected period of time that the asset will be productively employed by the
Company and is determined by management based on many factors, including
historical experience with similar assets, technological life cycles, and
industry standards for similar assets. 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.
Total depreciation and amortization expense was $1,946,000 in fiscal year 2010,
and consisted of $1,241,000, $468,000, and $237,000 for the PASSUR(R) Network,
software development costs, and property, plant and equipment, respectively.
27
STOCK-BASED COMPENSATION
The Company follows the provisions of FASB ASC 718 (SFAS 123R, "Share-Based
Payments") 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 $120,000 and $35,000 in
fiscal years 2010 and 2009, respectively, and was primarily included in selling,
general, and administrative expenses. Stock-based compensation expense was
reduced in fiscal year 2009 due to reversals of $31,000 for the forfeiture of
stock options with a service condition, previously issued to employees
terminated in fiscal year 2009.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued an accounting standard update amending the
disclosure requirements for financial instruments under fair value. New
disclosures required include the amount of significant transfers in and out of
levels 1 and 2 fair value measurements and the reasons for the transfers. In
addition, the reconciliation for level 3 activity will be required on a gross
rather than net basis. The update provides additional guidance related to the
level of disaggregation in determining classes of assets and liabilities and
disclosures about inputs and valuation techniques. This is effective for fiscal
years beginning on or after December 31, 2009, and interim periods within these
fiscal years. The Company does not expect the adoption of this guidance to have
a material impact on its consolidated financial statements and disclosures.
In September 2009, the FASB issued a standard which modifies the revenue
recognition guidance for arrangements that involve the delivery of multiple
elements, such as product, software, services or support, to a customer at
different times as part of a single revenue generating transaction. This
standard provides principles and application guidance to determine whether
multiple deliverables exist, how the individual deliverables should be
separated, and how to allocate the revenue in the arrangement among those
separate deliverables. The standard also expands the disclosure requirements for
multiple deliverable revenue arrangements. This standard is effective for fiscal
years beginning on or after June 15, 2010. The Company does not expect the
adoption of this guidance to have a material impact on its consolidated
financial statements.
In September 2009, the FASB issued a standard which changes the accounting model
for revenue arrangements that include both tangible products and software
elements and provides additional guidance on how to determine which software, if
any, relating to tangible product would be excluded from the scope of the
software revenue guidance. In addition, it provides guidance on how a vendor
should allocate arrangement consideration to deliverables in an arrangement that
includes both tangible products and software. This standard is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. The Company does not expect
the adoption of this guidance to have a material impact on its consolidated
financial statements.
28
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
None.
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's disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in reports filed or
submitted under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the Commission's rules. 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, 2010.
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 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.
29
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, 2010. Based on this evaluation, management concluded that the
Company's internal control over financial reporting was effective at a
reasonable assurance level as of October 31, 2010.
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, 2010, that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
30
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 DIRECTOR POSITION AND
SINCE OFFICERS WITH COMPANY
--------------------------------------------------------------------------------
G.S. Beckwith Gilbert 68 1997 Chairman of the Board and
Director
Richard R. Schilling, Jr. 85 1974 Director
John R. Keller 70 1997 Executive Vice President and
Director
Bruce N. Whitman 77 1997 Chairman of the Executive
Committee and Director
Paul L. Graziani 53 1997 Chairman of the Audit Committee
and Director
James T. Barry 49 2000 President, Chief Executive
Officer, and Director
James J. Morgan 68 2005 Chairman of the Compensation
Committee and Director
Kurt J. Ekert 40 2009 Director
Peter L. Bloom 53 2009 Director
Richard L. Haver 64 2010 Director
Each director is elected to serve until the succeeding Annual Meeting of
Stockholders and until his successor is duly elected and qualified.
31
(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 OFFICER POSITION AND
SINCE OFFICERS WITH COMPANY
--------------------------------------------------------------------------------
James T. Barry 49 1998 President, Chief Executive
Officer, and Director
Jeffrey P. Devaney 51 2004 Chief Financial Officer,
Treasurer, and Secretary
John R. Keller 70 1967 Executive Vice President and
Director
Dr. James A. Cole 70 1988 Senior Vice President of
Research and Development
Matthew H. Marcella 53 2003 Vice President of Software
Development
Ron A. Dunsky 48 2003 Vice President of Marketing
Tina W. Jonas 50 2010 Executive Vice President of
Operations
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.
32
(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 the Chairman of the Harvard Immunology
Advisory Board, the past Chairman 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.
Richard R. Schilling,Jr. Mr. Schilling has been a Director of the Company since
1974. Mr. Schilling is a member of the law firm of
Burns, Kennedy, Schilling & O'Shea, New York, New
York, where he has been practicing since October 1964.
Mr. Schilling's knowledge of the Company through his
service as a Director of the Company, as well as his
extensive legal experience, allow him to bring
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.
He is Co-Chairman of the Board and Chairman of the
Nominating Committee of the Congressional Medal of
Honor Foundation; a Director of the General Aviation
Manufacturers Association; an Executive Committee
member of NATA's Air Charter Safety Foundation Board
of Governors; a Director and member of the Executive
Committee of ORBIS International and a Director
Emeritus of the Smithsonian National Air and Space
Museum. He is a member of the Board of Governors of
the Aerospace Industries Association, Vice Chairman of
the Air Force Academy Falcon Foundation, Vice
President of The Wings Club and a Trustee of Kent
School and the National World War II Museum. He was
honored with the 2009 Distinguished Service Award from
the USO of Metropolitan New York. Mr. Whitman's
knowledge of the Company through his service as a
Director of the Company and Chairman of the Executive
Committee, as well as his extensive participation as a
member of various business and charitable
organizations, allow him to bring valuable insight and
knowledge to the Board.
33
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 boards of governors of
the Civil Air Patrol (CAP) and the Aerospace
Industries Association (AIA). 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
Incorporated. Mr. Morgan's knowledge of the Company
through his service as a Director of the Company, as
well as his prior experience as CEO of a
publicly-traded company, allow him to bring valuable
insight and knowledge to the Board.
34
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 GDS (including brands
Galileo and Worldspan), where he holds global
responsibility for sales, customer engagement,
sourcing, and operations across 160 countries. In this
role, he holds offices in Langley, U.K. and Atlanta,
U.S. Travelport is a Blackstone portfolio company.
Previously, 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. Mr.
Ekert led GTA's commercial and operations functions,
as well as all elements of its online consumer
business, OctopusTravel.com. 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 US Army officer. Mr.
Ekert received a BS 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. 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.
35
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, 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.
36
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 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. 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.
37
Ron A. Dunsky Mr. Dunsky was named Vice President of Marketing on
May 21, 2003. Mr. Dunsky joined the Company in 2001,
and initially served as Director of Marketing and New
Product Development. Prior to joining the Company, Mr.
Dunsky was a Senior Aviation Producer with the New
York bureau of ABCNews.com from 2000 to 2001. Prior to
ABCNews.com, he was a Senior Aviation Producer with
the New York bureau of CNN from 1995 to 2000.
Tina W. Jonas Ms. Jonas joined the Company as Executive Vice
President of Operations on July 1, 2010. Prior to
joining the Company, Ms. Jonas served as Director of
Operations Planning and Analysis at Sikorsky Aircraft
Corporation from 2008 to 2010. From 2004 to 2008, she
served as Undersecretary of Defense, Comptroller, and
Chief Financial Officer for the Department of Defense
(DOD). Before joining the DOD, she served as Assistant
Director and Chief Financial Officer for the Federal
Bureau of Investigation from 2002 to 2004.
(F) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
The Company knows of no event which occurred during the past five years and
which is described in Item 401(f) of Regulation S-K relating to any director or
executive officer of the Company.
(G) IDENTIFICATION OF AUDIT COMMITTEE
Our Board of Directors has appointed an Audit Committee, consisting of three
directors. All of the members of the Audit Committee are independent of our
Company and management, as independence is defined under applicable National
Association of Securities Dealers ("NASD") rules. The Audit Committee consists
of Mr. Graziani, Mr. Schilling, and Mr. Whitman.
(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 NASD 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, except as set forth below, the Company believes that during the
fiscal year ended October 31, 2010, 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.
The following filings were not timely filed, but were filed within thirty days
of the applicable due date: a Form 3 for Peter Bloom reporting initial
beneficial ownership of the Company's Common Stock, a Form 4 for Peter Bloom
reporting the grant of certain stock options to Mr. Bloom (one transaction), a
Form 4 for Bruce Whitman reporting the exercise of certain stock options (six
transactions), a Form 4 for Paul Graziani reporting the exercise of certain
stock options (six transactions), a Form 4 for James Morgan reporting the
exercise of certain stock options (six transactions), a Form 4 for James Barry
reporting the exercise of certain stock options (two transactions), a Form 4 for
Matthew Marcella reporting the exercise of certain stock options (two
transactions), a Form 4 for Tina Jonas reporting the grant of certain stock
options (one transaction), and a Form 4 for Richard Haver reporting the grant of
certain stock options (one transaction).
38
(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, 2010 by the Company with the Securities and Exchange Commission
in connection with the Company's 2010 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, 2010 (the "2011 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 2011 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 2011 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
Effective November 1, 2008, the Company entered into a new agreement, renewing
and extending the term of the $13,815,000 note due to G.S. Beckwith Gilbert, the
Company's significant shareholder and Chairman, from one year to three years,
resulting in an increase in the interest rate from 4.5% to 9% as of February 1,
2009, with a maturity of November 1, 2011. During fiscal year 2009, Mr. Gilbert
loaned the Company an additional $100,000, bringing the principal amount of
notes due to Mr. Gilbert to $13,915,000 on October 31, 2009. The accrued
interest balance on the notes was $1,108,000 as of October 31, 2009, resulting
in a total of $15,023,000 due to Mr. Gilbert on October 31, 2009.
Under the agreement, interest remained at the annual rate of 4.5% from November
1, 2008 to January 31, 2009, payable in cash. Effective February 1, 2009 through
October 31, 2011, the interest rate was increased to 9% and is payable as
follows: interest at the annual rate of 6% will be payable in cash with the
remaining interest, at the annual rate of 3%, payable at the option of the
Company in cash or "paid in kind" and added to the principal of the note. Annual
interest payments are due at October 31 of each fiscal year. During October
2009, the Company entered into an agreement to extend the interest payment due
to Mr. Gilbert on October 31, 2009 to December 31, 2009. This interest payment
was paid in full by the Company prior to the extended due date.
39
In fiscal year 2010, Mr. Gilbert loaned the Company an additional $1,150,000,
used in part to fund the prior fiscal year's interest payment, increasing the
principal balance to $15,065,000. During fiscal year 2010, the Company paid
fiscal year 2010 interest to Mr. Gilbert of $914,000, representing the entire
cash portion of the fiscal 2010 interest due, thereby meeting the cash payment
requirements of the loan agreement. Total cash payments for interest made to Mr.
Gilbert in fiscal year 2010 were $2,037,000, including the remaining fiscal year
2009 interest payment. The balance of the fiscal year 2010 interest payable of
$446,000 was accrued. In October 2010, the Company made a $250,000 principal
payment, reducing loan principal to $14,815,000, resulting in a total of
$15,261,000 due to Mr. Gilbert as of October 31, 2010.
The Company has a commitment from Mr. Gilbert that if the Company, at any time,
is unable to meet its obligations through January 25, 2012, Mr. 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 notes are secured by the Company's assets.
(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 NASD standards.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Company hereby incorporates by reference into this Item the information
contained under the heading "Principal Accounting Fees and Services" in the 2011
Proxy Statement.
40
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, 2010 and 2009
Consolidated Statements of F-3
Income for the years ended
October 31, 2010 and 2009
Consolidated Statements of F-4
Stockholders' Deficit for the years ended
October 31, 2010 and 2009
Consolidated Statements of F-5
Cash Flows for the years ended
October 31, 2010 and 2009
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 regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
41
(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.
42
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.
16 Change in Certifying Accountant is incorporated by reference to our
Form 8-K/A, dated October 28, 1998.
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.
43
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 31, 2011 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 31, 2011 /s/ James T. Barry
------------------
James T. Barry
President and Chief Executive Officer
(Principal Executive Officer)
DATED: JANUARY 31, 2011 /s/ Jeffrey P. Devaney
----------------------
Jeffrey P. Devaney
Chief Financial Officer, Treasurer, and
Secretary
(Principal Financial and Accounting
Officer)
44
SIGNATURES (CONTINUED)
DATED: JANUARY 31, 2011 /s/ G.S. Beckwith Gilbert
-------------------------
G.S. Beckwith Gilbert
Chairman of the Board and Director
DATED: JANUARY 31, 2011 /s/ John R. Keller
------------------
John R. Keller
Executive Vice President and Director
DATED: JANUARY 31, 2011 /s/ Richard R. Schilling, Jr.
----------------------------
Richard R. Schilling, Jr.
Director
DATED: JANUARY 31, 2011 /s/ Bruce N. Whitman
--------------------
Bruce N. Whitman
Chairman of the Executive Committee and
Director
DATED: JANUARY 31, 2011 /s/ Paul L. Graziani
--------------------
Paul L. Graziani
Chairman of the Audit Committee and
Director
DATED: JANUARY 31, 2011 /s/ James J. Morgan
-------------------
James J. Morgan
Chairman of the Compensation Committee and
Director
DATED: JANUARY 31, 2011 /s/ Kurt J. Ekert
-----------------
Kurt J. Ekert
Director
DATED: JANUARY 31, 2011 /s/ Peter L. Bloom
------------------
Peter L. Bloom
Director
DATED: JANUARY 31, 2011 /s/ Richard L. Haver
--------------------
Richard L. Haver
Director
45
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, 2010 and 2009 and the related
consolidated statements of income, stockholders' deficit, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PASSUR Aerospace,
Inc. and Subsidiary at October 31, 2010 and 2009, 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 31, 2011
F - 1
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Balance Sheets
October 31, 2010 and 2009
2010 2009
----------------- -------------------
ASSETS
Current assets:
Cash $ 107,069 $ 250,626
Accounts receivable, net 1,853,901 867,043
Prepaid expenses and other current assets 269,102 243,918
----------------- -------------------
Total current assets 2,230,072 1,361,587
PASSUR(R) Network, net 7,300,902 7,291,429
Software development costs, net 3,334,905 2,516,278
Property, plant and equipment, net 158,737 259,231
Other assets 254,030 282,569
----------------- -------------------
TOTAL ASSETS $ 13,278,646 $ 11,711,094
================= ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 982,431 $ 407,647
Accrued expenses and other current liabilities 898,829 540,793
Deferred revenue, current portion 1,503,750 1,377,106
Accrued interest - related party 446,211 1,108,112
----------------- -------------------
Total current liabilities 3,831,221 3,433,658
Deferred revenue, less current portion 227,798 305,193
Notes payable - related party 14,814,880 13,914,880
----------------- -------------------
18,873,899 17,653,731
COMMITMENT AND CONTINGENCIES
Stockholders' deficit:
Preferred shares - authorized 5,000,000 shares,
par value $.01 per share; none issued or outstanding
-- --
Common shares - authorized 10,000,000 shares,
par value $.01 per share; issued 5,387,948 in 2010
and 4,990,448 in 2009 53,879 49,904
Additional paid-in capital 4,758,816 4,436,770
Accumulated deficit (8,784,473) (8,805,836)
----------------- -------------------
(3,971,778) (4,319,162)
Treasury stock, at cost, 696,500 shares in 2010 and 2009 (1,623,475) (1,623,475)
----------------- -------------------
Total stockholders' deficit (5,595,253) (5,942,637)
----------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 13,278,646 $ 11,711,094
================= ===================
See accompanying notes to consolidated financial statements.
F - 2
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended October 31, 2010 and 2009
2010 2009
----------------- -----------------
REVENUES $ 10,958,202 $ 8,960,310
COST AND EXPENSES:
Cost of revenues 4,816,895 3,373,842
Research and development 290,555 278,058
Selling, general, and administrative expenses 4,408,129 4,037,272
----------------- -----------------
9,515,579 7,689,172
----------------- -----------------
INCOME FROM OPERATIONS 1,442,623 1,271,138
Interest expense - related party 1,374,936 1,108,112
----------------- -----------------
Income before income taxes 67,687 163,026
Provision for income taxes 46,324 8,812
----------------- -----------------
NET INCOME $ 21,363 $ 154,214
================= =================
Net income per common share - basic $ -- $ .04
================= =================
Net income per common share - diluted $ -- $ .03
================= =================
Weighted average number of common shares outstanding - basic 4,553,681 4,190,900
================= =================
Weighted average number of common shares outstanding - diluted 5,342,299 5,265,889
================= =================
See accompanying notes to consolidated financial statements.
F - 3
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Stockholders' Deficit
Years Ended October 31, 2010 and 2009
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
SHARES STOCK CAPITAL DEFICIT STOCK DEFICIT
----------- ---------- ------------- ------------- ------------ -------------
Balance at November 1, 2008 4,146,448 $ 48,429 $ 4,381,528 $ (8,960,050) $ (1,623,475) $ (6,153,568)
Exercise of common stock options 147,500 1,475 20,650 22,125
Stock-based compensation expense 34,592 34,592
Net income 154,214 154,214
----------- ---------- ------------- ------------- ------------ -------------
Balance at October 31, 2009 4,293,948 49,904 4,436,770 (8,805,836) (1,623,475) (5,942,637)
Exercise of common stock options 397,500 3,975 202,388 206,363
Stock-based compensation expense 119,658 119,658
Net income 21,363 21,363
----------- ---------- ------------- ------------- ------------ -------------
Balance at October 31, 2010 4,691,448 $ 53,879 $ 4,758,816 $ (8,784,473) $ (1,623,475) $ (5,595,253)
=========== ========== ============= ============== ============= ==============
See accompanying notes to consolidated financial statements.
F - 4
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended October 31, 2010 and 2009
2010 2009
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 21,363 $ 154,214
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,946,476 1,676,606
Recovery of provision for doubtful accounts receivable (18,720) (10,350)
Stock-based compensation expense 119,658 34,592
Changes in operating assets and liabilities:
Accounts receivable (968,138) (226,805)
Prepaid expenses and other current assets (25,184) (97,445)
Other assets 28,539 (181,386)
Accounts payable 574,784 (207,992)
Accrued expenses and other current liabilities 358,036 (293,339)
Deferred revenue 49,249 423,636
Accrued interest - related party (661,901) 1,108,112
------------- ------------
Total adjustments 1,402,799 2,225,629
------------- ------------
Net cash provided by operating activities 1,424,162 2,379,843
CASH FLOWS FROM INVESTING ACTIVITIES
PASSUR(R) Network, net (1,250,095) (1,466,421)
Software development costs, net (1,287,151) (896,545)
Property, plant and equipment, net (136,836) (105,692)
------------- ------------
Net cash used in investing activities (2,674,082) (2,468,658)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - related party 1,150,000 100,000
Repayments of notes payable - related party (250,000) --
Proceeds from exercise of stock options 206,363 22,125
------------- ------------
Net cash provided by financing activities 1,106,363 122,125
------------- ------------
(Decrease) increase in cash (143,557) 33,310
Cash - beginning of year 250,626 217,316
------------- ------------
Cash - end of year $ 107,069 $ 250,626
============= ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest - related party $ 2,036,837 $ --
Income taxes $ 26,324 $ 8,812
See accompanying notes to consolidated financial statements.
F - 5
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements
October 31, 2010
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company is a business intelligence company which develops predictive
analytics built on proprietary algorithms and on concurrent integration and
simultaneous mining of multiple databases.
BASIS OF PRESENTATION
The Company's current liabilities exceeded current assets by $1,601,000 and had
a stockholder's deficit of $5,595,000 at October 31, 2010. The Company had net
income of $21,000 in fiscal year 2010.
Management is addressing the Company's working capital and stockholders'
deficiencies 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. The Company intends to increase the size and
related airspace coverage of its Company-owned PASSUR(R) Network, by continuing
to install PASSUR(R) Systems throughout the United States and certain foreign
countries. In addition, management believes that expanding its existing suite of
software products and professional services, which address the wide array of
needs of the aviation industry, through the continued development of new product
and service offerings, will continue to lead to increased growth in the
Company's customer-base and subscription-based revenues. Additionally, if the
Company's business plan does not generate sufficient cash flows from operations
to meet the Company's operating cash requirements, the Company will attempt to
obtain external financing, and if such external financing is not 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 25, 2012. Such continuing financial support may be in the form of
additional loans to the Company, in addition to the deferral of principal and/or
interest payments due on the outstanding loans, if deemed necessary.
Certain financial information in the footnotes has been rounded to the nearest
thousand for presentation purposes.
PRINCIPLES OF CONSOLIDATION
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.
REVENUE RECOGNITION POLICY
The Company follows the provisions of FASB ASC 985-605 (SOP 97-2, "Software
Revenue Recognition"), as amended. ASC 985-605 delineates the accounting
practices for software products, maintenance, support services, and professional
services revenue. Under ASC 985-605, the Company recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
determinable, and collection of the resulting receivable is probable. For
arrangements involving multiple elements (e.g. maintenance, support, and other
services), the Company allocates revenue to each element of the arrangement
based on vendor-specific objective evidence of its fair value, or for products
not being sold separately, the objective and verifiable fair value established
by management.
F - 6
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION POLICY (CONTINUED)
The Company recognizes service and maintenance revenues on a straight-line basis
over the service contract period. Revenues for data subscription services are
recognized on a monthly basis upon the execution of an agreement and the
customer's receipt of the data. The Company performs certain professional
services for customers on a subscription basis that have stand-alone value. Such
subscription-based professional services are recognized over the subscription
period.
The Company recognizes license fee revenues on a straight-line basis over the
term of the license agreement, which typically does not exceed five years.
The Company recognizes initial set-up fee revenues and associated costs on a
straight-line basis over the estimated life of the customer relationship period,
typically five years.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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 uses installment license and/or maintenance agreements as part of
its standard business practice. The Company has a history of successfully
collecting all amounts due under the original payment terms without making
concessions. 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. These account receivable balances include
unearned revenue attributable to deferred subscription revenues, deferred
maintenance revenues, and unamortized license fee revenues.
Accounts receivable balances also include initial set-up fees billed when the
service is performed and revenues are recognized on a straight-line basis over
the estimated life of the customer relationship period, typically five years.
The provision for doubtful accounts was $25,000 and $43,000 as of October 31,
2010 and 2009, 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.
F - 7
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PASSUR(R) NETWORK
The PASSUR(R) Network includes PASSUR(R) Systems and the related software
workstations used for the data derived from the PASSUR(R) Systems, as well as
costs pertaining to raw material, work-in-process, and finished goods
components. PASSUR(R) Network installations include the direct and indirect
production and installation costs incurred for each of the Company-owned
PASSUR(R) Systems, and are recorded at cost, net of accumulated depreciation of
$6,331,000 and $5,090,000 as of October 31, 2010 and 2009, 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) Network assets which are not installed in
the PASSUR(R) Network are carried at cost and no depreciation is recorded.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company follows the provisions of FASB ASC 985-20 (SFAS 86, "Accounting for
the Costs of Software to be Sold, Leased, or Otherwise Marketed.") Capitalized
software development costs are comprised of costs incurred to develop and
significantly enhance software products to be sold or otherwise marketed. Once
technological feasibility is established, and the software product is available
for general release to the public, the Company begins to amortize such costs to
cost of revenues.
Amortization of capitalized software costs is provided on a product-by-product
basis based on the greater of the ratio of current gross revenues to the total
of current and anticipated future gross revenues or the straight-line method
over the estimated economic life of the product beginning at the point the
product becomes available for general release, typically over five years. Costs
incurred to improve and support products after they become available for general
release are charged to expense as incurred. Costs incurred to enhance products
are capitalized. The assessment of recoverability of capitalized software
development costs requires the exercise of judgment by management. In the
opinion of management, all such costs capitalized as of October 31, 2010 are
recoverable through anticipated future sales of such applicable products. The
Company capitalized $1,287,000 and $897,000 of such costs in fiscal years 2010
and 2009, respectively. The Company recorded $468,000 and $371,000 of
amortization related to software development projects during fiscal years 2010
and 2009, respectively. The Company released capitalized software products for
sale during fiscal years 2010 and 2009, and had other software products in
development as of October 31, 2010 and 2009.
The Company did not write off any capitalized software projects during fiscal
years 2010 and 2009.
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.
F - 8
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST OF REVENUES
Costs associated with subscription and maintenance revenues consist primarily of
direct labor, depreciation of PASSUR(R) Network Systems, amortization of
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) Network Systems
necessary to make such systems compatible with new software applications, as
well as the ordinary repair and maintenance of existing PASSUR(R) Network
Systems. Additionally, cost of revenues in each reporting period is impacted by:
(1) the number of PASSUR(R) Network units added, which include the production,
shipment, and installation of these assets, which are capitalized to the
PASSUR(R) Network; and (2) capitalized costs associated with software
development 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
740-10 (Financial Accounting Standards Board ("FASB") Interpretation No. 48),
"Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109" ("FIN 48"), 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, 2010, the
Company did not have any uncertain tax positions, and the Company does not
expect ASC 740-10 (FIN 48) to have a significant impact on its results of
operations or financial position during the next 12 months. As permitted by
ASC-740-10 (FIN 48), the Company also adopted an accounting policy to
prospectively classify accrued interest and penalties related to any
unrecognized tax benefits in its income tax provision. Previously, the Company's
policy was to classify interest and penalties as an interest expense in arriving
at pre-tax income.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
F - 9
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 2010
and 2009 are as follows:
2010 2009
----------- -----------
Basic weighted average shares outstanding 4,553,681 4,190,900
Effect of dilutive stock options 788,618 1,074,989
----------- -----------
Diluted weighted average shares outstanding 5,342,299 5,265,889
=========== ===========
Weighted average shares which are not included
in the calculation of diluted net income per
share because their impact is anti-dilutive
Stock options 689,381 552,011
=========== ===========
DEFERRED REVENUE
Deferred revenue includes advances received on subscription services and/or
maintenance agreements, which are derived from the Company's PASSUR(R) Network
and which may be prepaid either annually or quarterly, as well as the
unamortized portion of one-time payments received for license fees relating to
Company software applications. Revenues from subscription and maintenance
services are recognized as income ratably over the subscription and/or
maintenance period that coincides with the respective agreement.
The Company recognizes license fee revenues on a straight-line basis over the
term of the license agreement, which typically does not exceed five years.
The Company recognizes initial set-up fee revenues and associated costs on a
straight-line basis over the estimated life of the customer relationship period,
typically five years.
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 (see footnote 6) 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.
F - 10
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 (SFAS 123R, "Share-Based Payments") 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 $120,000 and $35,000 in fiscal years 2010
and 2009, respectively, and was primarily included in selling, general, and
administrative expenses. Stock-based compensation expense was reduced in fiscal
year 2009 due to reversals of $31,000 for the forfeiture of stock options with a
service condition, previously issued to employees terminated in fiscal year
2009.
The Company's stock options vest over a period of three and 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 2010 and 2009; risk-free interest rates of 3.54% to
4.47%, volatility factor of the expected market price of the Company's common
stock of 109% to 128%, 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 2010 and 2009.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued an accounting standard update amending the
disclosure requirements for financial instruments under fair value. New
disclosures required include the amount of significant transfers in and out of
levels 1 and 2 fair value measurements and the reasons for the transfers. In
addition, the reconciliation for level 3 activity will be required on a gross
rather than net basis. The update provides additional guidance related to the
level of disaggregation in determining classes of assets and liabilities and
disclosures about inputs and valuation techniques. This is effective for fiscal
years beginning on or after December 31, 2009, and interim periods within these
fiscal years. The Company does not expect the adoption of this guidance to have
a material impact on its consolidated financial statements and disclosures.
In September 2009, the FASB issued a standard which modifies the revenue
recognition guidance for arrangements that involve the delivery of multiple
elements, such as product, software, services or support, to a customer at
different times as part of a single revenue generating transaction. This
standard provides principles and application guidance to determine whether
multiple deliverables exist, how the individual deliverables should be
separated, and how to allocate the revenue in the arrangement among those
separate deliverables. The standard also expands the disclosure requirements for
multiple deliverable revenue arrangements. This standard is effective for fiscal
years beginning on or after June 15, 2010. The Company does not expect the
adoption of this guidance to have a material impact on its consolidated
financial statements.
F - 11
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In September 2009, the FASB issued a standard which changes the accounting model
for revenue arrangements that include both tangible products and software
elements and provides additional guidance on how to determine which software, if
any, relating to tangible product would be excluded from the scope of the
software revenue guidance. In addition, it provides guidance on how a vendor
should allocate arrangement consideration to deliverables in an arrangement that
includes both tangible products and software. This standard is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. The Company does not expect
the adoption of this guidance to have a material impact on its consolidated
financial statements.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of October 31, 2010
and 2009:
ESTIMATED
USEFUL LIVES 2010 2009
--------------------------------------------
Leasehold improvements 3-5 years $ 180,000 $ 155,000
Equipment 5-10 years 3,073,000 2,982,000
Furniture and fixtures 5-10 years 503,000 482,000
------------- ------------
3,756,000 3,619,000
Less accumulated depreciation
and amortization 3,597,000 3,360,000
------------- ------------
Total $ 159,000 $ 259,000
============= ============
The Company recorded depreciation and amortization expense on the assets
included in property, plant and equipment of $237,000 and $227,000 for fiscal
years 2010 and 2009, respectively.
3. PASSUR(R) NETWORK
The Company had $13,632,000 and $12,381,000 of Company-owned PASSUR(R) Systems
capitalized, and $6,331,000 and $5,090,000 of accumulated depreciation related
to such costs, of as of October 31, 2010 and 2009, 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) Network Systems which are not installed in the PASSUR(R) Network are
carried at cost and no depreciation is recorded. These costs amounted to
$168,000 as of October 31, 2010. The Company capitalized $1,250,000 and
$1,466,000 of costs to the PASSUR(R) Network during fiscal years 2010 and 2009,
respectively. Included in the PASSUR(R) Network are $540,000 and $478,000 of
costs pertaining to raw material, work-in-process, and finished goods components
as of October 31, 2010 and 2009, respectively. Depreciation expense related to
the Company-owned PASSUR(R) Network was $1,241,000 and $1,079,000 in fiscal
years 2010 and 2009, respectively. The Company did not dispose of any PASSUR(R)
Network assets in fiscal years 2010 or 2009.
F - 12
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company had $$5,431,000 and $4,144,000 of software development costs
capitalized, and $2,096,000 and $1,628,000 of accumulated amortization related
to such costs, as of October 31, 2010 and 2009, respectively. The average
amortization period of the Company's software development costs was 3.6 years as
of October 31, 2010. Amortization related to capitalized software development
projects was $468,000 and $371,000 in fiscal years 2010 and 2009, respectively.
Future amortization expense for software development costs capitalized where
amortization has commenced, is estimated to approximate $496,000, $409,000,
$316,000, $166,000, and $79,000, for the next five fiscal years, respectively.
The Company had $1,885,000 of capitalized software development costs relating to
projects still in development as of October 31, 2010.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following as of
October 31, 2010 and
2009:
2010 2009
------------- -------------
Payroll, payroll taxes, and benefits $ 286,000 $ 255,000
Professional fees 188,000 121,000
License fees 50,000 50,000
Travel expenses 70,000 25,000
Commissions 186,000 16,000
Other liabilities 119,000 74,000
------------- -------------
Total $ 899,000 $ 541,000
============= =============
6. NOTES PAYABLE - RELATED PARTY
Effective November 1, 2008, the Company entered into a new agreement, renewing
and extending the term of the $13,815,000 note due to G.S. Beckwith Gilbert, the
Company's significant shareholder and Chairman, from one year to three years,
resulting in an increase in the interest rate from 4.5% to 9% as of February 1,
2009, with a maturity of November 1, 2011. During fiscal year 2009, Mr. Gilbert
loaned the Company an additional $100,000, bringing the principal amount of
notes due to Mr. Gilbert to $13,915,000 on October 31, 2009. The accrued
interest balance on the notes was $1,108,000 as of October 31, 2009, resulting
in a total of $15,023,000 due to Mr. Gilbert on October 31, 2009.
Under the agreement, interest remained at the annual rate of 4.5% from November
1, 2008 to January 31, 2009, payable in cash. Effective February 1, 2009 through
October 31, 2011, the interest rate was increased to 9% and is payable as
follows: interest at the annual rate of 6% will be payable in cash with the
remaining interest, at the annual rate of 3%, payable at the option of the
Company in cash or "paid in kind" and added to the principal of the note. Annual
interest payments are due at October 31 of each fiscal year. During October
2009, the Company entered into an agreement to extend the interest payment due
to Mr. Gilbert on October 31, 2009 to December 31, 2009. This interest payment
was paid in full by the Company prior to the extended due date.
F - 13
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. NOTES PAYABLE - RELATED PARTY (CONTINUED)
In fiscal year 2010, Mr. Gilbert loaned the Company an additional $1,150,000,
used in part to fund the prior fiscal year's interest payment, increasing the
principal balance to $15,065,000. During fiscal year 2010, the Company paid
fiscal year 2010 interest to Mr. Gilbert of $914,000, representing the entire
cash portion of the fiscal 2010 interest due, thereby meeting the cash payment
requirements of the loan agreement. Total cash payments for interest made to Mr.
Gilbert in fiscal year 2010 were $2,037,000, including the remaining fiscal year
2009 interest payment. The balance of the fiscal year 2010 interest payable of
$446,000 was accrued. In October 2010, the Company made a $250,000 principal
payment, reducing loan principal to $14,815,000, resulting in a total of
$15,261,000 due to Mr. Gilbert as of October 31, 2010.
The Company has a commitment from Mr. Gilbert that if the Company, at any time,
is unable to meet its obligations through January 25, 2012, Mr. 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 notes are secured by the Company's assets.
7. LEASES
The Company's headquarters, located in Stamford, Connecticut, are subject to a
lease for the five year period ending January 21, 2015, at an average annual
rental rate of $209,000. The Company's software development and manufacturing
facility, located in Bohemia, New York, is subject to a lease through October
31, 2012, at an average annual rental rate of $109,000. These leases provide for
additional payments of real estate taxes and other operating expenses over the
minimum rental amount. Other short-term operating leases are included below. All
other operating leases are under a month-to-month arrangement.
Fiscal Year Ended October 31: CONTRACTUAL OBLIGATIONS
UNDER OPERATING LEASES
----------------------
2011 $ 323,000
2012 321,000
2013 213,000
2014 218,000
2015 51,000
-------------
Total minimum contractual $ 1,126,000
=============
8. INCOME TAXES
The Company's provision for income taxes in each fiscal year consists of current
state and local minimum taxes.
At October 31, 2010, the Company has available a federal net operating loss
("NOL") carry-forward of $12,653,000 for income tax purposes, which will expire
in various tax years from 2011 through 2029. The Company has provided a full
valuation allowance on the net deferred tax asset of $4,399,000, which primarily
consists of net operating loss carry-forwards, which are not considered more
likely than not to be realizable.
The Company's provision for income taxes in each fiscal year consists of current
state and local minimum taxes.
F - 14
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
A reconciliation of the U.S statutory tax rate to the Company's effective tax
rate for fiscal years 2010 and 2009 is as follows:
2010 2009
AMOUNT PERCENT Amount Percent
------------ ----------- ------------ ---------
U.S. statutory tax $ 23,000 34.0% $ 55,000 34.0%
Decrease in valuation
allowance (83,000) (122.3) (69,000) (42.6)
Permanent differences (38,000) (56.8) (5,000) (3.2)
NOL stock-compensation
adjustment 116,000 171.4 -- --
State tax, net of
federal benefit 30,000 45.1 6,000 3.6
Reversal of AMT credit -- -- 22,000 13.6
Other, net (2,000) (3.0) -- --
----------- ----------- ----------- ----------
Effective tax rate $ 46,000 68.4% $ 9,000 5.4%
=========== ============ =========== ==========
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities as of October 31, 2010 and 2009 is as follows:
2010 2009
--------------- --------------
Deferred tax assets and liabilities:
Net operating loss carry-forward $ 4,924,000 $ 4,582,000
Accrued interest 178,000 443,000
Accrued vacation 78,000 78,000
Allowance for doubtful accounts receivable 10,000 17,000
Stock compensation-nonqualified 7,000 22,000
Contributions 4,000 --
Depreciation (802,000) (645,000)
--------------- --------------
Deferred tax assets and liabilities 4,399,000 4,497,000
Less: valuation allowance (4,399,000) (4,497,000)
--------------- --------------
Net deferred tax assets and liabilities $ -- $ --
=============== ==============
F - 15
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
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. 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.
There were 535,500 shares of common stock reserved for future issuance under the
Company's 2009 stock option plan as of October 31, 2010. For fiscal year 2010
stock-based compensation expense of $120,000 was primarily charged to selling,
general, and administrative expense, consisting of $45,000 for stock options
granted during fiscal year 2010 and $75,000 for stock options granted prior to
October 31, 2009. There was $1,115,000 of unrecognized stock-based compensation
costs, net of estimated forfeitures, related to non-vested, stock-based
compensation arrangements, expected to be recognized over a weighted average
period of 4.5 years as of October 31, 2010.
Information with respect to the Company's stock options for fiscal years 2010
and 2009 is as follows:
WEIGHTED
AVERAGE
WEIGHTED REMAINING
NUMBER OF AVERAGE CONTRACTUAL AGGREGATE
STOCK EXERCISE TERM INTRINSIC
OPTIONS PRICE (IN YEARS) VALUE
-----------------------------------------------
Stock options outstanding
at November 1, 2008 1,785,500 $ .75
Stock options granted 70,000 $ 2.05
Stock options exercised (147,500) $ .15
Stock options forfeited
and expired (81,000) $ 3.95
----------
Outstanding at
October 31, 2009 1,627,000 $ .70
Stock options granted 394,500 $ 3.32
Stock options exercised (397,500) $ .52
Stock options forfeited (146,000) $ 1.23
----------
Stock options outstanding
at October 31, 2010 1,478,000 $ 1.40 5.5 $ 2,068,000
========== ========= ========= ============
Stock options exercisable
at October 31, 2010 984,700 $ .51 3.5 $ 498,000
========== ========= ========= ============
The weighted average grant date fair value of the Company's stock options
granted during fiscal years 2010 and 2009 was $2.42 and $1.86, respectively. The
total intrinsic value of stock options exercised was $206,000 and $22,000 during
fiscal years 2010 and 2009, respectively.
F-16
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. MAJOR CUSTOMERS
The Company's principal business is to provide business intelligence and
predictive analytics solutions serving the needs of the aviation industry,
primarily airlines, airports, and other aviation related companies. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. Credit losses historically have been immaterial.
Two customers accounted for 23% and 22% of total revenues for fiscal years 2010
and 2009, respectively.
The Company had foreign sales of $147,000 and $157,000 in fiscal years 2010 and
2009, respectively. All sales, including foreign sales, are denominated in U.S.
dollars.
11. ROYALTY AGREEMENT
The Company is a party to a license agreement, as amended in fiscal year 2001,
whereby the Company is granted the exclusive right and license worldwide to
manufacture and sell PASSUR(R) Systems for use with airline dispatch systems and
in other aircraft flight tracking systems. The Company is also granted an
exclusive worldwide license to sell PASSUR(R) Systems and/or data subscriptions
for noise applications, dispatch activities, and new applications based on
modifications to existing designs. Under the terms of 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. The Company had $50,000 accrued as a component
of accrued expenses and other accrued liabilities as of October 31, 2010 and
2009. This license agreement is in effect until the date of expiration of the
last licensed patent to expire, which occurs in 2013.
F - 1
