Back to GetFilings.com
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 JANUARY 31, 2003
----------------
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)
11-2208938 NEW YORK
---------- --------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
47 ARCH STREET, GREENWICH, CONNECTICUT 06830
-------------------------------------- -----
(Address of Principal Executive Office) (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 3,488,115 shares of common stock with a par value of $0.01 per share
outstanding at March 17, 2003.
INDEX
Megadata Corporation and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Balance Sheets - January 31, 2003 (unaudited)
and October 31, 2002 (audited). 3
Consolidated Statements of Operations (unaudited) - Three
months ended January 31, 2003 and 2002. 4
Consolidated Statements of Cash Flows (unaudited) - Three
months ended January 31, 2003 and 2002. 5
Notes to Consolidated Financial
Statements (unaudited) - January 31, 2003. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 21
Item 4. Controls and Procedures 21
Part II. Other Information
Item 1. Legal Proceedings. 22
Item 2. Changes in Securities and Use of Proceeds. 22
Item 3. Defaults upon Senior Securities. 22
Item 4. Submission of Matters to a Vote of Security Holders. 22
Item 5. Other Information. 22
Item 6. Exhibits and Reports on Form 8-K. 22
Signatures 23
Certifications 24
Page 2 of 27
Part I. Financial Information
Megadata Corporation and Subsidiaries
Consolidated Balance Sheets
JANUARY 31, OCTOBER 31,
2003 2002
------------ ---------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash $ 119,209 $ 86,334
Accounts receivable, net 316,338 230,676
Inventory 286,574 303,633
Prepaid expenses and other current assets 59,728 72,197
----------- -----------
Total current assets 781,849 692,840
Property, plant and equipment, net 128,942 133,233
PASSUR network, net 3,120,315 3,070,784
Software development costs, net 564,121 537,057
Other assets 16,085 16,085
----------- -----------
Total Assets $ 4,611,312 $ 4,449,999
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 245,987 $ 456,755
Accrued expenses and other current liabilities 382,220 418,775
Accrued expenses--related parties 133,637 162,881
Notes payable--related party 6,605,000 --
Deferred income 912,070 784,374
----------- -----------
Total current liabilities 8,278,914 1,822,785
Notes payable--related party, less current portion -- 5,705,000
----------- -----------
8,278,914 7,527,785
Commitment and contingencies
Stockholders' deficit:
Preferred shares - authorized 5,000,000 shares,
par value $.01 per share; none
issued or outstanding -- --
Common shares--authorized 10,000,000 shares, par value
$.01 per share; issued 4,169,615 in 2003 and 2002 41,696 41,696
Additional paid-in capital 3,722,144 3,716,832
Accumulated deficit (5,807,967) (5,212,839)
----------- -----------
(2,044,127) (1,454,311)
Treasury Stock, at cost, 696,500 shares in 2003
and 2002 (1,623,475) (1,623,475)
----------- -----------
Total stockholders' deficit (3,667,602) (3,077,786)
----------- -----------
Total liabilities and stockholders' deficiency $ 4,611,312 $ 4,449,999
=========== ===========
SEE ACCOMPANYING NOTES.
Page 3 of 27
Megadata Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED JANUARY 31,
2003 2002
------------------------------
Revenues:
Subscriptions $ 332,720 $ 150,991
Maintenance 164,670 104,055
Systems -- 37,063
Other 350 3,690
----------- -----------
Net revenues 497,740 295,799
----------- -----------
Cost and expenses:
Cost of sales 284,482 270,970
Research and development 107,247 72,297
Selling, general and administrative expenses 556,114 376,259
----------- -----------
947,843 719,526
----------- -----------
Loss from operations (450,103) (423,727)
Other income (expense):
Interest income 258 251
Interest expense -- (236)
Interest expense--related party (142,640) (78,593)
----------- -----------
Loss before income taxes (592,485) (502,305)
Provision for income taxes 2,643 1,982
----------- -----------
Net loss $ (595,128) $ (504,287)
=========== ===========
Net loss per common share--
basic and diluted $ (.17) $ (.15)
=========== ===========
Weighted average number of common shares
outstanding--basic and diluted 3,473,115 3,473,115
=========== ===========
SEE ACCOMPANYING NOTES.
Page 4 of 27
Megadata Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED JANUARY 31,
2003 2002
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(595,128) $(504,287)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 141,663 88,224
Common stock options granted for services performed 5,312 --
Changes in operating assets and liabilities:
Accounts receivable (85,662) (86,536)
Inventories 17,059 5,886
Prepaid expenses and other current assets 12,469 1,779
Other assets -- (1,000)
Accounts payable (210,768) (62,132)
Deferred income 127,696 244,180
Accrued expenses and other current liabilities (65,799) (160,598)
--------- ---------
Total adjustments (58,030) 29,803
--------- ---------
Net cash used in operating activities (653,158) (474,484)
CASH FLOWS FROM INVESTING ACTIVITIES
PASSUR network (169,632) (103,634)
Software development costs (36,653) (77,326)
Capital expenditures (7,682) (6,537)
--------- ---------
Net cash used in investing activities (213,967) (187,497)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable--related party 900,000 715,000
Payments of installment notes -- (1,089)
--------- ---------
Net cash provided by financing activities 900,000 713,911
--------- ---------
Increase in cash 32,875 51,930
Cash--beginning of period 86,334 8,961
--------- ---------
Cash--end of period $ 119,209 $ 60,891
========= =========
SEE ACCOMPANYING NOTES.
Page 5 of 27
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2003
(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 business segment: as a supplier of information, data services, software, and
communication products for the aviation industry.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated 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, 2002 on Form 10-K filed with the Securities and Exchange
Commission ("SEC"); the consolidated 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 January 31, 2003 and its
consolidated results of operations and cash flows for the three months ended
January 31, 2003 and 2002.
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 in some cases have been deployed. The Company is continuing
to increase 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 2003. 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, 2003.
Page 6 of 27
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 practices 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 when the
products or systems have been shipped in accordance with Staff Accounting
Bulletin 101. Installation charges, if any, are not material and are recognized
when installation services are completed.
The Company recognizes services and maintenance revenues on a straight-line
basis over the service contract period. Revenues for data subscription services
are recognized on a monthly basis upon the execution of an agreement and the
customer's receipt of the data.
The Company 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, whichever 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 7 of 27
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 for PASSUR Systems
and five years for related workstations. Units which are not placed into service
are not depreciated until such time.
On November 1, 2003, the Company changed the estimated useful lives of certain
assets within the capitalized PASSUR Network to reflect the revised expected
useful life of such assets. The change increased total depreciation expense
during the three months ended January 31, 2003 by approximately $19,700,
equivalent to approximately $0.01 per diluted share.
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 as well as 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.
Page 8 of 27
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SOFTWARE COSTS (CONTINUED)
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 January 31, 2003 are recoverable through anticipated future
sales of such applicable products.
DEFERRED INCOME
Deferred income includes advances received on maintenance agreements and/or
subscription services which are derived from the Company's PASSUR Network and
which may be prepaid either annually or quarterly, as well as advance one-time
payments received for license fees relating to Company software applications.
Revenues from maintenance and subscription services are recognized in income as
earned over the maintenance and/or subscription period that coincides with the
respective agreement. 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, whichever is longer, which typically
does not exceed five years.
Page 9 of 27
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
3. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the three months ended January 31, 2003, G.S. Beckwith Gilbert, the
Company's significant shareholder and Chairman, loaned the Company an additional
$900,000 in exchange for promissory notes bearing interest at 9% per annum and
maturing on December 31, 2003. The Company and Mr. Gilbert extended the maturity
date of certain notes, which had a maturity date of December 31, 2002, to
December 31, 2003. As of January 31, 2003, the total principal amounts of the
notes due to Mr. Gilbert aggregated $6,605,000 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 three months ended January 31, 2003, services rendered by
FPCM to the Company totaled $3,000.
4. SUBSEQUENT EVENTS
On January 31, 2003, the Company's Board of Directors elected James T. Barry as
Vice Chairman and appointed Mr. Barry as Chief Executive Officer and Louis J.
Petrucelly as Chief Financial Officer and Secretary, effective February 1, 2003.
Effective February 1, 2003, G. S. Beckwith Gilbert retired as the Company's
Chief Executive Officer but remains as the Chairman and a Director of the
Company. The Company filed a Form 8-K disclosing such events with the Securities
Exchange Commission on February 3, 2003.
Page 10 of 27
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations.
DESCRIPTION OF BUSINESS
Megadata Corporation (the "Company") operates in one business segment: as a
supplier of information, software, and communication products/applications 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(TM) (formerly PASTRACK). FlightPerform
enables the customer to benefit from the algorithms and functionality already
used by airline and airport customers over the past several years. In addition,
during fiscal years 2002 and 2001, the Company began development of several new
products derived primarily from the information generated from its PASSUR
Network, including FlightSure(TM), RapidResponse(TM), FlightNewsLive(TM),
AirportMonitor(TM) and IROPSNet(TM). As of January 31, 2003, AirportMonitor and
IROPSNet were completed and available for sale to customers. Amortization of the
capitalized costs of these new products commenced as of the date they became
available for sale during fiscal 2002.
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 35 of the top 50 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. 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, Megadata retains both
proprietary and distribution rights to the information derived from such system
and can distribute such information at the Company's sole discretion.
Page 11 of 27
RESULTS OF OPERATIONS
REVENUES
The Company has transitioned from a seller of equipment (one-time sales) to a
provider of subscription-based applications and decision support information
supplied from its PASSUR Network. Revenues during the three months ended January
31, 2003 increased by approximately $202,000, or 68%, as compared to the
corresponding period in the prior year. This increase was primarily due to an
increase in subscription-based revenues of approximately $182,000, or 120% for
the three months ended January 31, 2003 as compared to the same period in fiscal
2002. Additionally, maintenance revenues increased by approximately $61,000 or
58% and system upgrade revenues decreased approximately $37,000 or 100% during
the three months ended January 31, 2003 as compared to the same period in fiscal
2002.
Management continues to concentrate its efforts on the sale of information and
decision support applications derived from the data from the Company-owned
PASSUR Network. Subscription and maintenance-based revenues increased
approximately $242,000, or 95% for the three months ended January 31, 2003 as
compared to the same period in fiscal 2002. The Company's business plan
continues to focus on increasing subscription-based revenues; however, the
Company from time to time will sell PASSUR systems (one-time sales event) at a
specific customer's request.
The Company shipped two and installed three Company-owned PASSUR systems during
the three months ended January 31, 2003, which were capitalized as part of the
"PASSUR Network". The Company will continue to expand the PASSUR network through
shipments and installations of additional systems throughout fiscal 2003. The
Company will continue to market the information generated from the PASSUR
network directly to airlines, airports and aviation related companies and
anticipates that the information derived from the network will ultimately be
subscribed to by multiple users at each specific network site. With 35 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 revenues 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 $350 for the three
months ended January 31, 2003 as compared to $3,690 for the same period in
fiscal 2002.
Page 12 of 27
COST OF SALES
Costs associated with equipment sales consist primarily of purchased materials,
direct labor and overhead costs. Costs associated with service and subscription
revenues primarily consist of direct labor, overhead costs and the amortization
of certain equipment. Also included in costs of sales are costs associated with
the upgrades of PASSUR systems necessary to make such systems compatible with
new software applications as well as the ordinary repair and maintenance of
existing systems. Cost of sales in each reporting period is impacted by the
number of PASSUR systems in production as the costs of producing systems are
charged to inventory in that period.
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.
During the three months ended January 31, 2003, cost of sales increased by
approximately $14,000, or 5%, as compared to the same period in fiscal 2002.
This increase is primarily due to the additional depreciation expense of
approximately $19,700 as a result of the change in estimated useful lives of
certain Company owned assets from seven to five years as well as increases in
communication costs and overhead costs (and amortization) associated with
maintaining and expanding the Company's "nationwide" network of PASSUR systems.
RESEARCH AND DEVELOPMENT
The Company's research and development expenses increased by $35,000, or 48% for
the three months ended January 31, 2003 as compared to the same period of fiscal
2002. 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
additional costs allocated to the development of new software applications
addressing the aviation market needs. There were no customer sponsored research
and development activities during the three months ended January 31, 2003 and
2002. Research and development expenses are funded through current operations.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by $180,000, or 48%, for
the three months ended January 31, 2003 as compared to the same period in fiscal
2002. Increases are primarily due to increases in salaries (additional sales and
executive personnel were hired), severance payments, professional and consulting
fees, travel, promotion and advertising expenses as well as unabsorbed labor and
overhead costs.
The Company continues to increase its sales and marketing efforts in order to
market new and existing products. The Company expects its sales and marketing
expenses in fiscal 2003 will continue to grow as part of the Company's effort to
focus and execute on its subscription-based business strategy. The Company is
also increasing its presence at industry conventions throughout the United
States and Europe.
Page 13 of 27
OTHER INCOME (EXPENSE)
Interest income and interest expense did not change significantly for the three
months ended January 31, 2003 as compared to the same periods of fiscal 2002.
Interest expense-related party increased by $64,000, or 81% for the three months
ended January 31, 2003 as compared to the same period of fiscal 2002. The
increase is due to additional borrowings during the current fiscal year.
NET LOSS
The Company incurred a net loss of $595,000, or $.17 per diluted common share,
after a non-recurring charge of approximately $74,000 for severance payments and
additional depreciation expense of approximately $19,700 as a result of the
change in the estimated useful lives of certain PASSUR network assets from seven
to five years during the three months ended January 31, 2003. In the same period
of fiscal 2002, the Company incurred a net loss of $504,000, or $.15 per diluted
common share. Despite the increase in revenues of approximately 68% for the
three months ended January 31, 2003, increased costs associated with the
placement, operation, development, maintenance and marketing of the Company
owned PASSUR Network as well as the non-recurring and additional depreciation
expense contributed to the increased loss.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2003, the Company's current liabilities exceeded current assets
by $7,497,000. At January 31, 2003, the Company's stockholders' deficit was
$3,668,000. For the three months ended January 31, 2003, the Company incurred a
net loss of $595,000.
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. The Company continues to increase the size of its
owned "PASSUR Network," as well as expanding its existing software suite of
products through the continued development of new product offerings, which
management believes will continue to 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 2003. 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.
Page 14 of 27
For the three months ended January 31, 2003, net cash used by operating
activities was approximately $653,000. Cash used in investing activities was
approximately $214,000 and consisted primarily of investments in the Company's
PASSUR network as well as capitalized software development costs. Cash provided
by financing activities of approximately $900,000 came primarily from $900,000
in the form of notes payable - related party. No principal payments on notes
payable - related party were made during the three months ended January 31,
2003.
The Company was unprofitable for the three months ended January 31, 2003. The
Company continues to increase revenues as a result of the implementation of its
subscription-based revenue model. However, costs associated with developing,
maintaining and supporting such revenue streams continue to increase.
Additionally, the aviation market has been impacted by budgetary constraints due
to both the downturn in the current economy and the 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, and management anticipates 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.
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 revenues do not increase, additional losses may
occur. The extent of such profits or losses will be dependent on sales volume
achieved and Company cost reduction initiatives.
CONTRACTUAL OBLIGATIONS
As of January 31, 2003, the Company had contractual obligations as follows:
- --------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
- --------------------------------------------------------------------------------
TOTAL LESS THAN 1 YEAR 1-3 YEARS
- --------------------------------------------------------------------------------
Operating Leases $ 230,205 $ 81,642 $ 148,563
- --------------------------------------------------------------------------------
Promissory Notes $6,605,000 $6,605,000 $ --
- -------------------------------- ---------- ---------- ----------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total contractual cash
- --------------------------------------------------------------------------------
Obligations $6,835,205 $6,686,642 $ 148,563
- --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities based upon accounting policies management has
implemented. The Company has identified the policies below as critical to its
Page 15 of 27
business operations and the understanding of its results of operations. The
impact and any associated risks related to these policies on the Company's
business operations is discussed throughout Management's Discussion and Analysis
of Financial Conditions and Results of Operations where such policies affect its
reported financial results. Actual results may differ from these judgments under
different assumptions or conditions. The Company's accounting policies that
require management to apply significant judgment and estimates include:
REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB 101"), as amended.
SAB 101 requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the fee is fixed and determinable;
and (4) collectibility is reasonably assured. The Company also recognizes
revenue in accordance with Statement of Position 97-2, SOFTWARE REVENUE
RECOGNITION ("SOP 97-2"), as amended, when applicable.
The Company's revenues are generated from the following: (1) subscription and
maintenance agreements; (2) system sales, including system upgrade sales; and
(3) one-time license fees. The Company recognizes revenue from system sales when
the system is shipped 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. The Company invoices and records revenue pursuant to individual
contracts on a month-by-month basis, as outlined by the applicable agreement and
in accordance with SOP 97-2. In many cases, the Company may invoice respective
customers in advance of specified period(s), either quarterly or annually which
coincides with the terms of the agreement. In such cases, the Company will defer
at the close of each month and/or reporting period any subscription or
maintenance revenues invoiced for which services have yet to be rendered, in
accordance with SOP 97-2.
From time to time, the Company will receive one-time payments from customers for
rights, including but not limited to the rights to use certain data at an agreed
upon location(s) for a specific use and/or for an unlimited number of users.
Such one-time payments are in the form of license fees. These fees are
recognized as revenue ratably over the term of the license agreement or expected
useful life of such license arrangement, whichever is longer, but typically five
years.
Any deferred revenue is classified on the Company's balance sheet as a liability
in the deferred income account until such time as revenue from services is
properly recognized as revenue in accordance with SAB 101 and/or SOP 97-2 and
the corresponding agreement.
CAPITALIZED SOFTWARE COSTS
The Company follows the provisions of Statement of Financial Accounting
Standards No. 86, "ACCOUNTING FOR THE COSTS OF SOFTWARE TO BE SOLD, LEASED, OR
OTHERWISE MARKETED" ("SFAS 86"). Costs incurred to develop computer hardware and
software products as well as significant enhancements to software features of
the existing products to be sold or otherwise marketed are capitalized after
technological feasibility is established. Once the software products become
available for general release to the public, the Company will begin to amortize
such costs to cost of sales.
Page 16 of 27
The Company's policy on capitalized software costs determines whether the costs
incurred are classified as capitalized costs (in accordance with SFAS 86) or as
research and development expenses. In cases whereby the Company capitalizes
costs incurred with development of new hardware/software products, a product
specification is designed and/or working model of the respective project is
developed as the guideline for the criteria to capitalize costs associated with
such project in accordance with SFAS 86.
Once a product has been made available for sale and/or released for sale to the
general public, the development costs of that product are no longer capitalized
and any additional costs incurred to maintain or support such product are
expensed as incurred. In some cases, the Company may capitalize costs incurred
in the development of enhanced versions of already existing products, but will
immediately expense any costs incurred on products which were completed and
released to the general public in the form of continued maintenance of such
products, in accordance with SFAS 86. Management uses judgment in determining
and evaluating whether development costs meet the criteria for immediate expense
or capitalization.
The Company's net capitalized software costs at January 31, 2003 totaled
$564,000. The carrying value of the capitalized software costs is dependent on
the forecasted and actual performance of future cash flows generated from such
assets as determined and evaluated by management.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS" ("SFAS 144"). The Company reviews long-lived assets for impairment when
circumstances indicate the carrying amount of an asset may not be recoverable or
at each reporting period. 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 of the PASSUR
Network and software development costs that at January 31, 2003 were
approximately $3,120,000 and $564,000, respectively. Long-term fixed assets
accounted for 80% of the Company's total assets. The carrying value of the
long-term assets is dependent on the forecasted and actual financial performance
and future cash flows of such assets as determined by management.
On November 1, 2003, the Company changed the estimated useful lives of certain
assets within the capitalized PASSUR Network to reflect the revised expected
useful life of such assets from seven to five years.
At each reporting period, management evaluates the carrying values of the
Company's assets. The evaluation represents the undiscounted cash flows
generated from current contractual revenue sources and the anticipated forecast
revenue derived from each asset. It then evaluates these revenues on an overall
basis to determine if any impairment issues exist. As of January 31, 2003, based
upon management's evaluation of the above asset groups, no impairments appear to
exist. If these forecasts are not met the Company may have to record impairment
charges not previously recorded.
Page 17 of 27
RISK FACTORS
THE COMPANY HAS A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOWS AND
EXPECTS ITS LOSSES TO CONTINUE FOR THE NEXT SEVERAL REPORTING PERIODS.
The Company has incurred significant losses during the last six fiscal years.
The Company incurred net losses of $595,000 during the three months ended
January 31, 2003, $2,110,000 during the fiscal year ended October 31, 2002 and
$1,629,000 during the fiscal year ended October 31, 2001. As of January 31,
2003, the Company's accumulated deficit was approximately $3,668,000. The
Company anticipates that it will continue to incur net losses for the next
several reporting periods. The Company's ability to achieve and maintain
profitability will depend upon its ability to generate significant revenues
through new and existing customer agreements, additional services and/or
products offered to existing customers and controlling the costs associated with
the business operations. There is no guarantee that the Company will be able to
execute on these requirements. If the Company becomes profitable for a specific
reporting period, it still may not be able to sustain or increase its profits on
a quarterly or annual basis in the future.
IF MEGADATA DOES NOT EXECUTE ITS BUSINESS PLAN OR IF THE MARKET FOR ITS SERVICES
FAILS TO DEVELOP DUE TO THE DEPRESSED AVIATION INDUSTRY MARKET, ITS RESULTS OF
OPERATIONS AND FINANCIAL RESULTS COULD CONTINUE TO BE ADVERSELY AFFECTED.
The Company's revenues are solely derived from the aviation industry. The
Company's subscription-based revenues increased by 120% during the three months
ended January 31, 2003 as compared to the same reporting period in fiscal 2002.
The Company transitioned from a seller of equipment (one-time sales) to a
supplier of data through software incorporated decision support tools on a
subscription basis. The Company's future revenues and results of operations are
dependent on its continued execution of its subscription-based revenue strategy
and development of new software solutions and applications for the aviation
industry. Due to the depressed aviation industry market, it is not assured that
the Company will be able to continue to report growth in its subscription-based
business or sustain its current subscription business. If the Company is unable
to sustain and/or increase its levels of revenues, and it is not successful in
reducing costs, its cash requirements may increase and the results of operations
will continue to be adversely affected.
Page 18 of 27
RELIANCE ON THE COMPANY'S QUARTERLY OPERATING RESULTS AS AN INDICATION OF FUTURE
RESULTS IS INAPPROPRIATE DUE TO POTENTIAL SIGNIFICANT FLUCTUATIONS.
The Company's future revenues and results of operations may fluctuate
significantly due to a combination of factors, including:
o Delays and/or decreases in the signing and invoicing of new contracts;
o The length of time needed to initiate and complete customer contracts;
o Revenues recognized from one-time sales events (selling or upgrading
systems) versus subscription based sales;
o The introduction and market acceptance of new and enhanced products and
services;
o The costs associated with providing existing and new products and
services; and
o Economic conditions in the United States and the impact on the aviation
industry from the terrorist events of September 11, 2001.
Accordingly, quarter-to-quarter comparisons of its results of operations should
not be relied on as an indication of performance. It is possible that in future
periods results of operations may be below the expected future performance based
upon previous performances.
THE COMPANY MAY BE UNABLE TO RAISE ADDITIONAL FUNDS TO MEET OPERATING CAPITAL
REQUIREMENTS IN THE FUTURE.
The Company has incurred significant negative cash flows from operations over
the past several fiscal years. It has obtained a commitment from its significant
shareholder and Chairman to provide the resources necessary to meet working
capital and liquidity requirements through October 31, 2003. However, future
liquidity and capital requirements are difficult to predict, as they depend on
numerous factors, including the maintenance and growth of existing product lines
and service offerings, as well as the ability to develop, provide and sell new
products in an industry for which liquidity and resources are already adversely
affected. The Company has significant cost requirements, which are expected to
continue in the near future. The Company may need to raise additional funds in
order to support discretionary capital expenditures. These discretionary
expenditures in some cases may be beyond the scope and normal operating
requirements for which the Company has a commitment from its significant
shareholder to fund, and therefore, may not be approved. In such case, the
Company may be required to abandon such activities by either: terminating or
eliminating certain operating activities; terminating personnel; eliminating
marketing activities; and/or eliminating research and development programs. If
any of the aforementioned occurs, the Company's ability to expand and grow could
become adversely affected.
A LIMITED NUMBER OF CUSTOMER CONTRACTS ACCOUNT FOR A HIGH PERCENTAGE OF THE
COMPANY'S REVENUES, AND THE INABILITY TO REPLACE A KEY CUSTOMER CONTRACT COULD
ADVERSELY AFFECT ITS RESULTS OF OPERATIONS, BUSINESS AND FINANCIAL CONDITION.
The Company relies on a small number of customer contracts for a large
percentage of its revenues and expects that a significant percentage of its
revenues will continue to be derived from a limited number of customer
contracts. The Company's business plan is to obtain additional customers, but
anticipates that near term revenues and operating results will continue to
depend on large contracts from a small number of customers. As a result of this
concentration of its customer base, an inability to replace one or more of these
large customer contracts could materially adversely affect its results of
operations and financial condition.
Page 19 of 27
THE COMPANY DEPENDS UPON CERTAIN KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN
THESE EMPLOYEES.
The Company's future performance depends on the continued services of its key
technical and engineering personnel. Significant improvements have been made in
the past year to address such issues, in particular, technical redundancy, but
the Company continues to depend on the efforts of a limited number of key
personnel. The employment of any of the Company's key personnel could cease at
any time.
THE PASSUR NETWORK COULD EXPERIENCE DISRUPTIONS, WHICH COULD AFFECT THE DELIVERY
OF DATA.
The Company's network infrastructure may be vulnerable to computer viruses,
break-ins, denial of service attacks and similar disruptive problems. Computer
viruses, break-ins, denial of service attacks or other problems caused by third
parties could lead to interruptions, delays or cessation in service to its
customers. There is currently no existing technology that provides absolute
security. Such incidents could deter potential customers and adversely affect
existing customer relationships.
THE COMPANY MAY BE SUBJECT TO EXISTING AND NEWLY ISSUED GOVERNMENT REGULATIONS
RELATING TO THE DISTRIBUTION OF FLIGHT-TRACKING DATA.
The Company currently maintains the strictest safety regulations for its data in
order to comply with current government regulations. Due to the continued
growing safety needs and concerns of the aviation industry, new government
regulations may be implemented. Such new regulations may, in some cases, hinder
the Company's ability to provide current and/or additional services.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition 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. The words "believe," "may," "will,"
"could," "should," "would," "anticipate," "estimate," "expect," "project,"
"intend," "objective," "seek," "strive," "might," "likely result," "build,"
"grow," "plan," "goal," "expand," "position," or similar words, or the negatives
of these words, or similar terminology identify forward-looking statements.
These statements are based on assumptions that the Company believes are
reasonable, but are subject to a wide range of risks and uncertainties, and a
number of factors could cause the Company's actual results to differ materially
from those expressed in the forward-looking statements referred to above. These
factors include, 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 the current uncertainty in the
aviation industry due to the recent terrorist events. Other uncertainties which
could impact the Company are uncertainties with respect to future changes in
governmental regulation affecting the products and their use in flight dispatch
information services and the impact of those uncertainties on the Company's
business and the significant shareholder's continued support. Additional
uncertainties are related to the Company's ability to find and maintain the
personnel necessary to sell, manufacture and service its products.
Page 20 of 27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from potential changes in interest rates.
The Company regularly evaluates these risks. The Company believes the amount of
risk relating to interest rates is not material to the Company's financial
condition or results of operations. The Company has not and does not anticipate
entering into derivative financial instruments.
ITEM 4. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
For purposes of Rules 13a-14 and 15d-14 of the Exchange Act 1934 ("Exchange
Act") the term "disclosure controls and procedures" refers to the controls and
other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files under the
Exchange Act is recorded, processed, summarized and reported within required
time periods. Within 90 days prior to the date of this Report (the "Evaluation
Date"), the Company carried out an evaluation under the supervision and with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer of the effectiveness of the design and operation of its disclosure
controls and procedures. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the Evaluation
Date, such controls and procedures were effective at ensuring that required
information will be disclosed on a timely basis in the Company's reports filed
under the Exchange Act.
(B) CHANGES IN INTERNAL CONTROLS
There were no significant changes to our internal controls or in other
factors that could significantly affect the Company's internal controls
subsequent to the Evaluation Date.
Page 21 of 27
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
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three months
ended January 31, 2003.
Page 22 of 27
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: MARCH 17, 2003 By: /s/ James T. Barry
-----------------------------------
James T. Barry, Vice-Chairman,
and Chief Executive Officer
DATED: MARCH 17, 2003 By: /s/ Louis J. Petrucelly
-------------------------------------
Louis J. Petrucelly, Chief Financial
Officer, Treasurer and Secretary
Page 23 of 27
CERTIFICATIONS
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
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing of this
quarterly report ("the Evaluation Date"); and
c. Presented in this quarterly report our conclusion about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 17, 2003
By: /s/ James T. Barry
----------------------------
James T. Barry
Chief Executive Officer
(Principal Executive Officer)
Page 24 of 27
CERTIFICATIONS
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
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing of this
quarterly report ("the Evaluation Date"); and
c. Presented in this quarterly report our conclusion about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
d. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
e. Any fraud, whether or not material, that involves management or other
employees who have significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 17, 2003
By: /s/ Louis J. Petrucelly
--------------------------------------------
Louis J. Petrucelly
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 25 of 27