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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JULY 31, 2002
-------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission file number 0-7642
------
MEGADATA CORPORATION
- ---------------------
(Exact name of registrant as specified in its charter)
NEW YORK 11-2208938
- -------------------------- -------------------
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
47 ARCH STREET, GREENWICH, CONNECTICUT 06830
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 629-8757
---------------
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
------- -------
======================================================================
There were 3,473,115 shares of common stock with a par
value of $0.01 per share outstanding at September 13, 2002.
INDEX
Megadata Corporation and Subsidiaries
Page
PART I. Financial Information
Item 1. Financial Statements.
Consolidated Balance Sheets - July 31, 2002 (unaudited)
and October 31, 2001 (audited). 3
Consolidated Statements of Operations (unaudited) - Nine
months ended July 31, 2002 and 2001. 4
Consolidated Statements of Operations (unaudited) - Three
months ended July 31, 2002 and 2001. 5
Consolidated Statements of Cash Flows (unaudited) - Nine
months ended July 31, 2002 and 2001. 6
Notes to Consolidated Financial
Statements - July 31, 2002. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 19
PART II. Other Information
Item 1. Legal Proceedings. 19
Item 2. Changes in Securities and Use of Proceeds. 19
Item 3. Defaults upon Senior Securities. 19
Item 4. Submission of Matters to a Vote of Security Holders. 19
Item 5. Other Information. 19
Item 6. Exhibits and Reports on Form 8-K. 19
Signatures 20
Part I. Financial Information
Megadata Corporation and Subsidiaries
Consolidated Balance Sheets
JULY 31, OCTOBER 31,
2002 2001
------------------- -------------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash $ 130,430 $ 8,961
Accounts receivable 186,324 78,973
Inventories 242,291 246,901
Prepaid expenses and other current assets 4,457 15,571
----------- -----------
Total current assets 563,502 350,406
Property, plant and equipment, net 145,840 176,879
PASSUR network, net 2,569,147 2,481,194
Software development costs, net 516,625 331,779
Other assets 17,085 16,085
----------- -----------
Total Assets $ 3,812,199 $ 3,356,343
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities:
Accounts payable $ 218,276 $ 486,082
Accrued expenses and other current liabilities 384,815 455,917
Accrued expenses--related parties 82,870 74,456
Notes payable--related party 5,105,000 --
Deferred income 586,877 234,308
Installment notes payable 487 4,404
----------- -----------
Total current liabilities 6,378,325 1,255,167
Notes payable--related party, less current portion -- 3,090,000
----------- -----------
6,378,325 4,345,167
Commitment and contingencies
Stockholders' deficiency:
Preferred shares - authorized 5,000,000 shares, par value
$.01 per share; none issued or outstanding -- --
Common shares--authorized 10,000,000 shares, par value
$.01 per share; issued 4,169,615 in 2002 and 2001 41,696 41,696
Additional paid-in capital 3,695,582 3,695,582
Accumulated deficit (4,679,929) (3,102,627)
----------- -----------
(942,651) 634,651
Less cost of 696,500 common shares held in treasury 1,623,475 1,623,475
----------- -----------
Total stockholders' deficiency (2,566,126) (988,824)
----------- -----------
Total liabilities and stockholders' deficiency $ 3,812,199 $ 3,356,343
=========== ===========
SEE ACCOMPANYING NOTES.
Megadata Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
NINE MONTHS ENDED JULY 31,
2002 2001
------------------------------------
Revenues:
Subscriptions $ 514,682 $ 332,082
Maintenance 334,065 338,542
Systems 289,263 20,650
----------- -----------
Other 10,973 28,078
----------- -----------
Net sales 1,148,983 719,352
----------- -----------
Cost and expenses:
Cost of sales 756,538 430,692
Research and development 298,772 189,085
Selling, general and administrative expenses 1,382,056 1,105,002
----------- -----------
2,437,366 1,724,779
----------- -----------
Loss from operations (1,288,383) (1,005,427)
Other income (expense):
Interest income 788 3,091
Interest expense (665) (2,818)
Interest expense--related party (285,869) (109,713)
----------- -----------
Loss before income taxes (1,574,129) (1,114,867)
Provision for income taxes 3,173 2,167
----------- -----------
Net loss $(1,577,302) $(1,117,034)
=========== ===========
Net loss per common share--basic
and diluted $ (.45) $ (.32)
=========== ===========
Weighted average number of common shares outstanding--basic and
diluted 3,473,115 3,473,115
=========== ===========
SEE ACCOMPANYING NOTES.
Megadata Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED JULY 31,
2002 2001
---------------- --------------
Revenues:
Subscriptions $ 203,120 $ 175,211
Maintenance 136,500 126,340
Systems 240,000 20,650
Other 795 9,875
----------- -----------
Net sales 580,415 332,076
----------- -----------
Cost and expenses:
Cost of sales 188,972 90,822
Research and development 158,783 77,358
Selling, general and administrative expenses 511,720 417,695
----------- -----------
859,475 585,875
----------- -----------
Loss from operations (279,060) (253,799)
Other income (expense):
Interest income 167 464
Interest expense (222) (581)
Interest expense--related party (112,015) (48,400)
----------- -----------
Loss before income taxes (391,130) (302,316)
Provision for income taxes 1,191 --
----------- -----------
Net Loss $ (392,321) $ (302,316)
=========== ===========
Net loss per common share--basic
and diluted $ (.11) $ (.09)
=========== ===========
Weighted average number of common shares outstanding--basic and
diluted 3,473,115 3,473,115
=========== ===========
SEE ACCOMPANYING NOTES.
Page 6
Megadata Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED JULY 31,
2002 2001
-------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,577,302) $(1,117,034)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 282,377 164,377
Changes in operating assets and liabilities:
Accounts receivable (107,351) 27,586
Inventories 4,610 (140,875)
Prepaid expenses and other current assets 11,114 (3,743)
Other assets (1,000) 300
Accounts payable (267,806) 50,851
Deferred income 352,569 50,882
Accrued expenses and other current liabilities (62,688) 11,771
----------- -----------
Total adjustments 211,825 161,149
----------- -----------
Net cash used in operating activities (1,365,477) (955,885)
CASH FLOWS FROM INVESTING ACTIVITIES
PASSUR network (321,932) (422,996)
Software development costs (190,859) (225,341)
Capital expenditures (11,346) (26,443)
----------- -----------
Net cash used in investing activities (524,137) (674,780)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable--related party 2,015,000 1,600,000
Payments of installment notes (3,917) (12,199)
----------- -----------
Net cash provided by financing activities 2,011,083 1,587,801
----------- -----------
Increase / (decrease) in cash 121,469 (42,864)
Cash--beginning of period 8,961 69,090
----------- -----------
Cash--end of period $ 130,430 $ 26,226
=========== ===========
SEE ACCOMPANYING NOTES.
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2002
(Unaudited)
1. NATURE OF BUSINESS
Megadata Corporation (the "Company") is a supplier of information,
data services, and software products intended to satisfy the needs of
the aviation industry, primarily airlines, airports, and other
aviation related companies. Its principal business is the delivery of
data and software by subscription from the Company owned PASSUR
Network of flight tracking systems. The Company also sells PASSUR
Systems only at specific customer requests. The Company operates in
one reportable segment: as a supplier of information, data services,
software, and communication products for the aviation industry,
primarily for airlines, airline affiliates, and airports.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The financial information contained in this Form 10-Q represents
condensed financial data and, therefore, does not include all
footnote disclosures required to be included in financial statements
prepared in conformity with accounting principles generally accepted
in the United States. Such footnote information was included in the
Company's annual report for the year ended October 31, 2001 on Form
10-K filed with the Securities and Exchange Commission ("SEC"); the
condensed financial data included herein should be read in
conjunction with that report. In the opinion of the Company, the
accompanying unaudited consolidated financial statements contain all
adjustments (which include only normal recurring adjustments)
necessary to present fairly the Company's consolidated financial
position at July 31, 2002 and its consolidated results of operations
and cash flows for the three and nine months ended July 31, 2002 and
2001.
Management is addressing the working capital and stockholders'
deficiencies and operating losses by aggressively marketing its
PASSUR information capabilities in its existing product lines, as
well as in new products, which are currently being developed and
deployed. It is also increasing the size of the Company owned PASSUR
Network, which management believes will lead to continued growth in
subscription-based revenues. In addition, the Company will attempt to
obtain external financing, and if such external financing is not
consummated, the Company has a commitment to receive additional
financial support from the significant shareholder through the end of
fiscal 2002. Such commitment for financial support may be in the form
of additional advances or loans to the Company in addition to the
deferral of principal and interest payments due on existing loans, if
deemed necessary.
The results of operations for the interim periods stated above are
not necessarily indicative of the results of operations to be
recorded for the fiscal year ending October 31, 2002.
Page 8
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION POLICY
The Company follows the provisions of the American Institute of
Certified Public Accountants Statement of Position 97-2, or SOP 97-2,
SOFTWARE REVENUE RECOGNITION, as amended. SOP 97-2 delineates the
accounting for software products, maintenance and support services
and consulting revenue. Under SOP 97-2, the Company recognizes
revenue when persuasive evidence of an arrangement exists, delivery
has occurred, the fee is determinable and collection of the resulting
receivable is probable. For arrangements involving multiple elements
(e.g. maintenance, support and other services), the Company allocates
revenue to each element of the arrangement based on vendor specific
objective evidence of its fair value, or for products not being sold
separately, the objective and verifiable fair value established by
management.
The Company recognizes revenue on the sale of products and systems
typically when the products or systems have been shipped and in
accordance with Staff Accounting Bulletin 101, or SAB 101 and SOP
97-2. Installation charges, if any, are recognized when installation
services are completed.
The Company recognizes services and maintenance revenues on a
straight-line basis over the service contract period in accordance
with SOP 97-2. Revenues for data subscription services are recognized
on a monthly basis upon the execution of an agreement and the
customer's receipt of the data.
The Company recognizes license fee revenues on a straight-line basis
over either the term of the license agreement or the expected useful
life of such license arrangement, which ever is longer, which
typically does not exceed five years.
COST OF SALES
The Company has not segregated its cost of sales between cost of
tangible products and cost of services, as it is not practical to
segregate such costs.
Costs associated with equipment sales consist primarily of purchased
materials, direct labor and overhead costs. Costs associated with
service and subscription-based revenues primarily consist of direct
labor, overhead costs and amortization of certain equipment.
Page 9
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost or market with cost being
determined using the first-in, first-out (FIFO) method. Costs
included in inventories consist of materials, labor and manufacturing
overhead that are related to the purchase and production of
inventories. The Company values its inventory during the interim
period based on perpetual inventory records.
PASSUR NETWORK
The PASSUR Network installations, which include the direct and
indirect production and installation costs incurred for each of the
Company owned PASSUR systems (the "PASSUR Network"), are recorded at
cost, net of accumulated depreciation. Depreciation is computed on
the straight-line method over the useful life of the assets, which is
estimated at seven years. Units which are not placed into service are
not depreciated until such time.
CAPITALIZED SOFTWARE COSTS
The Company follows the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 86, "ACCOUNTING FOR THE COSTS OF
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED." Costs incurred
to develop computer software products and significant enhancements to
software features of the existing products to be sold or otherwise
marketed are capitalized after technological feasibility is
established and ending when the product is available for release to
customers. Once the software products become available for general
release to the public, the Company will begin to amortize such costs
to cost of sales. Amortization of capitalized software costs is
provided on a product-by-product basis based on the greater of the
ratio of current gross revenues to the total of current and
anticipated future gross revenues or the straight-line method over
the estimated economic life of the product beginning at the point the
product becomes available for general release. Costs incurred to
improve and support products after they become available for general
release are charged to expense as incurred. The assessment of
recoverability of capitalized software development costs requires the
exercise of judgment by management. In the opinion of management, all
such costs capitalized as of July 31, 2002 are recoverable through
anticipated future sales of such applicable products.
Page 10
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
EARNINGS PER SHARE
The Company follows the provisions of SFAS No. 128, EARNINGS PER
SHARE. For the three and nine months ended July 31, 2002, the effects
of outstanding stock options were excluded from the diluted loss per
share computation, as the effect would have been antidilutive.
DEFERRED INCOME
Deferred income includes advance payments received on maintenance
agreements and/or subscription services prepaid either annually or
quarterly in addition to advance payments received for license fees
relating to Company software. Revenues from maintenance and
subscription services are recognized in income as earned over the
maintenance and/or subscription period in accordance with SOP 97-2.
Revenues from license fees are recognized in income on a
straight-line basis over either the term of the license agreement or
expected useful life of such license arrangement, which ever is
longer, which typically does not exceed five years.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL
OF LONG-LIVED ASSETS, which supersedes FASB Statement No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. The basis for recognition and measurement
model under Statement 121 for assets held for use and held for sale
has been retained. Statement 144 removes goodwill from its scope,
thus eliminating Statement 121's requirement to allocate goodwill to
long-lived assets to be tested for impairment. The accounting for
goodwill now is subject to the provisions of Statements 141 and 142
on business combinations and goodwill and other intangible assets.
Statement 144 provides guidance on differentiating between assets
held and used, held for sale, and held for disposal other than by
sale.
Page 11
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Statement 144 continues to require a three-step approach for
recognizing and measuring the impairment of assets to be held and
used. Statement 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and is to be applied
prospectively. Management does not expect the adoption of this
statement will have a material impact on the Company's financial
position, result of operations or liquidity.
RECLASSIFICATION
Certain balances in the prior fiscal period have been reclassified to
conform to the presentation in the current fiscal period.
3. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In fiscal 2002, G.S. Beckwith Gilbert, the Company's controlling
shareholder, Chairman and Chief Executive Officer, loaned the Company
an additional $2,015,000 in exchange for promissory notes bearing
interest at 9% per annum and maturing on December 31, 2002. The
Company and Mr. Gilbert extended the maturity date of certain notes,
which had a maturity date of December 31, 2001, to December 31, 2002.
As of July 31, 2002, the total notes due to Mr. Gilbert aggregated
$5,105,000 and are secured by the Company's assets.
Effective October 1998, the Company began leasing space from Field
Point Capital Management Company ("FPCM"), a company 100% owned by
Mr. Gilbert, at $1,000 per month rent. For the nine months ended July
31, 2002, services rendered by FPCM to the Company totaled $9,000.
4. SUBSEQUENT EVENTS
On August 26, 2002, the Company's Board of Directors elected Robert
W. Baker, former Vice Chairman of American Airlines, to the Board. On
September 9, 2002, the Company named Delon Dotson, founder of
Federation One and former Chief Technology Officer and Executive Vice
President of MP3.com as President, Chief Technology Officer and
Director of the Company. The Company filed Form 8-K disclosing such
events with the Securities Exchange Commission on August 30, 2002 and
September 12, 2002, respectively.
Page 12
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations.
DESCRIPTION OF BUSINESS
-----------------------
Megadata Corporation (the "Company") operates in one reportable
segment: as a supplier of information, data services, software, and
communication products for the aviation industry, primarily for
airlines, airline affiliates, and airports.
The Company's principal product is the PASSUR (Passive Secondary
Surveillance Radar) System and its affiliated suite of software
products and services. PASSUR is an integrated operations control and
management system used by airlines at their dispatch and station
control centers. In addition, major airports worldwide use the PASSUR
System as part of an integrated noise management and monitoring
system, as well as for operations control.
The Company has transitioned from being a supplier of passive
surveillance systems (a capital equipment business) to a provider of
subscription based information and decision support services supplied
by the Company owned PASSUR Network.
To enhance its subscription service, the Company provides its own
proprietary software suite, called FlightPerform (formerly PASTRACK).
FlightPerform enables the customer to benefit from the algorithms and
functionality already experienced by airline and airport customers
over the past several years. In addition, during fiscal 2001 and
2002, the Company began development of several new products derived
primarily from the data generated from its PASSUR Network, including
FlightSure, RapidResponse, AirportMonitor and IROPSNet. As of January
31, 2002, FlightSure and AirportMonitor were completed and available
for sale to customers; as of July 31, 2002, IROPSNet was completed
and available for sale to customers. Amortization of the capitalized
costs of these new products commenced as of February 1, 2002 and
August 1, 2002, respectively, where applicable.
As a result of the Company's development of new software
applications, the information generated from the PASSUR Network is
available to a larger audience of aviation and aviation-related
organizations, thus creating potential additional demand for the
Company's services. Currently, PASSUR flight track coverage is
available for 27 of the top 40 airports in the United States
including 9 of the top 10. In addition, 5 of the top 6 airlines in
the United States utilize the information, data and software
information products derived from the Company's PASSUR Network.
The Company generates revenue by selling either (1)
subscription-based information- derived from a PASSUR system, which
is part of the "PASSUR Network", or (2) equipment - a PASSUR system
(included is a sale for an annual maintenance contract and an
additional charge for installation).
Under the subscription-based model, the customer subscribes to the
information on a monthly basis pursuant to a subscription agreement,
which may be for a multi-year period. The agreement also provides
that the information from the PASSUR system cannot be resold or used
for unauthorized purposes. When systems are sold, the Company retains
both proprietary and distribution rights to the data generated from
such systems.
RESULTS OF OPERATIONS
---------------------
REVENUES
--------
The Company has transitioned from a seller of equipment to a provider
of subscription-based information supplied from its PASSUR Network.
Revenues during the nine months ended July 31, 2002 increased by
$430,000, or 60%, as compared to the corresponding period in the
prior year. This increase was primarily due to an increase in
subscription-based revenues of $183,000, or 55% for the nine months
ended July 31, 2002 as compared to the same period in fiscal 2001.
Additionally, system and system upgrade revenues increased
approximately $269,000 for the nine months ended July 31, 2002 as
compared to the same period in fiscal 2001.
Revenues during the three months ended July 31, 2002 increased by
$248,000, or 75%, as compared to the corresponding period in fiscal
2001. The increase was primarily due to increases in subscription
based revenues of $28,000, or 16%, and an increase in system sales of
$219,000 for the three months ended July 31, 2002, as compared to the
same period in fiscal 2001.
Management continues to concentrate its efforts on the sale of
information through existing software applications from the Company
owned PASSUR Network rather than on system sales. As a result of the
change in the Company's business model, subscription and maintenance
revenues collectively increased by $178,000, or 27%, and $38,000, or
13%, for the nine and three months ended July 31, 2002, respectively,
when compared to the same periods of fiscal 2001. The Company will
sell complete PASSUR Systems only at a customer's specific request.
The Company continues to install PASSUR systems in its network using
existing inventoried systems including the 10 completed PASSUR units
built in the prior fiscal year. As a result of increasing demand for
data solutions generated from the PASSUR System, the Company has
begun production of 10 additional PASSUR Systems, during the fourth
quarter of fiscal 2002. The Company will market the data generated
from the network directly to airline, airport, and aviation-related
customers and anticipates that it will ultimately sell such data to
multiple users at each site. With 26 Company owned PASSUR systems
located at various airports throughout the continental United States,
the Company believes the revenue stream generated from the "PASSUR
Network" in the form of subscription-based revenue will continue to
increase steadily.
Management has decided to discontinue marketing various non-PASSUR
product offerings; however, these products continue to contribute
slightly to the revenue base from the sale of existing inventory,
along with minor service and repair revenues. The Company recorded
non-PASSUR revenue of $11,000 for the nine months ended July 31, 2002
as compared to $28,000 for the same period in fiscal 2001.
COST OF SALES
-------------
Costs associated with equipment sales consist primarily of purchased
materials, direct labor and overhead costs. Costs associated with
service and subscription-based revenues primarily consist of direct
labor, overhead costs and amortization of certain equipment.
During the three and nine months ended July 31, 2002, cost of sales
increased by approximately $98,000, or 108%, and $326,000, or 76%
respectively, over the same periods of fiscal 2001. The increase is
primarily due to increases in costs associated with the sale of
completed systems; costs associated with upgrading Company owned
network systems; and overhead costs (telecommunication costs and
related amortization of Company owned network equipment) associated
with maintaining the subscription-based revenues.
The increases relating to system sales and system upgrades consist
primarily of material costs; increases relating to overhead costs are
primarily due to the increase in the number of PASSUR systems placed
into service and related telecommunication costs at July 31, 2002 as
compared to July 31, 2001.
RESEARCH AND DEVELOPMENT
------------------------
The Company's research and development expenses increased by
$110,000, or 58% for the nine months ended July 31, 2002, after
capitalization of product development costs relating to the Company's
new product developments were recorded, as compared to the same
period of fiscal 2001. The Company continues to invest in research
and development to develop additional applications for its PASSUR
customers. Research and development efforts include activities
associated with the enhancement and improvement of the Company's
existing hardware, software and information products as well as
development of new software products based upon customer needs and
specific requests. There were no customer sponsored research and
development activities during the nine months ended July 31, 2002 and
2001.
During the three months ended July 31, 2002, research and development
increased by $81,000, or 105%, after capitalization for product
development costs were recorded. This increase is primarily due to
the additional costs associated with software development and
maintenance of new and existing products as compared to the same
period in the prior corresponding period.
SELLING, GENERAL AND ADMINISTRATIVE
-----------------------------------
Selling, general and administrative expenses increased by $277,000,
or 25%, for the nine months ended July 31, 2002 as compared to the
same period in fiscal 2001. Selling, general and administrative
expenses increased by $94,000, or 23% for the three months ended July
31, 2002 as compared to the same period in fiscal 2001. Increases
occurred in salaries, professional and consulting fees, travel,
promotion and advertising expenses as well as unabsorbed overhead
costs, primarily consisting of direct labor costs.
The Company continues to increase its sales and marketing efforts in
order to market existing and new products. The Company expects its
sales and marketing expenses in fiscal 2002 will continue to grow as
part of the Company's effort to focus on its new business strategy.
The Company is also increasing its presence at industry conventions
throughout the United States and Europe.
OTHER INCOME (EXPENSE)
----------------------
Interest income and interest expense did not change significantly for
the three and nine months ended July 31, 2002 as compared to the same
periods of fiscal 2001.
Interest expense-related party increased by $64,000, or 131% and
$176,000, or 161% for the three and nine month ended July 31, 2002 as
compared to the same periods of fiscal 2001. The increase is due to
additional borrowings during the current fiscal year.
NET LOSS
--------
The Company incurred a net loss of $1,577,000, or $.45 per diluted
common share, during the nine month period ended July 31, 2002. In
the same period of fiscal 2001, the Company incurred a net loss of
$1,117,000, or $.32 per diluted common share. Increased costs
associated with the placement, operation, development, maintenance
and marketing of the Company owned PASSUR Network contributed to the
increased loss.
During the three months ended July 31, 2002, the Company incurred a
net loss of $392,000, or $.11 per diluted common share. In the same
period of fiscal 2001, the Company incurred a net loss of $302,000,
or $.09 per diluted common share.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At July 31, 2002, the Company's current liabilities exceeded current
assets by $5,815,000; and at July 31, 2002, the Company's
stockholders' deficit was $2,566,000. For the nine months ended July
31, 2002, the Company incurred a net loss of $ 1,577,000.
Management is addressing the working capital and stockholders'
deficiencies and operating losses by aggressively marketing its
PASSUR information capabilities in existing product lines as well as
in new products that are currently being developed and deployed. The
Company continues to increase the size of its owned "PASSUR Network,"
which management believes will lead to increased subscription-based
revenues. In addition, the Company will attempt to obtain external
financing, and if such external financing is not consummated, the
Company has a commitment to receive additional financial support from
its significant shareholder through the end of fiscal 2002. Such
commitment for financial support may be in the form of additional
advances or loans to the Company in addition to the deferral of
principal and interest payments due on existing loans, if deemed
necessary.
Net cash used by operating activities for the nine months ended July
31, 2002 was approximately $1,365,000. Cash flows provided by
financing activities of approximately $2,011,000 came primarily from
$2,015,000 in the form of notes payable - related party. No principal
payments on notes payable - related party were made during the nine
months ended July 31, 2002.
Cash flows used in investing activities for the nine months ended
July 31, 2002 was approximately $524,000 and consisted primarily of
investments in the Company's PASSUR network as well as capitalized
software development costs.
The Company was unprofitable for the first nine months of fiscal
2002. The Company continues to recognize increased revenues as a
result of its change to a subscription-based business model. However,
costs associated with generating such revenues also continued to
increase as the transition to its new business model requires
additional supporting costs. Additionally, the aviation market has
been impacted by continued budgetary constraints due to both the
downturn in the current economy and terrorist events of September 11,
2001. The aviation market is extensively regulated by government
agencies, particularly the Federal Aviation Administration and The
National Transportation Safety Board. Management continues to
anticipate that new regulations relating to air travel will continue
to be issued. Since substantially all of the Company's revenues are
derived from either airports or airlines, it is premature to evaluate
the impact, if any, that any new regulations or changes in the
economic situation of the aviation industry could have on the future
operations of the Company, either positively or negatively.
1
Interest by potential customers in the information and data software
products obtained from the PASSUR Network remains strong and the
Company anticipates an increase in future revenues. However, the
Company cannot predict if such revenues will materialize. If sales do
not increase, additional losses may occur and could continue. The
extent of such profits or losses will be dependent on sales volume
achieved.
CRITICAL ACCOUNTING POLICIES
----------------------------
GENERAL
The Company's discussion and analysis of its financial condition and
results of operations are based upon the 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
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 its business operations is discussed
throughout Management's Discussion and Analysis of Financial
Conditions and Results of Operations where such policies affect its
reported financial results. For a detailed discussion on the
application of these and other accounting policies, see Note 1 in the
Notes to the Consolidated Financial Statements of the Annual Report
on Form 10-K.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS ("SAB 101"), as amended. SAB 101 requires that the four
basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has
occurred or services rendered; (3) the fee is fixed and determinable;
and (4) collectibility is reasonably assured.
The Company's revenues are generated from the following: (1) system
sales, including system upgrade sales; (2) subscription and
maintenance agreements; and (3) one-time license fees. The Company
recognizes revenue from system sales when the system is shipped and
in accordance with SAB 101 and SOP 97-2. Revenues generated from
subscription and maintenance agreements are recognized over the term
of such executed agreements and/or customer's receipt of such data or
services. Revenues generated from one-time license fee payments are
recognized over either the term of the license agreement or expected
useful life of such license arrangement, whichever is longer.
CAPITALIZED SOFTWARE COSTS
The Company follows the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 86, "ACCOUNTING FOR THE COSTS OF
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED." Costs incurred
to develop computer software products and significant enhancements to
software features of the existing products to be sold or otherwise
marketed are capitalized after technological feasibility is
established and then expensed when the product is available for
release to customers. Once the software products become available for
general release to the public, the Company will begin to amortize
such costs to cost of sales.
2
The Company's policy on capitalized software costs determines the
timing of its recognition of certain development costs. In addition,
this policy determines whether the costs incurred are classified as
capitalized costs (in accordance with SFAS 86) or as research and
development expenses. Additionally, once a product has been made
available for sale to the general public, the development costs of
that product are no longer capitalized and any additional costs
incurred to maintain or support such product are expensed as
incurred. Management uses judgment in determining whether development
costs meet the criteria for immediate expense or capitalization.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF."
The Company reviews long-lived assets for impairment when
circumstances indicate the carrying amount of an asset may not be
recoverable. An impairment is recognized when the sum of the
undiscounted estimated future cash flows expected to result from the
use of the asset is less than the carrying value. The Company
evaluates the periods of amortization continually in determining
whether any events or circumstances warrant revised estimates of
useful lives.
The Company's long-lived assets include long-term fixed assets
("PASSUR Network" of Systems). At July 31, 2002, the Company had
$2,600,000 of long-term fixed assets, accounting for 67% of the
Company's total assets. The carrying value of the long-term assets is
dependant on the forecasted financial performance and future cash
flows of such assets as determined by management. If these forecasts
are not met the Company may have to record impairment charges not
previously recorded.
RISK FACTORS; FORWARD LOOKING STATEMENTS
----------------------------------------
The Management's Discussion and Analysis of Financial Conditions and
Results of Operations and the information provided elsewhere in this
Quarterly Report on Form 10-Q (including, without limitation,
"Liquidity and Capital Resources" above) contain forward-looking
statements regarding the Company's future plans, objectives, and
expected performance. These statements are based on assumptions that
the Company believes are reasonable, but are subject to a wide range
of risks and uncertainties, and a number of factors could cause the
Company's actual results to differ materially from those expressed in
the forward-looking statements referred to above. These factors
include, among others, the uncertainties related to the ability of
the Company to sell data subscriptions from its PASSUR Network, and
to make new sales of its PASSUR and other product lines due to
potential competitive pressure from other companies or other products
as well as to the downturn in the current economy and the current
uncertainty in the aviation industry as a result of the terrorist
3
events. Other uncertainties, which could impact the Company, are
uncertainties with respect to future changes in governmental
regulation affecting the product and its use in flight dispatch and
the impact such changes could have on the Company's ability to obtain
financing commitments. Additional uncertainties are related to the
Company's ability to find and maintain the personnel necessary to
sell, manufacture, and service its products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not have any significant financial instruments that
are sensitive to market risks.
Part II. Other Information
ITEM 1. LEGAL PROCEEDINGS.
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
ITEM 5. OTHER INFORMATION.
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.3 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
The Company did not file any reports on Form
8-K during the three months ended July 31,
2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereto duly authorized.
MEGADATA CORPORATION
DATED: SEPTEMBER 13, 2002 By: /s/ G. S. Beckwith Gilbert
----------------------------
G. S. Beckwith Gilbert,
Chairman, and Chief
Executive Officer
DATED: SEPTEMBER 13, 2002 By: /s/ James T. Barry
----------------------------
James T. Barry, Chief
Operating Officer, and Chief
Financial Officer
DATED: SEPTEMBER 13, 2002 By: /s/ Louis J. Petrucelly
----------------------------
Louis J. Petrucelly,
Chief Accounting Officer,
Treasurer and Controller
CERTIFICATIONS
I, G.S. Beckwith Gilbert, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Megadata
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary
to make the statement made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 13, 2002
By: /s/ G. S. Beckwith Gilbert
---------------------------
G. S. Beckwith Gilbert
Chief Executive Officer
I, James T. Barry, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Megadata
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary
to make the statement made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 13, 2002
By: /s/ James T. Barry
-----------------------
James T. Barry
Chief Financial Officer
I, Louis J. Petrucelly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Megadata
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary
to make the statement made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 13, 2002
By: /s/ Louis J. Petrucelly
---------------------------
Louis J. Petrucelly
Chief Accounting Officer