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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 APRIL 30, 2003
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-7642
MEGADATA CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
NEW YORK
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(State or Other Jurisdiction of Incorporation or Organization)
11-2208938
------------------------------------
(I.R.S. Employer 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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
----- -----
======================================================================
There were 3,488,115 shares of common stock with a par value of
$0.01 per share outstanding at June 13, 2003.
INDEX
Megadata Corporation and Subsidiaries
Page
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Balance Sheets - April 30, 2003 (unaudited)
and October 31, 2002 (audited). 3
Consolidated Statements of Operations (unaudited) - Six
months ended April 30, 2003 and 2002. 4
Consolidated Statements of Operations (unaudited) - Three months
ended April 30, 2003 and 2002. 5
Consolidated Statements of Cash Flows (unaudited) - Six
months ended April 30, 2003 and 2002. 6
Notes to Consolidated Financial
Statements (unaudited) - April 30, 2003. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 24
Item 4. Controls and Procedures 25
Part II. Other Information
Item 1. Legal Proceedings. 26
Item 2. Changes in Securities and Use of Proceeds. 26
Item 3. Defaults upon Senior Securities. 26
Item 4. Submission of Matters to a Vote of Security Holders. 26
Item 5. Other Information. 26
Item 6. Exhibits and Reports on Form 8-K. 27
Signatures 27
Certifications 28
2
Part I. Financial Information
Megadata Corporation and Subsidiaries
Consolidated Balance Sheets
APRIL 30, OCTOBER 31,
2003 2002
---------------- ---------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash $ 24,300 $ 86,334
Accounts receivable, net 514,517 230,676
Inventory 317,517 303,633
Prepaid expenses and other current assets 30,509 72,197
---------------- ---------------
Total current assets 886,843 692,840
Property, plant and equipment, net 118,344 133,233
PASSUR network, net 3,124,271 3,070,784
Software development costs, net 672,812 537,057
Other assets 17,315 16,085
---------------- ---------------
Total Assets $ 4,819,585 $ 4,449,999
================ ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 241,842 $ 456,755
Accrued expenses and other current liabilities 357,998 418,775
Accrued expenses--related parties 145,306 162,881
Notes payable--related party 7,300,000 -
Deferred income 854,699 784,374
---------------- ---------------
Total current liabilities 8,899,845 1,822,785
Notes payable--related party, less current portion - 5,705,000
---------------- ---------------
8,899,845 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 4,184,615 and 4,169,615 in 2003 and 2002,
respectively 41,846 41,696
Additional paid-in capital 3,729,557 3,716,832
Accumulated deficit (6,228,188) (5,212,839)
---------------- ---------------
(2,456,785) (1,454,311)
Treasury Stock, at cost, 696,500 shares in 2003
and 2002 (1,623,475) (1,623,475)
---------------- ---------------
Total stockholders' deficit (4,080,260) (3,077,786)
---------------- ---------------
Total liabilities and stockholders' deficit $ 4,819,585 $ 4,449,999
================ ===============
SEE ACCOMPANYING NOTES.
3
Megadata Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
SIX MONTHS ENDED APRIL 30,
2003 2002
----------- -----------
Revenues:
Subscriptions $ 745,451 $ 311,562
Maintenance 299,690 197,565
Systems -- 49,263
Other 8,894 10,178
----------- -----------
Net revenues 1,054,035 568,568
----------- -----------
Cost and expenses:
Cost of sales 543,157 567,566
Research and development 203,893 139,989
Selling, general and administrative expenses 1,023,314 870,336
----------- -----------
1,770,364 1,577,891
----------- -----------
Loss from operations (716,329) (1,009,323)
Other income (expense):
Interest income 389 621
Interest expense -- (443)
Interest expense--related party (296,766) (173,854)
----------- -----------
Loss before income taxes (1,012,706) (1,182,999)
Provision for income taxes 2,643 1,982
----------- -----------
Net loss $(1,015,349) $(1,184,981)
=========== ===========
Net loss per common share--basic
and diluted $ (.29) $ (.34)
=========== ===========
Weighted average number of common shares
outstanding--basic and diluted 3,478,115 3,473,115
=========== ===========
SEE ACCOMPANYING NOTES.
4
Megadata Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED APRIL 30,
2003 2002
----------- -----------
Revenues:
Subscriptions $ 412,731 $ 160,571
Maintenance 135,020 93,510
Systems -- 12,200
Other 8,544 6,488
----------- -----------
Net sales 556,295 272,769
----------- -----------
Cost and expenses:
Cost of sales 258,675 296,596
Research and development 96,646 67,692
Selling, general and administrative expenses 467,200 494,077
----------- -----------
822,521 858,365
----------- -----------
Loss from operations (266,226) (585,596)
Other income (expense):
Interest income 131 370
Interest expense -- (207)
Interest expense--related party (154,126) (95,261)
----------- -----------
Net loss $ (420,221) $ (680,694)
=========== ===========
Net loss per common share--basic
and diluted $ (.12) $ (.20)
=========== ===========
Weighted average number of common shares
outstanding--basic and diluted 3,488,115 3,473,115
=========== ===========
SEE ACCOMPANYING NOTES.
5
Megadata Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
SIX MONTHS ENDED APRIL 30,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,015,349) $(1,184,981)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 294,768 183,554
Common stock options granted for services performed
10,625 --
Changes in operating assets and liabilities:
Accounts receivable (283,841) (40,455)
Inventories (13,884) (30,590)
Prepaid expenses and other current assets 41,688 5,102
Other assets (1,230) (1,000)
Accounts payable (214,913) (343,331)
Deferred income 70,325 195,165
Accrued expenses and other current liabilities (78,352) (101,512)
----------- -----------
Total adjustments (174,814) (133,067)
----------- -----------
Net cash used in operating activities (1,190,163) (1,318,048)
CASH FLOWS FROM INVESTING ACTIVITIES
PASSUR network (305,131) (134,434)
Software development costs (154,931) (155,504)
Capital expenditures (9,059) (6,512)
----------- -----------
Net cash used in investing activities (469,121) (296,450)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable--related party 1,595,000 1,615,000
Proceeds from stock options exercised 2,250 --
Payments of installment notes -- (2,607)
----------- -----------
Net cash provided by financing activities 1,597,250 1,612,393
----------- -----------
Decrease in cash (62,034) (2,105)
Cash--beginning of period 86,334 8,961
----------- -----------
Cash--end of period $ 24,300 $ 6,856
=========== ===========
SEE ACCOMPANYING NOTES.
6
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 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 April 30, 2003 and its
consolidated results of operations and cash flows for the three and six months
ended April 30, 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 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.
The results of operations for the interim period stated above is not necessarily
indicative of the results of operations to be recorded for the full fiscal year
ending October 31, 2003.
7
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.
8
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, 2002, 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. This change increased total depreciation expense
during the three months and six months ended April 30, 2003 by approximately
$20,200, or $0.01 per diluted share and $39,900, or $0.01 per diluted share,
respectively.
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.
9
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 April 30, 2003 are recoverable through anticipated future
sales of such applicable products.
EARNINGS PER SHARE
The Company follows the provisions of SFAS No. 128, EARNINGS PER SHARE. For the
six and three months ended April 30, 2003, 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 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 the
expected useful life of such license arrangement, whichever is longer, which
typically does not exceed five years.
STOCK BASED COMPENSATION PLANS
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE."
SFAS No. 148 amends SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," to
provide alternative methods of transition to SFAS No. 123's fair value method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the
disclosure provisions of SFAS No. 123 and Accounting Principles Board ("APB")
No. 28, "INTERIM FINANCIAL REPORTING," to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income/loss
and earnings per share in annual and interim financial statements.
10
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION PLANS (CONTINUED)
While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of SFAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of SFAS No. 123 or the intrinsic value method of APB
No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." The Company has adopted SFAS
No. 148 effective December 31, 2002.
The Company grants options for a fixed number of shares to employees, directors
and consultants with an exercise price equal to the fair value of the shares at
the date of grant. The Company accounts for stock option grants under the
recognition and measurement principles of APB No. 25 and related Interpretations
because the Company believes the alternative fair value accounting provided for
under SFAS No. 123 requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB No. 25, because
the exercise price of the Company's employee stock options equals the market
price (fair value) of the underlying stock on the date of grant, no compensation
expense is recorded.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based compensation for the three and six months ended April 30, 2003
and 2002.
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
APRIL 30, APRIL 30, APRIL 30, APRIL 30,
2003 2002 2003 2002
-------------- ------------- ------------- --------------
Reported net loss $ 420,000 $ 681,000 $1,015,000 $ 1,185,000
Pro-forma stock compensation
expense 9,500 10,800 20,000 21,000
Pro-forma net loss $ 429,500 $ 691,800 $1,035,000 $ 1,206,000
============== ============= ============= ==============
Reported basic and diluted net
loss per common share $ (.12) $ (.20) $ (.29) $ (.34)
============== ============= ============= ==============
Pro-forma basic and diluted net
loss per common share $ (.12) $ (.20) $ (.30) $ (.35)
============== ============= ============= ==============
11
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
3. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the six months ended April 30, 2003, G.S. Beckwith Gilbert, the Company's
significant shareholder and Chairman, loaned the Company an additional
$1,595,000 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 April 30, 2003, the total principal amounts of the
notes due to Mr. Gilbert aggregated $7,300,000 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 April 30, 2003, services rendered by FPCM
to the Company totaled $6,000.
During the three months ended April 30, 2003, the Company paid approximately
$6,900 to Surf-Tech Manufacturing, Inc. (a non-public corporation) for materials
and labor in connection with the production of PASSUR systems components. A
Company Executive Vice President and Director is a 50% shareholder of the
aforementioned company, and the Company believes that these rates are
competitive and are at or below market rates.
12
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, data services, and software products intended to
satisfy the needs of the aviation industry, primarily airlines, airports, and
other aviation related companies.
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 both in
the United States and abroad 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 2003, 2002 and 2001, the Company began development of
several new products derived primarily from the information generated from its
PASSUR Network, including FlightSure(TM), FlightNewsLive(TM),
AirportMonitorV.1(TM), IROPSNet(TM), AirportMonitorV.2(TM) and PASSUR Pulse(TM).
As of February 2002 and August 2002, AirportMonitorV.1 and IROPSNet were
completed and available for sale to customers, respectively. Amortization of the
capitalized costs of these products commenced as of the date they became
available for sale during fiscal 2002. The Company anticipates the completion
and release of AirportMonitorV.2 and PASSUR Pulse during the third quarter of
fiscal 2003, whereby related amortization will commence.
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 subscription services. Currently, PASSUR
flight track coverage is available for more than 30 of the leading airports in
the United States including 9 of the top 10. In addition, 7 of the world's
leading airlines utilize the information, data and software information products
derived from the Company's PASSUR Network.
13
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.
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 six months ended April 30,
2003 increased by approximately $485,000, or 85%, as compared to the
corresponding period in the prior year. This increase was primarily due to an
increase in subscription-based revenues of approximately $434,000, or 139% for
the six months ended April 30, 2003 as compared to the same period in fiscal
2002. Additionally, maintenance revenues increased by approximately $102,000 or
52% and systems upgrade revenues decreased approximately $49,000 or 100% during
the six months ended April 30, 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.
Revenues during the three months ended April 30, 2003 increased by approximately
$284,000, or 104%, as compared to the corresponding period in fiscal 2002. The
increase was primarily due to increases in subscription-based revenues of
approximately $252,000, or 157%, and maintenance revenues of approximately
$42,000, or 44%, as compared to the corresponding 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 $294,000, or 115%, and approximately $536,000, or 105%,
respectively, for the three and six months ended April 30, 2003 as compared to
the same periods in fiscal 2002.
The Company shipped four and installed eight Company-owned PASSUR systems during
the six months ended April 30, 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 more than 30
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.
14
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 $8,500 and $8,900
for the three and six months ended April 30, 2003, respectively, as compared to
$6,500 and $10,100 for the three and six months ended April 30, 2002.
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 cost 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 and six months ended April 30, 2003, cost of sales decreased by
approximately $38,000, or 13%, and $24,000, or 4%, respectively, as compared to
the same periods in fiscal 2002. These decreases are primarily due to the lack
of systems sales and/or upgrades, significant cost reduction initiatives and
capitalization of PASSUR Systems installations, shipments and software
development. Such decreases were offset by the continued 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 $29,000, or 43% and
$64,000, or 46%, for the three and six months ended April 30, 2003,
respectively, as compared to the same periods of fiscal 2002. These increases
are primarily due to the Company's continued investment in new product
development and research as well as the continued maintenance of existing
products. 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 needs of the aviation market. There
were no customer sponsored research and development activities during the six
months ended April 30, 2003 and 2002. Research and development expenses are
funded through current operations.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by approximately
$153,000, or 18%, for the six months ended April 30, 2003 as compared to the
same period in fiscal 2002. Increases are primarily due to increases in
professional and consulting fees, travel, promotion, advertising expenses,
unabsorbed labor and overhead costs and severance payments, all of which offset
the cost reduction initiatives implemented by the Company during the three
months ended April 30, 2003.
15
During the three months ended April 30, 2003, selling, general and
administrative expenses decreased by approximately $27,000, or 5%, as compared
to the same period in fiscal 2002. This decrease is primarily due to the
significant cost reduction initiatives implemented by the Company during the
three months ended April 30, 2003, which were offset by increases during such
time in professional and consulting fees, travel, promotion, advertising
expenses and unabsorbed labor and overhead costs.
The Company continues to increase its sales and marketing efforts in order to
market its 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 trade shows throughout the
United States and Europe.
OTHER INCOME (EXPENSE)
Interest income and interest expense did not change significantly for the three
and six months ended April 30, 2003 as compared to the same periods of fiscal
2002.
Interest expense-related party increased by $59,000, or 62% and $123,000, or
71%, for the three and six months ended April 30, 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 $1,015,000, or $.29 per diluted common share,
during the six months ended April 30, 2003. During the corresponding period of
fiscal 2002, the Company incurred a net loss of $1,185,000, or $.34 per diluted
common share. Despite the increase in revenues of approximately 85% for the six
months ended April 30, 2003, the increased costs associated with the placement,
operation, development, maintenance and marketing of the Company owned PASSUR
Network contributed to the loss.
During the three months ended April 30, 2003, the Company incurred a net loss of
$420,000, or $.12 per diluted common share. During the three months ended April
30, 2002, the Company incurred a net loss of $681,000, or $.20 per diluted
common share.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2003, the Company's current liabilities exceeded current assets by
$8,013,000. At April 30, 2003, the Company's stockholders' deficit was
$4,080,000. For the six months ended April 30, 2003, the Company incurred a net
loss of $1,015,000.
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 the
16
Company-owned "PASSUR Network," as well as expanding its existing software suite
of products through the continued development of new product offerings.
Management believes these efforts will lead to continued increases 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 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.
For the six months ended April 30, 2003, net cash used by operating activities
was approximately $1,190,000. Cash used in investing activities was
approximately $469,000 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 $1,597,000 came primarily from
$1,595,000 in the form of notes payable - related party. No principal payments
on notes payable - related party were made during the six months ended April 30,
2003.
The Company was unprofitable for the six months ended April 30, 2003. The
Company continues to experience increased revenues as a result of the
implementation of its subscription-based revenue model. The Company is actively
addressing the increasing costs associated with supporting the business, and
will continue to identify and reduce any unnecessary costs as part of its cost
reduction initiatives. Additionally, the aviation market has been impacted by
budgetary constraints and airline bankruptcies due to both the downturn in the
current economy and the terrorist events of September 11, 2001 and the war on
terrorism. 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 April 30, 2003, the Company had contractual obligations as follows:
------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------------
TOTAL LESS THAN 1 YEAR 1-3 YEARS
------------------------------------------------------------------------------
Operating Leases $ 209,946 $ 82,248 $ 127,698
------------------------------------------------------------------------------
Promissory Notes $ 7,300,000 $ 7,300,000 $ -
----------- ----------- ------------
------------------------------------------------------------------------------
Total contractual cash
------------------------------------------------------------------------------
Obligations $ 7,509,946 $ 7,382,248 $ 127,698
------------------------------------------------------------------------------
17
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
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.
18
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.
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 April 30, 2003 totaled $673,000.
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.
19
The Company's long-lived assets include long-term fixed assets of the PASSUR
Network and software development costs that at April 30, 2003 were approximately
$3,124,000 and $673,000, respectively. Long-term fixed assets accounted for 82%
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, 2002, the Company changed the estimated useful lives of certain
assets within the capitalized PASSUR Network from seven to five years to reflect
the revised expected useful life of such assets.
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 April 30, 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.
RISK FACTORS
THE COMPANY HAS A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOWS FROM
OPERATIONS AND EXPECTS ITS LOSSES AND NEGATIVE CASH FLOWS 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 $420,000 and $1,015,000 during the three and
six months ended April 30, 2003, respectively, $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 April 30, 2003, the Company's accumulated deficit was approximately
$4,080,000. The Company anticipates that it will continue to incur net losses
and negative cash flows for the next several reporting periods. The Company's
ability to achieve and maintain profitability will depend upon its ability to
generate significant increased revenues through new and existing customer
agreements, additional services and/or products offered to existing customers
and 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.
THE COMPANY'S SUCCESS IS DEPENDANT ON THE AVIATION INDUSTRY. IF THE COMPANY DOES
NOT EXECUTE ITS BUSINESS PLAN OR IF THE MARKET FOR ITS SERVICES FAILS TO DEVELOP
DUE TO THE DEPRESSED AVIATION INDUSTRY MARKET, ITS RESULTS OF OPERATIONS AND
FINANCIAL RESULTS COULD CONTINUE TO BE ADVERSELY AFFECTED.
20
The Company's revenues are solely derived from the aviation industry. The
Company's subscription-based revenues increased by 139% during the six months
ended April 30, 2003 as compared to the same reporting period in fiscal 2002.
The Company successfully 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.
Additionally, the aviation market has been impacted by budgetary constraints and
airline bankruptcies due to both the downturn in the current economy and the
terrorist events of September 11, 2001 and the war on terrorism. The aviation
market is extensively regulated by government agencies, particularly the Federal
Aviation Administration and The National Transportation Safety Board. New air
travel regulations have been, and management anticipates will continue to be,
implemented that could have a negative impact on airline and airport revenues.
Since substantially all of the Company's revenues are derived from either
airports or airlines, continued increased regulations of the aviation industry
or continued downturn in the economic situation of the aviation industry could
have a material adverse effect on the Company.
RELIANCE ON THE COMPANY'S QUARTERLY OPERATING RESULTS AS AN INDICATION OF FUTURE
RESULTS IS INAPPROPRIATE DUE TO POTENTIAL SIGNIFICANT FLUCTUATIONS.
The Company's future revenues and results of operations may fluctuate
significantly due to a combination of factors, including:
o Delays and/or decreases in the signing and invoicing of new contracts;
o The length of time needed to initiate and complete customer contracts;
o 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.
21
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 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 and/or funded. In such case, the Company may be
required to seek alternate sources of financing (which may not be available on
favorable terms or at all) or abandon such activities by either: 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. Additionally, the
aviation industry, particularly the airline sector, has experienced several
Chapter 11 bankruptcy filings recently. Any Chapter 11 filings by our existing
customers may adversely affect our ability to continue such services and related
revenue generated from such customers. As a result of this concentration of our
customer base, an inability to replace one or more of these large customer
contracts could materially adversely affect our results of operations and
financial condition.
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
customers. There is currently no existing technology that provides absolute
security. Such incidents could deter potential customers and adversely affect
existing customer relationships.
22
THE COMPANY MAY BE SUBJECT TO EXISTING AND NEWLY ISSUED GOVERNMENT REGULATIONS
RELATING TO THE DISTRIBUTION OF FLIGHT-TRACKING DATA.
The Company currently maintains strict safety regulations for its data in order
to comply with current government regulations. Due to the continued growing
safety needs and concerns of the aviation industry, new government regulations
may be implemented. Such new regulations may, in some cases, hinder the
Company's ability to provide current and/or additional services.
UNAUTHORIZED USE OF THE COMPANY'S INTELLECTUAL PROPERTIES BY THIRD PARTIES MAY
DAMAGE AND/OR ADVERSELY AFFECT OUR BUSINESS.
We regard our trademarks, trade secrets and all other intellectual property as
critical to our future success. Unauthorized use of our intellectual property by
third parties may damage and/or impair our business. Our intellectual property
includes exclusive licenses to use patents held by third parties, as well as
Company-owned patents. We rely on trademarks, trade secrets, patent protection
and contracts, including confidentiality and non-exclusive license agreements
with our customers, employees, consultants, strategic partners and others to
protect our intellectual property rights. Despite our precautions, it may be
possible for third parties to obtain and use our intellectual property without
our prior knowledge and/or authorization.
The Company currently has the exclusive license rights to use fifteen patents in
the United States and various foreign countries, relating to the Company's
PASSUR System and related technologies. The licensed patents expire in various
years through 2010. We currently have three additional patents pending with the
United States Patent Office, relating to newly developed internet based software
applications, primarily derived from the data generated from the Company's
PASSUR Systems. We also intend to seek further patents on our continuous
technology advancements, when appropriate. There can be no assurance that the
patents will be issued for any of our pending or future patent applications or
that any claims allowed from such applications will be of sufficient scope, or
provide adequate protection or any commercial advantage to the Company.
Additionally, our competitors may be able to design around our patents and
possibly affect our commercial interests.
The Company has filed applications for trademark registration of PASSUR in the
Untied States. We cannot be assured that the registration will be granted from
our pending or future applications, or that any registrations that are granted
will prevent others from using similar trademarks in connection with related
services.
23
DEFENDING AGAINST INTELLECTUAL PROPERTY CLAIMS COULD POSE SIGNIFICANT LEGAL AND
PROFESSIONAL COSTS, AND IF WERE UNSUCCESSFUL, COULD ADVERSELY AFFECT THE
COMPANY.
We cannot assure you that our future products, technologies and software
applications will not infringe valid patents or other intellectual property
rights held by third parties. We may be subject to legal proceedings and claims
from time to time relating to the intellectual property of others. Prosecuting
infringers and defending against intellectual property infringement claims could
be time consuming and costly, and irrespective of whether or not the Company is
successful, could cause substantial expenses and disrupt out business. We may
incur substantial expenses in defending against these third party claims,
regardless of their merit. Successful infringement claims against the Company
may result in significant monetary liability and could adversely affect our
business.
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 terrorist events, the war on terror and airline
bankruptcies. 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, our ability to adequately protect out
intellectual property and our ability to secure future financing.
24
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.
25
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.
Shareholders at the Company`s Annual Meeting on April 14, 2003 voted to:
(1) Elect the following to the Board of Directors:
FOR WITHHOLD
G.S. Beckwith Gilbert 3,046,602 7,400
Richard R. Schilling 3,046,602 7,400
Bruce N. Whitman 3,046,602 7,400
Paul L. Graziani 3,046,602 7,400
John R. Keller 3,046,602 7,400
James T. Barry 3,046,602 7,400
Robert W. Baker 3,046,602 7,400
(2) Ratify the appointment of Ernst & Young LLP, as the Company's independent
public accountants for the fiscal year ending October 31, 2003.
FOR AGAINST ABSTAIN
--- ------- -------
3,074,612 20,702 1,300
(3) Amendment to the 1999 Stock Incentive Plan.
FOR AGAINST ABSTAIN
--- ------- -------
2,500,588 38,291 900
26
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:
On February 3, 2003, the Company filed Form 8-K announcing the retirement of
G.S. Beckwith Gilbert as Chief Executive Officer of the Company and the
appointments of James T. Barry as Chief Executive Officer and Louis J.
Petrucelly as Chief Financial Officer and Secretary, effective February 1, 2003.
On March 18, 2003, the Company filed Form 8-K announcing that Delon Dotson,
President, Chief Technology Officer and Director had resigned all of his
positions with the Company, effective March 14, 2003.
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: JUNE 13, 2003 By: /s/ James T. Barry
-----------------------------
James T. Barry, President and
Chief Executive Officer
DATED: JUNE 13, 2003 By: /s/ Louis J. Petrucelly
------------------------------
Louis J. Petrucelly, Chief
Financial Officer,
Treasurer and Secretary
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: June 13, 2003
By: /s/ James T. Barry
-----------------------------
James T. Barry
Chief Executive Officer
(Principal Executive Officer)
28
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: June 13, 2003
By: /s/ Louis J. Petrucelly
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Louis J. Petrucelly
Chief Financial Officer
(Principal Financial and Accounting Officer)
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