U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A
Amendment #1
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended October 31, 1997
--------------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File Number 0-15362
--------------------------------------------
COMPUFLIGHT, INC.
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 11-2883366
- --------------------------------------------------------------------------------
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification Number)
125 Mineola Avenue, Roslyn Heights, NY 11577
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number (516) 625-0202
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
- --------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 No X
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year (1997): $ 2,790,367
The aggregate market value of the voting stock held by non-affiliates based
upon the average bid and asked prices of such stock as of September 30, 1999 was
$ 122,689
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
(APPLICABLE ONLY TO CORPORATE REGISTRANTS) The number of
shares outstanding of the issuer's common stock, as of
September 30, 1999 was 2,001,980 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
None
<PAGE>
COMPUFLIGHT, INC.
1997 FORM 10-KSB/A
Amendment 1
TABLE OF CONTENTS
PART II
Item 7. Financial Statements
PART III
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheet as of October 31, 1997 F-3
Consolidated Statements of Operations for the Years Ended
October 31, 1997 and 1996 F-4
Consolidated Statement of Shareholders' Deficit for the
Years Ended October 31, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 to F-27
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Compuflight, Inc.
We have audited the accompanying consolidated balance sheet of Compuflight, Inc.
and Subsidiaries (the "Company") as of October 31, 1997 and the related
consolidated statements of operations, shareholders' deficit and cash flows for
each of the two 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Compuflight, Inc. and Subsidiaries as of October 31, 1997, and the results of
its consolidated operations and its cash flows for each of the two years then
ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the financial
statements, as of October 31, 1997, the Company has a deficiency in working
capital and shareholders equity of $1,039,201 and $651,535, respectively, and
has incurred a net loss of $1,818,652 for the year ended October 31, 1997. This
factor, among others, as described in Note B to the consolidated financial
statements, raises substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note B. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
GRANT THORNTON LLP
Melville, New York
August 5, 1999
F-2
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<TABLE>
<S> <C>
Compuflight, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
October 31, 1997
ASSETS
CURRENT ASSETS
Accounts receivable, net of allowance for doubtful accounts
of $178,997 $ 250,476
Prepaid expenses and other 18,206
-----------
Total current assets 268,682
INVESTMENT TAX CREDITS RECEIVABLE, NET OF ALLOWANCE 490,850
FIXED ASSETS, NET 403,475
RESTRICTED CASH 50,000
OTHER ASSETS 22,120
$1,235,127
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Cash overdraft $ 81,996
Bank revolving demand loans 81,615
Accounts payable 473,429
Accrued and other liabilities 442,178
Due to related parties - current portion 169,608
Current portion of long-term debt 43,627
Current portion of deferred lease inducements 15,430
----------
1,307,883
DUE TO RELATED PARTIES 76,672
LONG-TERM DEBT 112,702
DEFERRED LEASE INDUCEMENTS 123,440
OTHER LIABILITIES 11,751
MINORITY INTERESTS 254,214
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIENCY
Common stock, par value $.001 per share; authorized
2,500,000 shares; issued and outstanding,
1,701,980 shares 1,702
Additional paid-in capital 1,545,745
Notes receivable - former chairmen (278,325)
Cumulative foreign exchange adjustment 43,070
Accumulated deficit (1,963,727)
----------
(651,535)
$1,235,127
The accompanying notes are an integral part of this statement.
F-3
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Compuflight, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended October 31,
1997 1996
---------- ----------
Revenue
Service fees $2,665,337 $3,078,084
Hardware, software and license sales 125,030 496,505
---------- ----------
2,790,367 3,574,589
---------- ----------
Costs and expenses
Operating 2,398,086 2,023,678
Research and development, net 35,334 122,177
Selling, general and administrative 1,532,665 1,157,488
Allowance for reduction in scientific research and
experimental development credits 296,029
Restructuring costs 90,948
Office relocation costs 67,678
Depreciation and amortization 162,448 133,072
---------- ----------
4,583,188 3,436,415
---------- ----------
Operating (loss) income (1,792,821) 138,174
Other income (expense)
Interest income 54,590 59,825
Interest expense - related parties (35,680) (40,351)
Interest expense - other (68,834) (46,587)
Realized foreign exchange loss (7,690) (645)
Waiver of deferred salaries 5,499
Other 30,783 33,751
----------- ----------
NET (LOSS) INCOME $(1,819,652) $ 149,666
========== ==========
Net (loss) income per share $(1.07) $0.09
===== ====
Weighted average number of common shares outstanding 1,701,980 1,691,563
========= =========
The accompanying notes are an integral part of these statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Compuflight, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
Years ended October 31, 1997 and 1996
Notes Cumulative
Additional Receivable - foreign
Common stock paid -in former translation Accumulated
Shares Amount capital chairmen adjustment deficit Total
---------- ------- ----------- ----------- ----------- ------------ --------
Balance at November 1, 1995 1,576,980 $1,577 $1,444,308 $(1,050,533) $54,034 $(293,741) $155,645
Issuance of common stock 125,000 125 101,437 101,562
Amortization of notes receivable -
former chairman 71,266 71,266
Repayments from RE&A - net 16,759 16,759
Foreign translation adjustment 11,125 11,125
Net income 149,666 149,666
---------- --------- ------------- ------------ --------- -------- --------
Balance at October 31, 1996 1,701,980 1,702 1,545,745 (962,508) 65,159 (144,075) 506,023
Write off of notes receivable -
former chairman 599,456 599,456
Repayments from RE&A - net 84,727 84,727
Foreign translation adjustment (22,089) (22,089)
Net loss (1,819,652) (1,819,652)
---------- ------- ------------- ------------ --------- ---------- ----------
Balance at October 31, 1997 1,701,980 $1,702 $1,545,745 $ (278,325) $43,070 $(1,963,727) $ (651,535)
========= ===== ========= ========== ====== ========== =========
The accompanying notes are an integral part of this statement.
F-5
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Compuflight, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended October 31,
1997 1996
---------- --------
Cash flows from operating activities
Net (loss) income $(1,819,652) $ 149,666
Adjustments to reconcile net earnings to net cash provided by operating
activities
Depreciation and amortization 162,448 133,072
Provision for uncollectible accounts 106,731 68,685
Allowance for reduction in investment tax credits 296,029
Write off of note receivable - former chairman 599,456
Consulting fees, net 71,266
(Increase) decrease in operating assets
Accounts receivable 237,336 (266,390)
Scientific research and experimental development credits (61,827) (290,559)
License fees receivable 104,502 235,110
Prepaid expenses and other 9,164 3,247
Increase (decrease) in operating liabilities
Accounts payable and accrued liabilities 144,239 264
--------- ---------
Net cash (used in) provided by operating activities (221,574) 104,361
--------- ---------
Cash flows from investing activities
Purchase of fixed assets (330,225) (27,247)
Proceeds from lease inducements 141,023
Payments from RE&A 66,223 16,759
--------- ---------
Net cash used in investing activities (122,979) (10,488)
--------- ---------
Cash flows from financing activities
Cash overdraft 81,995
Proceeds from bank revolving demand loans 81,616
Restricted cash (50,000)
Payment of notes - former affiliate (197,337)
Proceeds from bank loan 158,752
Proceeds from loan 13,948
Proceeds from note 47,215 44,753
Payment of notes (40,031) (2,943)
--------- ---------
Net cash provided by (used in) financing activities 293,495 (155,527)
--------- ---------
Effect of foreign translations on cash 13,696 1,104
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS
(37,362) (60,550)
Cash and cash equivalents at beginning of year 37,362 97,912
--------- ---------
Cash and cash equivalents at end of year $ $ 37,362
========= =========
The accompanying notes are an integral part of these statements.
F-6
</TABLE>
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1997 and 1996
NOTE A - DESCRIPTION OF BUSINESS AND ORGANIZATION
Compuflight, Inc. ("Compuflight") and Subsidiaries, Navtech
Systems Support Inc. ("Support") and Efficient Aviation Systems Inc.
("EAS") (herein referred to collectively as the "Company") are engaged
in the business of (1) providing computerized flight planning services
to all segments of the aviation industry, but principally to
commercial airlines and corporate aircraft users and (2) selling
customized versions of their proprietary software to end users mainly
throughout the United States and Canada.
NOTE B - LIQUIDITY AND CAPITAL RESOURCES
The consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. However, as of October
31, 1997, the Company has a deficiency in working capital and
shareholders' equity of $1,039,201 and $651,535, respectively, and has
a net loss of $1,819,652 for the year ended October 31, 1997. This
raises substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that may result should the Company be unable to continue in
existence.
The Company and its senior management group have focused on four
specific areas to address both strategic direction and daily
operational issues in an effort to position the Company for future
profitability as outlined below.
o The Company has increased its marketing endeavors with respect to
its two major software products, AURORA and COMRAD. This increase
is also tied to a strategic redirection by senior management to
focus the Company on the sale of systems versus the provision of
flight planning on a service bureau basis. These efforts have
resulted in several larger system sales in fiscal 1997. In
addition, the Company continues to develop complementary products
to address marketplace demands.
o The Company has added to its senior management team in order to
provide support for the development, customer support and
operations areas of the business. As a result, management
believes, an efficient management structure has been created with
a clear division between strategic and operational policy
development.
o The Company devoted time to the realization of its investment tax
credits receivable under the Canadian Scientific Research and
Experimental Development incentive program.
o The Company has continued its pursuit of financing.
F-7
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE B (continued)
The Company's operation is dependent upon its ability to obtain new
customers, to maintain profitable levels of service and to maintain
existing financial arrangements or obtain new financing. There can be
no assurance that sufficient cash flows will be generated by the
Company to avoid the further depletion of its working capital.
Additionally, there can be no assurance that additional debt or equity
financing will be available, if and when needed, or that if available,
such financing could be completed on commercially favorable terms.
Furthermore, no assurances can be given the above plans will enable the
Company to continue in existence.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in
the preparation of the consolidated financial statements follows:
1. Principles of Consolidation
The consolidated financial statements include the accounts of
Compuflight and its 100%-owned subsidiaries, Support and EAS. All
material intercompany balances and transactions have been eliminated in
consolidation. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 52, "Foreign Currency Translations," assets and
liabilities of foreign operations are translated at current rates of
exchange, while results of operations are translated at average rates
in effect for the period. Unrealized translation gains or losses are
shown as a separate component of shareholders' deficit.
2. Fixed Assets
Fixed assets are recorded at cost. Depreciation and amortization is
provided using the straight-line and declining balance methods over the
estimated useful lives of the related assets.
3. Goodwill
Goodwill is recorded at cost and is included as a component of other
assets. Amortization is computed on the straight-line method over ten
years.
F-8
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE C (continued)
4. Software Development Costs
The Company capitalizes expenditures incurred for the development of
existing software which has already reached technological feasibility
and expenses all other costs. Amortization is computed by the
straight-line method over the estimated useful life of the software.
5. Minority Interests
Effective November 24, 1995, the Company issued 125,000 shares of its
common stock in exchange for 500,000 shares of Support, which
represented the common shares of Support held by the one remaining
common shareholder of Support, Innovation Ontario Corporation, a
provincial government agency, and, accordingly, the Company now owns
100% of the outstanding common shares of Support. The excess of the
fair market value of the Company's common stock on the date of the
exchange ($101,563) over the Company's minority interest ($78,411) has
been recorded as goodwill (included in other assets) in the
accompanying consolidated balance sheet.
Minority interests at October 31, 1997 consist of 3,600 shares of Class
B, nonvoting shares of Support. Such shares, issued for $358,200
Canadian ($254,214 U.S. at October 31, 1997), are entitled to
noncumulative dividends of $8 per share and are redeemable at the
option of the Company for $540,000 Canadian ($383,238 U.S.). To date,
no dividends have been declared or paid with respect to such shares.
6. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-9
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE C (continued)
7. Income Taxes
Deferred income taxes are recognized for the tax consequences of
temporary differences by employing enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. A
valuation allowance has been established to offset the deferred tax
assets as it is more likely than not that such deferred tax assets will
not be realized.
8. Stock-based Compensation
During fiscal 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." As permitted under this standard, the
Company elected to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation expense for stock
options is measured as the excess, if any, of the fair value of the
Company's stock at the date of grant over the amount an employee must
pay to acquire the stock. Pro forma disclosures of net income and
income per common share for fiscal 1996, as if the fair value-based
method prescribed by SFAS No. 123 had been applied in measuring
compensation expense, are presented in Note I.
9. Net (Loss) Income Per Share
Net (loss) income per share of common stock is based upon the weighted
average number of shares outstanding during each year. Common stock
equivalents consist of additional shares that would be outstanding
assuming the exercise of dilutive outstanding stock options. Potential
common stock equivalents from outstanding stock options are excluded in
computing net loss per share for fiscal 1997 as their effects would be
antidilutive. No common stock equivalents were included in the net
income per common share calculation during fiscal 1996 as their
inclusion would not be materially dilutive.
F-10
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE C (continued)
10. Revenue Recognition
Revenue from license fees is recognized at the later of delivery of
software master copy or, if applicable, fulfillment of all other
significant obligations under terms of license agreements. The Company
has no significant expenditures relating either to warranties or
post-contract customer support bundled with the initial sale of the
license and, therefore, no provision is included in the consolidated
financial statements. For those agreements where there is uncertainty
as to ultimate collection, revenue is recognized only as cash is
received. Systems consulting and implementation fees and hardware
commissions are recognized upon rendering of services. Custom
programming, communication and database income, and service bureau and
support revenue are recognized ratably over applicable contractual
periods or as services are performed. Amounts billed but not yet earned
and payments received prior to the earnings of the revenue are recorded
as deferred revenue.
11. Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents. The Company paid interest
of approximately $57,800 and $47,600 during the years ended October 31,
1997 and 1996, respectively.
12. Accounting Pronouncements Not Yet Adopted
In February 1997, SFAS No. 128, "Earnings Per Share" was issued and is
effective for financial statements for both interim and annual periods
ending after December 15, 1997. Early adoption of the new standard is
not permitted. The new standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted
earnings per share together with disclosure of how the per share
amounts were computed. The adoption of this new standard is not
expected to have a material impact on the disclosure of earnings per
share in the Company's financial statements.
F-11
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE C (continued)
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was
issued. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. SFAS No.
130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 requires that a company (a)
classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided
for comparative purposes is required. The adoption of SFAS No. 130 is
not expected to have a material affect on the Company's consolidated
financial statements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," was issued. SFAS No. 131
establishes standards for the way that public companies report selected
information about operating segments in annual financial statements and
requires that those companies report selected information about
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131, which
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report information about
major customers, requires that a public company report financial and
descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources
and in assessing performance. Generally, financial information is
required to be reported on the basis that it is used internally for
evaluating segment performance and deciding how to allocate resources
to segments. SFAS No. 131 requires that a public company report a
measure of segment profit or loss, certain specific revenue and expense
items, and segment assets. However, SFAS No. 131 does not require that
reporting of information that is not prepared for internal use if
reporting it would be impracticable. SFAS No. 131 also requires that a
public company report descriptive information about the way that the
operating segments were determined, the products and services provided
by the operating segments, differences between the measurements used in
reporting segment information and those used in the enterprise's
general-purpose financial statements, and changes in the measurement of
segment amounts from period to period. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. The
adoption of SFAS No. 131 is not expected to have a material affect on
the Company's segment disclosure.
F-12
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE C (continued)
In October 1997, the Accounting Standards Executive Committee ("AcSEC")
of the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition". SOP
97-2 provides guidance on the timing and amount of revenue recognition
when licensing, selling, leasing or otherwise marketing computer
software and is effective for transactions entered into during fiscal
years beginning after December 15, 1997. On March 18, 1998, the
Financial Accounting Standards Board issued a new SOP that provides for
the one-year deferral of certain provisions of SOP 97-2 pertaining to
its requirements for what constitutes vendor specific evidence of the
fair value of multiple elements included in an arrangement. It is
AcSEC's intention to immediately begin a project to consider whether
guidance is needed on any restrictions that should be placed on what
constitutes evidence of fair value and, if so, what the guidance should
be. Because of the uncertainties with respect to the outcome of any
such project, the Company believes that the impact of the deferred
provisions of SOP 97-2 on its financial position or results of
operations upon expiration of the one-year deferral period is not
currently determinable. However, the Company believes that those
provisions of SOP 97-2 that have not been deferred, and therefore are
applicable commencing January 1, 1998, will not materially affect its
consolidated financial position or results of operations.
In February 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" which is
effective for years beginning after December 15, 1998. SOP 98-1
establishes the accounting for costs of software products developed or
purchased for internal use, including when such costs should be
capitalized. The Company does not expect SOP 98-1 to have a significant
impact on the Company's consolidated financial condition or results of
operations.
13. Reclassifications
For comparative purposes, certain prior year amounts have been
reclassified to conform to the current year presentation.
F-13
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE D - INVESTMENT TAX CREDITS RECEIVABLE
The Company has filed claims for Canadian investment tax credits
aggregating $946,053 for fiscal years ended October 31, 1992 through
October 31, 1997. These scientific research and experimental development
investment tax credits are available to certain entities located in Canada
for qualified scientific research expenditures. The rate of credit for
qualified research and development expenditures varies according to the
status of the company and, in certain instances, the company's taxable
income for the prior year. Credits aggregating approximately $64,000 and
$290,000, in 1998 and 1997, respectively, have been recorded as a reduction
in research and development expense.
In September 1998, Revenue Canada, the Canadian taxing authority, issued an
assessment to the Company with respect to its claims for fiscal years ended
October 31, 1992 through October 31, 1995 and an assessment for the
Company's claim related to fiscal 1996 followed in January 1999. The
assessments resulted from the completion of both financial and scientific
audits.
All of the Company's claims were subjected, by Revenue Canada, to
reductions based on Revenue Canada's disallowance of certain expenses
related to projects deemed non-qualifying. In addition, Revenue Canada also
denied the Company's claims for the enhanced refundable credit for the
fiscal years ended October 31, 1994 through October 31, 1996 on the basis
that the Company did not qualify as a Canadian-controlled private
corporation ("CCPC").
The Company challenged these assessments through the filing of Notices of
Objection for each of the claim years. Accordingly, after a review of the
file by Revenue Canada Appeals, CCPC status was conferred on the Company
and the local appeals officer was ordered to reassess.
The Company continues to object to the reductions resulting from the
scientific audits. At this time, the Company cannot reasonably determine
the likelihood of success in appealing the reductions resulting from the
scientific audits and has therefore recorded an allowance in fiscal 1997 of
$296,029 against its scientific research and experimental development
investment tax credits receivable. Due to continued delays in the
processing of such appeals at Revenue Canada, it is estimated that a result
may take over one year to obtain. To date, the Company has received
approximately $285,000 of such credits, which have been applied to
outstanding payroll taxes (see Note J).
F-14
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE E - FIXED ASSETS
Fixed assets consist of the following:
Useful
life 1997
Computer software 5-10 years $ 411,328
Computer equipment 5-10 years 374,175
Furniture and fixtures 5-20 years 46,507
Leasehold improvements 5-10 years 142,298
Office equipment 5 years 78,086
-----------
1,052,394
Less accumulated depreciation and amortization (648,919)
-----------
$ 403,475
===========
Amortization expense for capitalized software totaled approximately $65,500
and $75,000 in 1997 and 1996, respectively. Accumulated amortization
approximated $362,000 at October 31, 1997.
NOTE F - TRANSACTIONS WITH RELATED PARTIES
Notes Receivable - Former Chairmen
1. The Company's former Chairman's (through December 1, 1993) total
indebtedness (the "Note") to the Company of $804,000 as of November 1,
1993 is payable in equal monthly installments over a ten-year period
together with interest at 4-1/2% per annum. Further, the Company
entered into a ten-year consulting agreement, as of November 1, 1993,
with the former Chairman providing for fees payable substantially upon
the same terms of the indebtedness repayment. As of the fourth quarter
of fiscal 1997, the Company has written-off the note receivable against
future payments due to the former Chairman under the consulting
agreement as the Company no longer expects to derive any substantive
services from the former Chairman. Accordingly, the Company has
recorded a charge against earnings of $599,456.
F-15
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE F (continued)
2. In 1993, Support charged its parent company, Navtech Applied Research
Inc. ("NARI"), the successor company to Ray English and Associates
Inc. ("REA"), a management and marketing fee in connection with the
management of certain software owned by EAS, formerly a subsidiary of
NARI. Support also advanced funds to NARI in order to assist NARI in
meeting its obligations. NARI was owned by a former chairman of the
Company (for the period from December 1, 1993 through October 31,
1994) who resigned from that position on October 31, 1994. Effective
July 15, 1995, NARI executed and delivered to Support a promissory
note in the principal amount of $750,000 Canadian (the "NARI Note") to
evidence certain obligations to Support as of such date. The NARI Note
is payable on July 15, 2005 (or sooner, as described below) and
provides for interest at the rate of 5% per annum payable annually.
Further, pursuant to a consulting and marketing agreement between NARI
and Support, NARI was to provide software marketing services to the
Company. Support had the right to offset $3,500 Canadian per month
($2,484 U.S. at October 31, 1997) against compensation otherwise
payable to NARI thereunder as a payment of amounts due under the NARI
Note. The consulting and marketing agreement also provided for finder's
fees and commissions of 2% and 10%, respectively, for the introduction
of potential clients and for the licensing of software. Further, the
Company had the right to apply 10% to 25%, as defined, of the finder's
fees and commissions against amounts outstanding on the NARI Note.
Concurrent with the signing of the NARI Note, NARI also transferred all
of its common stock of the Company (802,766 shares) to a Voting Trust
("Trust") under the sole administration of Dorothy A. English. Mrs.
English is an Executive Vice President of the Company. Effective with
the succession of REA by NARI during 1998, Dorothy A. English became
the sole shareholder of NARI and at such time the voting trust was
revoked and the common stock of the Company was placed in escrow as
collateral for amounts payable by NARI to the former chairman under a
share transfer agreement. Further, the above consulting agreement
between NARI and Support was terminated.
The Company has provided for an allowance of $300,000 Canadian as of
October 31, 1997 ($212,910 U.S. as of October 31, 1997) to reflect
management's estimate of the amount ultimately collectible from NARI.
Such estimate is based principally on the estimated net worth of NARI,
which, in turn, is substantially based upon the estimated fair value of
the common shares of the Company beneficially owned by NARI.
F-16
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE F (continued)
Since the amount due from NARI is in all likelihood recoverable only
from amounts payable by the Company to NARI or from the proceeds
derived from NARI's sale of the Company's common stock, the amount due
from NARI, net of allowance, has been classified as a separate
component of shareholders' equity.
Due to Related Parties
Due to related parties at October 31, 1997 consists of the following:
Support shareholder demand loans (i) $ 35,485
Accrued interest (i) 57,847
Loans payable - related parties (ii) 68,118
Note payable - related party (iii) 84,830
--------
246,280
Less current portion (169,608)
Long-term portion $ 76,672
========
(i) Support shareholder demand loans bear interest at 15% per
annum. Interest in the amount of $56,654 is in arrears and
is included in accrued interest.
(ii) Loan payable - related party consists of a chattel mortgage
on specific computer equipment in the original amount of
$120,000 Canadian due to a company owned by the brother of a
shareholder of the Company. This note was originally due May
10, 1997 and bears interest at 15% per annum payable
monthly. Under an agreement dated August 1, 1998, the
balance of $95,982 Canadian remaining at that time, plus
accrued interest through July 31, 1998, was payable in six
monthly payments of $5,000 Canadian each and then continuing
monthly payments of $10,000 Canadian until the loan and
interest have been paid off.
(iii) Notes payable - related parties includes a note payable to a
company related to a director of the Company and a note
payable to a director of the Company. Interest in the amount
of $1,193 on the latter note is in arrears and is included
in accrued interest. The payments on the note payable to a
company related to a director of the Company are not fixed.
Amounts due on the note payable to a director of the Company
are due at various scheduled dated through March 2000.
F-17
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE F (continued)
Maturities of related party debts as of October 31, 1997 are as follows:
October 31,
1998 $ 169,608
1999 61,831
2000 14,841
---------
$ 246,280
NOTE G - BANK REVOLVING DEMAND LOANS AND LONG TERM DEBT
The Company has a revolving bank demand loan facility which provides for
borrowings of up to $115,000 Canadian which are payable on demand. These
demand loans bear interest at the bank's prime rate plus 1.25%.
Long-term debt is as follows as of October 31, 1997:
Small business bank loan payable, interest at the bank's prime rate plus
1.75%, payable in monthly principal payments of $5,123 Canadian plus
interest based on a 48 month amortization period $ 156,329
Less current portion (43,627)
--------
Long-term portion $ 112,702
========
Substantially all of the Company's assets are pledged as collateral for
revolving demand loans and long term debt. In addition, the revolving
demand loans are hypothecated by a U.S. term deposit in the amount of
$50,000 (U.S.) which is presented as "restricted cash" in the accompanying
balance sheet.
Maturities of related party debts as of October 31, 1997 are as follows:
October 31,
1998 $ 43,627
1999 43,627
2000 43,627
2001 25,448
--------
$ 156,329
========
F-18
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE H - INCOME TAXES
The Company's fiscal 1997 and 1996 effective income tax rate differs from
the statutory U.S. Federal income tax rate as a result of the following:
1997 1996
--------- --------
Statutory U.S. Federal tax rate (34.0)% 34.0%
Increase in valuation allowance 34.0
Utilization of NOL carryforward (34.0)
------ ------
- % - %
========= =========
The temporary differences which give rise to deferred tax assets and
liabilities at October 31, 1997 are summarized as follows:
Deferred tax assets
Net operating loss carryforwards $ 425,000
Deferred salaries and other compensation 313,000
Allowance for doubtful accounts 177,000
Fixed assets 24,000
---------
Total deferred tax assets 939,000
Deferred tax liabilities
License fees receivable (31,000)
Scientific research and experimental development
credits, net (203,000)
Total deferred tax liabilities (234,000)
Net deferred tax assets $ 705,000
========
Valuation allowance $(705,000)
========
During fiscal 1997, the Company increased its allowance by $558,000
principally due to the recognition of additional U.S. net operating loss
carryforwards.
F-19
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE H (continued)
The Company, for United States purposes, has available to offset future
taxable income net operating loss carryforwards approximating $478,000 at
October 31, 1997, which expire through 2017. For Canadian tax purposes, the
Company has available net operating loss carryforwards and scientific
research and experimental development credits of $693,000 Canadian
($500,000 U.S.) and $61,000 Canadian ($44,000 U.S.), respectively, expiring
through 2001 and 2006, respectively. The Company has established a
valuation allowance with respect to its net deferred tax assets, as it
cannot presently assess the utilization of such deferred tax assets as more
likely than not.
NOTE I - STOCK OPTIONS
The Company has adopted an incentive stock option plan which, as amended,
reserved 125,000 unissued shares of common stock for the plan. The plan
requires that all options be granted at exercise prices not less than the
fair market value of the stock on the date of grant. In September 1987, the
Company adopted a nonqualified stock option plan which reserved 62,500
unissued shares of common stock for the plan. The Company's subsidiary,
Support, has outstanding options to purchase 300,000 shares of its common
stock at exercise prices ranging from $.20 to $.50 Canadian per share.
Further, in 1995, the Company adopted the 1995 Key Advisor Stock Option
Plan (the "1995 Advisor Plan"), which provides for the granting to key
employees and advisors of the Company of nonqualified stock options for the
purchase of a maximum, as amended in 1996, of 700,000 shares of the
Company's common stock. Under the terms of the 1995 Advisor Plan, the
options, which expire no later than ten years after grant, are exercisable
at a price determined by the Board of Directors, and become exercisable in
accordance with terms established at the time of the grant.
F-20
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE I (continued)
<TABLE>
<S> <C> <C> <C> <C>
Summary information with respect to the stock option plans follows:
Range of Outstanding Weighted Outstanding
exercise options average options
prices granted exercise price exercisable
Balance at November 1, 1995 $0.625 - $3.24 1,228,377 0.658 427,877
Terminated 0.625 (600,000) 0.625
Granted 0.625 25,000 0.625
Became exercisable 0.625 - 3.24 225,250
---------- -------
Balance at October 31, 1996 0.625 - 3.24 653,377 0.687 653,127
Expired 0.625 - 3.24 (27,001) 0.77 (26,751)
---------- -------
Balance at October 31, 1997 0.625 - 1.88 626,376 0.684 626,376
========== =======
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable nonqualified stock options:
<TABLE>
<S> <C> <C> <C>
Weighted-average
Number outstanding remaining Weighted-average
and contractual life exercise
exercisable (months) price
Range of exercise prices ------------------ ---------------- ----------------
$0.00 to $0.99 550,000 33 $.625
$1.00 to $1.88 76,376 68 $1.11
</TABLE>
The weighted-average option fair value on the grant date was $0.17 for
options issued during the year ended October 31, 1996.
F-21
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE I (continued)
The Company has adopted the disclosure provisions of SFAS No. 123, it
applies APB Opinion No. 25 and related interpretations in accounting for
the plans and does not recognize compensation expense for such plans. If
the Company had elected to recognize compensation expense based upon the
fair value at the grant dates for awards under these plans consistent with
the methodology prescribed by SFAS No. 123, the Company's reported net
income and income per share would be reduced to the pro forma amount
indicated below for the fiscal year ended October 31, 1996:
1996
--------
Net income $149,666
As reported 145,416
Pro forma
Income per common share
As reported $0.09
Pro forma $0.09
There were no options issued by the Company in fiscal 1997, therefore there
is no pro forma effect presented.
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related
to grants made before fiscal 1996. The fair value of these options was
estimated at the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions for the fiscal year ended
October 31, 1996: expected volatility of 30%; risk-free interest rate of
5.50%; and expected term of 3 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the use of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective assumptions can materially
affect the fair value estimate in management's opinion, the existing models
do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
F-22
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE J - COMMITMENTS AND CONTINGENCIES
1. Failure to File Timely Reports
By letter dated March 2, 1998, the Securities and Exchange Commission
(the "Commission") advised the Company that it had failed to file its
Annual Report on Form 10-KSB for the fiscal year ended October 31,
1997. In such letter, the Company was advised by the Commission that it
reserved the right to bring an enforcement action, as appropriate, at
any time.
This failure to file on a timely basis could expose the Company to
enforcement actions by the Securities and Exchange Commission, which
could include civil penalties against the Company for violations of the
reporting requirements of Section 13(a) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the rules thereunder.
Pursuant to the Exchange Act, the amount of the penalty shall be
determined by the court in light of the facts and circumstances;
however, for each violation, the amount of the penalty, with regard to
a company, cannot exceed the greater of $50,000 or the gross amount of
pecuniary gain to the Company as a result of any violation. The
Exchange Act provides for substantially greater maximum penalties in
the event the violation involved fraud, deceit, manipulation, or
deliberate or reckless disregard of a regulatory requirement and/or
such violation directly or indirectly resulted in substantial losses or
created a significant risk of substantial losses to other persons.
The Company has also failed to file its Annual Report on Form 10-KSB
for the fiscal year ended October 31, 1998 and Quarterly Reports on
Form 10-QSB for the fiscal quarters ended January 31, 1998, April 30,
1998, July 31, 1998, January 31, 1999, April 30, 1999 and July 31,
1999.
The Company intends to file its Annual Report on Form 10-KSB for the
fiscal year ended October 31, 1997; its Annual Report on Form 10-KSB
for the fiscal year ended October 31, 1998; and its Quarterly Reports
on Form 10-QSB for the fiscal quarters ended January 31, 1998, April
30, 1998, July 31, 1998, January 31, 1999, April 30, 1999 and July 31,
1999 all on or before October 20, 1999. No assurances can be given
that, notwithstanding the Company's filing of the aforementioned
documents on or before the date set forth above, the Commission will
not seek to recover civil penalties from the Company. Any such action
taken by the Commission could have a material adverse effect on the
Company's financial position, liquidity and results of operations. As
the Company cannot presently predict, with any certainty, the ultimate
outcome of this matter, no amounts have been provided for in the
accompanying consolidated financial statements.
2. Operating Lease Commitments
The Company leases equipment and office space pursuant to various lease
agreements which expire through fiscal 2006. The annual rent of office
space consists of minimum rent, real estate taxes, maintenance and
other expenses. The Company also leases certain computer equipment from
a company controlled by the spouse of an Officer and Director of the
Company pursuant to an agreement which expires in fiscal 2000.
F-23
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE J (continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Future minimum annual rental payments pursuant to these leasing
agreements as of October 31,1997 are summarized as follows:
Related
Office party
space Equipment equipment Total
1998 $ 98,611 $30,084 $14,478 $143,173
1999 58,660 26,467 26,827 111,954
2000 56,283 22,625 29,665 108,573
2001 62,904 9,429 72,333
2002 62,904 7,886 70,790
-------- ------- -------- --------
$339,362 $96,491 $70,970 $506,823
======= ====== ====== =======
</TABLE>
Rental costs for fiscal 1997 and 1996 were $199,207 and $162,468,
respectively. Rental cost incurred in 1997 and 1996 in connection with
the equipment lease with the related party was $21,049 and $11,448,
respectively.
3. Employment and Consulting Contracts
The Company has entered into employment and consulting agreements with
its chairman, Chief Executive Officer, former Chairmen and a director
of the Company, which provide for minimum monthly compensation. The
Company's obligations under such agreements expire at various times
during the period from September 1997 through March 31, 2004. Further,
the Company has entered into a retirement agreement with its chairman
dated August 5, 1999, which provides for, among other things, the
payment of 96 consecutive monthly payments of $6,250 commencing
November 25, 1999 for services rendered for the period from November
1996 through October 1998. The Company has provided for approximately
$300,000 relating to the net present value of the services provided by
the chairman during fiscal 1998 and 1997. Concurrent with the term of
this retirement agreement, the Company has also agreed to reimburse the
Chairman for expenses incurred in the amount of $60,594 (payable over
the period August 1999 to May 2000) and to obtain a declining balance
life insurance policy on the Chairman commencing with coverage at
$600,000 and declining at a rate of $150,000 per year. The proceeds of
which are payable in full settlement of any remaining obligation at the
time of the former Chairman's demise. All amounts due by promissory
notes contain acceleration provisions, in the event, among other
things, default in payment.
F-24
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE J (continued)
Approximate aggregate minimum compensation obligations under all
agreements at October 31, 1997 are summarized as follows:
Year Amount
1998 $ 323,000
1999 205,000
2000 188,000
2001 131,000
2002 120,000
Thereafter 170,000
---------
$1,137,000
=========
4. Nonremittance of Payroll Taxes
During and as of the year ended October 31, 1997, the Company has not
timely remitted to the respective tax collecting jurisdictions payroll
taxes withheld from employees' earnings. At October 31, 1997, the
unremitted balance aggregated approximately $269,000 Canadian ($191,000
U.S. and included in accrued and other liabilities) which is subject to
additional penalty and interest charges until paid.
5. Legal Proceedings
The Company is subject to various legal proceedings, claims and
liabilities which arise in the ordinary course of its business. In the
opinion of management, the amount of any ultimate liability with
respect to these actions will not have a material adverse effect on the
Company's consolidated results of operations, cash flow or financial
position.
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS AND BUSINESS CONCENTRATIONS
The carrying amounts of cash, accounts receivable, and investment tax
credits receivable are estimated to approximate their fair values. The
Company believes that the carrying amount of its bank revolving demand
loans and long-term debt approximates the fair value as the variable
interest rate approximates the current prevailing interest rate. The
Company believes that it is not practicable to estimate the fair value
of its other liabilities due to its current financial condition.
In fiscal 1997, two customers each accounted for 11% of the Company's
consolidated revenues, and, in 1996, three customers accounted for 13%,
11% and 10%, respectively, of the Company's consolidated revenues.
F-25
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE L - OFFICE RELOCATION COSTS AND RESTRUCTURING CHARGES
During fiscal 1997, the Company moved its Canadian facility to a new
facility in Waterloo, Ontario. Costs associated with this relocation
are recorded in the accompanying Statements of Operations as "office
relocation costs" and aggregated $67,678 during fiscal 1997.
In addition, as a result of the Company's consolidation of its New York
facility into the new Waterloo, Ontario facility, which was also
completed in fiscal 1997, the Company has recorded $90,948 of pre-tax
restructuring charges. The restructuring charges include costs incurred
for moving from the New York facility to the recently acquired Canadian
facility. As of October 31, 1997, all expenses have been incurred
pertaining to the above mentioned charges.
NOTE M - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 1997, the Company wrote off a note
receivable from its former Chairman against earnings aggregating
$599,456, established an allowance of $296,029 against its investment
tax credits receivable and increased the allowance for doubtful
accounts by approximately $106,297.
NOTE N - INDUSTRY SEGMENT INFORMATION AND GEOGRAPHIC AREA OPERATIONS
The Company operates in one business segment, providing computerized
flight planning services and software to commercial airlines and
corporate aircraft users in the aviation industry.
A summary of the Company's operations by geographic area for the fiscal
years ended October 31, 1997 and 1996 is as follows:
F-26
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1997 and 1996
NOTE N (continued)
1997 1996
------------- ------------
Net sales
United States $2,052,518 $2,970,308
Canada 523,556 368,743
Other 214,293 235,538
----------- ----------
Total net sales $ 2,790,367 $3,574,589
----------- ==========
Operating (loss) profit
United States $ 1,165,939) 556,944
Canada (626,882) (418,770)
----------- ---------
Total operating (loss) income $(1,792,821) $138,174
========== =========
Identifiable assets
United States $1,040,648 $1,570,299
Canada 995,610 1,095,580
Eliminations (851,131) (850,981)
---------- ----------
Total identifiable assets $1,185,127 $1,814,898
========= =========
F-27
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
The total number of Common Shares outstanding as November 30, 1999 was
2,001,980. The Common Shares are the only class of securities outstanding. Each
share is entitled to one vote. The following table sets forth certain
information regarding the Company's outstanding Common Shares beneficially owned
as of November 30, 1999 by (i) each person who is known by the Company to own
beneficially or exercise voting or dispositive control over more than 5% of the
Company's Common Shares, (ii) each present Director, (iii) each person named in
the Summary Compensation Table above, and (iv) all of the Company's present
executive officers and directors as a group: <TABLE> <S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Approximate
Name and Address of Beneficial Percentage of
Owner Number of Shares Beneficially Owned Outstanding Shares
- ----------------------------------------------------------------------------------------------------------
Dorothy A. English 1,007,766(1)(2) 50.3%
175 Columbia Street West
Waterloo, Ontario,
Canada
- ----------------------------------------------------------------------------------------------------------
Navtech Applied Research Inc. 802,766(2)(3) 40.1%
175 Columbia Street West
Waterloo, Ontario,
Canada
- ----------------------------------------------------------------------------------------------------------
Kenneth M. Snyder 350,000(4) 14.9%
1751 Westwood Drive
Minden, Nevada
- ----------------------------------------------------------------------------------------------------------
Global Weather Dynamics, Inc 250,000 12.5%
2400 Garden Road
Monterey, California
- ----------------------------------------------------------------------------------------------------------
Innovation Ontario Corporation 125,000 6.2%
56 Wellesley Street West
Toronto, Ontario, Canada
- ----------------------------------------------------------------------------------------------------------
Russell K. Thal 93,813(5) 4.5%
125 Mineola Avenue
Roslyn Heights, New York
- ----------------------------------------------------------------------------------------------------------
Denis L. Metherell 6,000 *
175 Columbia Street West
Waterloo, Ontario,
Canada
- ----------------------------------------------------------------------------------------------------------
Duncan Macdonald - (6) *
275 Slater Street
Ottawa, Ontario,
Canada
- ----------------------------------------------------------------------------------------------------------
All executive officers and
directors as a group (7 persons) 1,457,579(1)(4)(5) 60.0%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents 802,766 shares beneficially owned by Navtech Applied
Research Inc. ("NARI") (see footnote (3) below) and 205,000 shares
beneficially owned by Ms. English.
(2) Such persons may be deemed parents of the Company.
(3) Represents shares beneficially owned by NARI, of which, the Company has
been advised, Ms. English is the Chairman, Chief Executive Officer and
sole shareholder. Furthermore, the Company has been advised that these
shares have been pledged to Raymond English as collateral for certain
amounts due to Mr. English under an agreement between Mr. English and
NARI. NARI has maintained voting control over these shares. See
"Certain Relationships and Related Transactions."
(4) Represents shares issuable upon exercise of options that are currently
exercisable.
(5) Includes 75,938 shares issuable pursuant to currently exercisable
options and 312 shares owned by Mr. Thal's wife. This shall not be
deemed an admission that Mr. Thal is the beneficial owner of the shares
owned by his wife.
(6) Mr. Macdonald has voluntarily agreed not to exercise currently
exercisable options held by him for the purchase of 200,000 Common
Shares until such time as the authorized share capital of the Company
has been sufficiently increased. In addition, as discussed under
"Certain Relationships and Related Transactions - Duncan Macdonald,"
in the event of such increase in authorized share capital of the
Company, a maximum of 343,546 Common Shares will be issuable to an
entity controlled by Mr. Macdonald pursuant to the terms of a
convertible loan made by such entity to the Company.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTIES
1. Navtech Applied Research Inc.
General
Ray English and Associates Inc. ("RE&A") was a corporation incorporated in
Ontario, Canada. Until June 29, 1998, RE&A was controlled by Raymond English, a
former Chairman of the Company. As of that date, pursuant to a share transfer
agreement, the ownership of RE&A was transferred to Mr. English's former spouse,
Dorothy A. English. Dorothy A. English is an Executive Vice President and
Director of the Company. As of July 2, 1998, RE&A was merged with Navtech
Applied Research Inc. ("NARI") and continued operations under the latter name.
NARI was incorporated in Ontario, Canada on December 31, 1997 and during
all material times has been wholly owned by Dorothy A. English, who serves as
its Chairman and Chief Executive Officer.
References to RE&A below will pertain strictly to the company as it existed
prior to the merger with NARI.
Share Ownership
NARI owns 802,766 Common Shares of the Company. On or about July 15, 1995,
RE&A had transferred all of its Common Shares of the Company to Dorothy A.
English, as voting trustee pursuant to a voting trust agreement between them.
When control of RE&A was transferred to Dorothy A. English as discussed above
and RE&A and NARI merged, the voting trust agreement was terminated and the
shares returned to NARI. At that time, the share certificate was placed in
escrow as security for amounts payable by NARI to Mr. English pursuant to the
share transfer agreement discussed above.
RE&A/Navtech Transactions
In 1993, Navtech charged RE&A, its then parent company, a management,
consulting and marketing fee in connection with the management of certain
software owned by EAS, formerly a subsidiary of RE&A. Navtech also advanced
funds to RE&A in order to assist RE&A in meeting its continuing obligations.
Effective July 15, 1995, RE&A executed and delivered to Navtech a promissory
note in the principal amount of $750,000 Canadian (the "RE&A Note") to evidence
certain obligations to Navtech as of such date. The RE&A Note is payable on July
15, 2005 (or sooner, as described below) and provides for interest at the rate
of 5% per annum payable annually. Effective with the merger of RE&A and NARI,
NARI, by operation of law, assumed the obligation represented by the RE&A Note.
Further, pursuant to a consulting and marketing agreement between RE&A and
Navtech, RE&A agreed to provide software marketing services to the Company.
Navtech had the right to offset $3,500 Canadian per month against compensation
otherwise payable to RE&A thereunder as payment of amounts due under the RE&A
Note. Effective July 15, 1998, this agreement was terminated by NARI and
Navtech.
<PAGE>
2. Global Weather Dynamics, Inc.
On July 15, 1998, NARI acquired from Global Weather Dynamics, Inc. ("GWDI")
all of the assets of the GWDI's Weather Services Division ("WSD") for a
consideration consisting of $250,000 in cash, the delivery of 250,000 Common
Shares of the Company to GWDI and the delivery of 50,000 Common Shares of the
Company to an unrelated third party as a finder's fee. The primary assets
acquired included the weather and certain other software that had been developed
by GWDI. In addition, NARI obtained an assignment of the WSD customer contracts.
Following the WSD acquisition by NARI, NARI and Compuflight entered into a
non-exclusive, non-transferable software license agreement (the "License
Agreement") for a term commencing August 1, 1998 and expiring initially on
October 31, 1999, pursuant to which Compuflight has been granted the right to
install, configure, modify and use in its business the software acquired by
NARI. Pursuant to the License Agreement, the term automatically renews for
additional one year periods unless either party gives at least 60 days prior
written notice of its desire not to renew. Since no notice was given at least 60
days prior to October 31, 1999, the current term of the License Agreement has
been extended to October 31, 2000. In addition, pursuant to the License
Agreement, Compuflight is obligated to pay royalties in an amount equal to 10%
of certain revenues derived from the sale of data processed using the licensed
software. Concurrently with the execution of the License Agreement, NARI also
assigned to Compuflight the rights it had obtained from GWDI with respect to the
WSD customer contracts.
In order to effect NARI's acquisition of WSD, certain transactions were
undertaken between the Company and NARI to provide the necessary financing as
follows:
1. NARI purchased from Compuflight 300,000 Common Shares of the Company in
consideration of $300 in cash and the delivery of a promissory note in
the amount of $134,700, payable in 36 monthly installments and bearing
interest at the rate of 10% per annum. The note provides that payments
are to be made by offsetting royalties due under the License Agreement.
2. Compuflight borrowed $210,000 from a Canadian financial institution,
which loan is repayable over a 28-month term bearing interest at the
rate of 9.18% per annum. Dorothy A. English personally guaranteed the
repayment of this loan.
3. The proceeds from the loan were transferred to Navtech which, in turn,
loaned $150,000 to NARI. This loan bears interest commencing November
1, 1998 at the rate of 10% per annum and is repayable in 36 monthly
installments commencing November 1, 1999.
4. Subsequent to October 31, 1998, the Company advanced an additional
$100,000 to NARI. The additional advance is repayable commencing with
the payment in full of the promissory note in Item 1 above. It is
repayable at the same monthly rates outlined above. The weather and
other software acquired by NARI and licensed to the Company was of
critical importance to the Company in order for it to maintain a
competitive advantage in the delivery of its products to the
marketplace. The Company had determined that the internal development
of this software would require at least 10 man-years to complete at a
cost estimated to be in excess of $700,000. Furthermore, the Company
was paying third party weather suppliers approximately $4,000 per
month for weather and related data it had determined was below the
standards required by the Company's customers.
3. Russell K. Thal
Reference is made to "Employment Contracts; Termination of Employment and
Change-in-Control Arrangements" for a discussion of a certain retirement
agreement entered into between the Company and Mr. Thal.
4. AVCON Associates Inc. ("AVCON")
AVCON, an entity of which Denis L. Metherell, Secretary and a Director of
the Company, is a Vice President and a Director, leased certain computer
equipment to Navtech. Effective January 31, 1996, the leases were terminated. On
October 1, 1996, the Company entered into two new lease agreements for certain
computer equipment. These agreements were replaced on June 1, 1999 with amended
lease agreements. Under the present agreements, the Company is required to make
varying payments until November 2004. The Company believes that the lease
payments, which commenced July 1999 at $1,952 Canadian per month, are no higher
than would be payable to a nonaffiliated third party.
<PAGE>
On October 31, 1996, the Company executed and delivered to AVCON a
promissory note in the principal amount of $53,000 Canadian (the "AVCON Note")
to evidence amounts due under the terminated lease agreement noted above and
outstanding as of such date. On June 1, 1999, the Company amended the note (the
"Amended AVCON Note") to include additional arrears that had accumulated on the
two leases. The Amended AVCON Note is in the principal amount of $90,000
Canadian, provides for interest at the rate of 18% per annum and is payable as
follows:
1. interest only of $1,350 Canadian per month from July 1999 to September
2000;
2. interest and principal of $2,400 Canadian per month from October 2000
to April 2005; and
3. a residual payment of principal and interest of $1,263 in May 2005.
5. Duncan Macdonald
Effective as of June 1, 1996, Navtech entered into a two year Key Advisor
Agreement (the "Macdonald Key Advisor Agreement") with Duncan Macdonald pursuant
to which Mr. Macdonald was retained to serve as Chief Executive Officer of the
Company. Pursuant to the Macdonald Key Advisor Agreement, as amended in January
1997, Mr. Macdonald was entitled to receive a base weekly fee of $3,000
Canadian. In addition, a bonus of $5,000 Canadian per fiscal quarter was payable
during the term of the Macdonald Key Advisor Agreement. Mr. Macdonald agreed to
expend at least 75% of his working time in the fulfillment of his duties under
the Macdonald Key Advisor Agreement. Mr. Macdonald has waived his entitlement to
the bonus amounts related to each of the fiscal quarters of 1997 and 1998. The
Macdonald Key Advisor Agreement expired in 1998, although Mr. Macdonald
continued to serve as Chief Executive Officer until December 1998 under the same
terms.
Effective December 1, 1998, the Company entered into a twenty month
Employment Agreement (the "Macdonald Employment Agreement") engaging Mr.
Macdonald as Chief Executive Officer of the Company. Mr. Macdonald is entitled
to receive a base quarterly fee of $1,250 commencing with the fiscal quarter
ended January 31, 1999. Mr. Macdonald has agreed to make 30% of his working time
available to the Company.
Effective January 1, 1999, Navtech entered into a two year Services
Agreement (the "Kintyre-Navtech Agreement") with Kintyre & Company Limited
("Kintyre"), a company owned by Mr. Macdonald. Under the Kintyre-Navtech
Agreement, Kintyre has agreed to provide the services of Mr. Macdonald and Mr.
Vietze, as well as other Kintyre staff as needed, to assist Navtech in it
stategic corporate structuring and corporate finance and accounting activities.
Kintyre is entitled to receive a base monthly fee of $23,250 Canadian, plus an
annual bonus of $8,700 Canadian.
In April 1999, St. Andrews Capital Limited Partnership ("St. Andrews LP")
advanced $90,000 to the Company for working capital purposes. Mr. Macdonald
serves as the President of the general partner of St. Andrews LP and is the
controlling stockholder of such general partner. The advance from St. Andrews LP
is repayable, together with interest at the rate of 18% per annum, in 22 monthly
installments.
On October 1, 1999, St. Andrews LP advanced $128,830 to the Company to
finance the Company's acquisition of Skyplan Services (UK) Limited. At the time
of the loan, the Company had sufficient working capital to undertake the
transaction, but determined that it was prudent to obtain outside financing. As
provided for in a term sheet (which calls for the completion of definitive loan
documents), the loan bears interest at the rate of 10% per annum and is
repayable in 24 equal monthly payments of approximately $5,945 commencing
November 1, 1999. The term sheet provides that the principal amount of the loan
is convertible into Common Shares of the Company at a conversion price of $0.375
per share effective on the first day of the month following the approval of an
increase in the authorized share capital of the Company sufficient for such
purpose.
6. Rainer Vietze
On November 1, 1998, Mr. Vietze ceased his employment with Navtech and
commenced employment with Kintyre. Effective December 1, 1998, the Company
entered into a twenty month Employment Agreement (the "Vietze Employment
Agreement") engaging Mr. Vietze as Chief Financial Officer of the Company. Mr.
Vietze is entitled to receive a base quarterly fee of $625 commencing with the
fiscal quarter ended January 31, 1999. Mr. Vietze has agreed to make 30% of his
working time available to the Company.5. Duncan Macdonald
Effective as of June 1, 1996, Navtech entered into a two year Key Advisor
Agreement (the "Macdonald Key Advisor Agreement") with Duncan Macdonald pursuant
to which Mr. Macdonald was retained to serve as Chief Executive Officer of the
Company. Pursuant to the Macdonald Key Advisor Agreement, as amended in January
1997, Mr. Macdonald was entitled to receive a base weekly fee of $3,000
Canadian. In addition, a bonus of $5,000 Canadian per fiscal quarter was payable
during the term of the Macdonald Key Advisor Agreement. Mr. Macdonald agreed to
expend at least 75% of his working time in the fulfillment of his duties under
the Macdonald Key Advisor Agreement. Mr. Macdonald has waived his entitlement to
the bonus amounts related to each of the fiscal quarters of 1997 and 1998. The
Macdonald Key Advisor Agreement expired in 1998, although Mr. Macdonald
continued to serve as Chief Executive Officer until December 1998 under the same
terms.
Effective December 1, 1998, the Company entered into a twenty month
Employment Agreement (the "Macdonald Employment Agreement") engaging Mr.
Macdonald as Chief Executive Officer of the Company. Mr. Macdonald is entitled
to receive a base quarterly fee of $1,250 commencing with the fiscal quarter
ended January 31, 1999. Mr. Macdonald has agreed to make 30% of his working time
available to the Company.
Effective January 1, 1999, Navtech entered into a two year Services
Agreement (the "Kintyre-Navtech Agreement") with Kintyre & Company Limited
("Kintyre"), a company owned by Mr. Macdonald. Under the Kintyre-Navtech
Agreement, Kintyre has agreed to provide the services of Mr. Macdonald and Mr.
Vietze, as well as other Kintyre staff as needed, to assist Navtech in it
stategic corporate structuring and corporate finance and accounting activities.
Kintyre is entitled to receive a base monthly fee of $23,250 Canadian, plus an
annual bonus of $8,700 Canadian.
In April 1999, St. Andrews Capital Limited Partnership ("St. Andrews LP")
advanced $90,000 to the Company for working capital purposes. Mr. Macdonald
serves as the President of the general partner of St. Andrews LP and is the
controlling stockholder of such general partner. The advance from St. Andrews LP
is repayable, together with interest at the rate of 18% per annum, in 22 monthly
installments.
On October 1, 1999, St. Andrews LP advanced $128,830 to the Company to
finance the Company's acquisition of Skyplan Services (UK) Limited. At the time
of the loan, the Company had sufficient working capital to undertake the
transaction, but determined that it was prudent to obtain outside financing. As
provided for in a term sheet (which calls for the completion of definitive loan
documents), the loan bears interest at the rate of 10% per annum and is
repayable in 24 equal monthly payments of approximately $5,945 commencing
November 1, 1999. The term sheet provides that the principal amount of the loan
is convertible into Common Shares of the Company at a conversion price of $0.375
per share effective on the first day of the month following the approval of an
increase in the authorized share capital of the Company sufficient for such
purpose.
6. Rainer Vietze
On November 1, 1998, Mr. Vietze ceased his employment with Navtech and
commenced employment with Kintyre. Effective December 1, 1998, the Company
entered into a twenty month Employment Agreement (the "Vietze Employment
Agreement") engaging Mr. Vietze as Chief Financial Officer of the Company. Mr.
Vietze is entitled to receive a base quarterly fee of $625 commencing with the
fiscal quarter ended January 31, 1999. Mr. Vietze has agreed to make 30% of his
working time available to the Company.5. Duncan Macdonald
Effective as of June 1, 1996, Navtech entered into a two year Key Advisor
Agreement (the "Macdonald Key Advisor Agreement") with Duncan Macdonald pursuant
to which Mr. Macdonald was retained to serve as Chief Executive Officer of the
Company. Pursuant to the Macdonald Key Advisor Agreement, as amended in January
1997, Mr. Macdonald was entitled to receive a base weekly fee of $3,000
Canadian. In addition, a bonus of $5,000 Canadian per fiscal quarter was payable
during the term of the Macdonald Key Advisor Agreement. Mr. Macdonald agreed to
expend at least 75% of his working time in the fulfillment of his duties under
the Macdonald Key Advisor Agreement. Mr. Macdonald has waived his entitlement to
the bonus amounts related to each of the fiscal quarters of 1997 and 1998. The
Macdonald Key Advisor Agreement expired in 1998, although Mr. Macdonald
continued to serve as Chief Executive Officer until December 1998 under the same
terms.
Effective December 1, 1998, the Company entered into a twenty month
Employment Agreement (the "Macdonald Employment Agreement") engaging Mr.
Macdonald as Chief Executive Officer of the Company. Mr. Macdonald is entitled
to receive a base quarterly fee of $1,250 commencing with the fiscal quarter
ended January 31, 1999. Mr. Macdonald has agreed to make 30% of his working time
available to the Company.
Effective January 1, 1999, Navtech entered into a two year Services
Agreement (the "Kintyre-Navtech Agreement") with Kintyre & Company Limited
("Kintyre"), a company owned by Mr. Macdonald. Under the Kintyre-Navtech
Agreement, Kintyre has agreed to provide the services of Mr. Macdonald and Mr.
Vietze, as well as other Kintyre staff as needed, to assist Navtech in it
stategic corporate structuring and corporate finance and accounting activities.
Kintyre is entitled to receive a base monthly fee of $23,250 Canadian, plus an
annual bonus of $8,700 Canadian.
In April 1999, St. Andrews Capital Limited Partnership ("St. Andrews LP")
advanced $90,000 to the Company for working capital purposes. Mr. Macdonald
serves as the President of the general partner of St. Andrews LP and is the
controlling stockholder of such general partner. The advance from St. Andrews LP
is repayable, together with interest at the rate of 18% per annum, in 22 monthly
installments.
On October 1, 1999, St. Andrews LP advanced $128,830 to the Company to
finance the Company's acquisition of Skyplan Services (UK) Limited. At the time
of the loan, the Company had sufficient working capital to undertake the
transaction, but determined that it was prudent to obtain outside financing. As
provided for in a term sheet (which calls for the completion of definitive loan
documents), the loan bears interest at the rate of 10% per annum and is
repayable in 24 equal monthly payments of approximately $5,945 commencing
November 1, 1999. The term sheet provides that the principal amount of the loan
is convertible into Common Shares of the Company at a conversion price of $0.375
per share effective on the first day of the month following the approval of an
increase in the authorized share capital of the Company sufficient for such
purpose.
6. Rainer Vietze
On November 1, 1998, Mr. Vietze ceased his employment with Navtech and
commenced employment with Kintyre. Effective December 1, 1998, the Company
entered into a twenty month Employment Agreement (the "Vietze Employment
Agreement") engaging Mr. Vietze as Chief Financial Officer of the Company. Mr.
Vietze is entitled to receive a base quarterly fee of $625 commencing with the
fiscal quarter ended January 31, 1999. Mr. Vietze has agreed to make 30% of his
working time available to the Company.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: December 3, 1999
COMPUFLIGHT, INC.
By: /s/ Duncan Macdonald
--------------------
Duncan Macdonald
Chief Executive Officer
