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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 JANUARY 31, 2004
----------------
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 000-7642
MEGADATA CORPORATION
----------------------
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 11-2208938
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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 4,088,115 shares of common stock with a par value
of $0.01 per share outstanding as of March 12, 2004.
INDEX
Megadata Corporation and Subsidiaries
Page
Part I. Financial Information 3
Item 1. Financial Statements.
Consolidated Balance Sheets - January 31, 2004 (unaudited)
and October 31, 2003 (audited). 3
Consolidated Statements of Operations (unaudited) - Three
months ended January 31, 2004 and 2003. 4
Consolidated Statements of Cash Flows (unaudited) - Three
months ended January 31, 2004 and 2003. 5
Notes to Consolidated Financial
Statements (unaudited) - January 31, 2004. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 28
Item 4. Controls and Procedures. 28
Part II. Other Information 29
Item 1. Legal Proceedings. 29
Item 2. Changes in Securities and Use of Proceeds. 29
Item 3. Defaults Upon Senior Securities. 29
Item 4. Submission of Matters to a Vote of Security Holders. 29
Item 5. Other Information. 29
Item 6. Exhibits and Reports on Form 8-K. 29
Signatures 30
Page 2 of 33
Part I. Financial Information
Megadata Corporation and Subsidiaries
Consolidated Balance Sheets
JANUARY 31, OCTOBER 31,
2004 2003
------------ ------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash $ 92,693 $ 48,980
Accounts receivable, net 613,206 485,693
Inventory 203,424 195,254
Prepaid expenses and other current assets 331,430 83,922
------------ ------------
Total current assets 1,240,753 813,849
Property, plant and equipment, net 91,130 98,919
PASSUR network, net 2,793,759 2,924,155
Software development costs, net 690,040 679,041
Other assets 17,315 17,315
------------ ------------
Total Assets $ 4,832,997 $ 4,533,279
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 172,251 $ 209,293
Accrued expenses and other current liabilities 342,687 409,405
Accrued expenses--related parties 32,050 145,837
Notes payable--related party 8,866,465 --
Deferred income 857,217 842,687
------------ ------------
Total current liabilities 10,270,670 1,607,222
Notes payable--related party, less current portion -- 8,466,465
------------ ------------
10,270,670 10,073,687
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 4,784,615
and 4,184,615 in 2004 and 2003, respectively 47,846 41,846
Additional paid-in capital 4,094,182 3,740,182
Accumulated deficit (7,956,226) (7,698,961)
------------ ------------
(3,814,198) (3,916,933)
Treasury Stock, at cost, 696,500 shares in
2004 and 2003 (1,623,475) (1,623,475)
------------ ------------
Total stockholders' deficit (5,437,673) (5,540,408)
------------ ------------
Total liabilities and stockholders' deficit $ 4,832,997 $ 4,533,279
============ ============
SEE ACCOMPANYING NOTES.
Page 3 of 33
Megadata Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED JANUARY 31,
2004 2003
----------- -----------
Revenues:
Subscriptions $ 571,716 $ 332,720
Maintenance 110,745 164,670
Systems & Hardware 1,500 --
Other 2,250 350
----------- -----------
Net revenues 686,211 497,740
----------- -----------
Cost and expenses:
Cost of sales 406,460 284,482
Research and development 96,448 107,247
Selling, general and administrative expenses 345,004 556,114
----------- -----------
847,912 947,843
----------- -----------
Loss from operations (161,701) (450,103)
Other income (expense):
Interest income 50 258
Interest expense--related party (91,975) (142,640)
----------- -----------
Loss before income taxes (253,626) (592,485)
Provision for income taxes 3,639 2,643
----------- -----------
Net loss $ (257,265) $ (595,128)
=========== ===========
Net loss per common share--basic
and diluted $ (.07) $ (.17)
=========== ===========
Weighted average number of common shares
outstanding--basic and diluted 3,513,115 3,473,115
=========== ===========
SEE ACCOMPANYING NOTES.
Page 4 of 33
Megadata Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED JANUARY 31,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(257,265) $(595,128)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 171,214 141,663
Common stock options granted for services performed
-- 5,312
Common stock issued for interest 90,000 --
Changes in operating assets and liabilities:
Accounts receivable (127,513) (85,662)
Inventories (8,170) 17,059
Prepaid expenses and other current assets 22,492 12,469
Accounts payable (37,042) (210,768)
Deferred income 14,530 127,696
Accrued expenses and other current liabilities (180,505) (65,799)
--------- ---------
Total adjustments (54,994) (58,030)
--------- ---------
Net cash used in operating activities (312,259) (653,158)
CASH FLOWS FROM INVESTING ACTIVITIES
PASSUR network -- (169,632)
Software development costs (44,028) (36,653)
Capital expenditures -- (7,682)
--------- ---------
Net cash used in investing activities (44,028) (213,967)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable--related party 400,000 900,000
--------- ---------
Net cash provided by financing activities 400,000 900,000
--------- ---------
Increase in cash 43,713 32,875
Cash--beginning of period 48,980 86,334
--------- ---------
Cash--end of period $ 92,693 $ 119,209
========= =========
SUPPLEMENTAL INFORMATION
Common stock issuance of prepaid interest $ 270,000 --
========= =========
SEE ACCOMPANYING NOTES.
Page 5 of 33
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2004
(Unaudited)
1. NATURE OF BUSINESS
Megadata Corporation (the "Company") is a supplier of information and decision
support software serving the needs of the aviation industry, primarily airlines,
airports and other aviation-related companies. Its principal business is the
delivery of information and decision support software by subscription from a
database of flight and travel-related information, of which a primary data
component is its PASSUR(TM) (Passive Secondary Surveillance Radar) 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 on Form
10-K for the year ended October 31, 2003 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, 2004 and its
consolidated results of operations and cash flows for the three months ended
January 31, 2004 and 2003.
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 2004. 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 are not
necessarily indicative of the results of operations to be recorded for the full
fiscal year ending October 31, 2004.
Page 6 of 33
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 and in accordance with Staff Accounting
Bulletin 101 and SOP 97-2. Installation charges, if any, are not material and
are recognized when installation services are completed.
The Company recognizes service and maintenance revenues on a straight-line basis
over the service contract period. Revenues for data subscription services are
recognized on a monthly basis upon the execution of an agreement and the
customer's receipt of the data.
The Company 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.
ACCOUNTS RECEIVABLE
The Company uses installment license and/or maintenance agreements as part of
its standard business practice. The Company has a history of successfully
collecting primarily all amounts due under the original payment terms, without
making concessions on payments, software products, maintenance or other
services. Net accounts receivable is composed of either the monthly, quarterly
or annual committed amounts due from customers pursuant to the terms of each
respective customer's agreement. These accounts receivable balances include
unearned revenue attributable to deferred subscription revenues, deferred
maintenance revenues and unamortized license fee revenues. Deferred revenue
amounts represent fees billed prior to actual performance of services, which
will be recognized as revenue over either the respective license agreement term
or the estimated useful life of such revenue, whichever is longer.
Page 7 of 33
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE (CONTINUED)
The Company typically does not record a provision for doubtful accounts due to
its history of successful collections. However, if a customer's financial
condition deteriorates, specifically due to Chapter 11 bankruptcy filings,
resulting in an impairment of its ability to make payments, allowances are then
recorded against such accounts. For the period ended January 31, 2004, the
provision for doubtful accounts approximated $ 6,800, which was related to
Chapter 11 filings by existing customers.
COST OF SALES
The Company has not segregated its cost of sales between cost of system sales
and cost of subscription and maintenance revenues, as it is not practicable to
segregate such costs. Costs associated with system sales consist primarily of
purchased materials, direct labor and overhead costs.
Costs associated with subscription and maintenance revenues consists primarily
of direct labor, communication costs, depreciation of PASSUR network assets,
amortization of software development costs and overhead cost allocations. 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 PASSUR network
systems. Additionally, cost of sales in each reporting period are impacted by:
(1) the number of PASSUR network units added, which include the production,
shipment and installation of these assets which are capitalized to the PASSUR
Network; and (2) capitalized costs associated with software development programs
which are expensed in cost of sales.
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.
Page 8 of 33
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 charged to cost of sales and is calculated using
the straight-line method over the estimated useful life of the asset, which is
estimated at seven years for PASSUR systems and five years for related
workstations. Units that are not placed into service are not depreciated until
such time.
CAPITALIZED SOFTWARE COSTS
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 86, "ACCOUNTING FOR THE COSTS OF SOFTWARE TO BE SOLD,
LEASED, OR OTHERWISE MARKETED." Costs incurred to develop computer software
products 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 begins 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, typically over five years. 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, 2004 are recoverable through anticipated future sales of such
applicable products.
Page 9 of 33
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 as income
ratably over the maintenance and/or subscription period that coincides with the
respective agreement. Revenues from license fees are recognized as 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.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment when circumstances indicate
the carrying amount of an asset may not be recoverable. Impairment is recognized
to the extent the sum of undiscounted estimated future cash flows expected to
result from the use of the asset is less than the carrying value. Assets to be
disposed of are carried at the lower of their carrying value or fair value, less
costs to sell.
The Company evaluates the periods of amortization continually in determining
whether later events and circumstances warrant revised estimates of useful
lives. If estimates are changed, the unamortized costs will be allocated to the
increased or decreased number of remaining periods in the revised life.
NET LOSS PER COMMON SHARE
The Company reports basic and diluted net loss per common share in accordance
with SFAS No. 128, "EARNINGS PER SHARE." Net loss per common share was computed
using the weighted-average number of common shares outstanding during the
period. Conversion of the common equivalent shares relating to outstanding stock
options and warrants is not assumed, since the results would have been
antidilutive.
COMPREHENSIVE LOSS
Comprehensive loss for the three months ended January 31, 2004 and 2003 is
equivalent to that of the Company's total net loss for those respective periods.
Page 10 of 33
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION PLANS
Effective December 31, 2002, the Company adopted the disclosure provisions of
SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE" 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.
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 Accounting Principles Board ("APB") No
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" and related interpretations
because the Company believes the alternative fair value accounting provided for
under SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," 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 loss and loss per share as if
the Company had applied the fair value recognition provisions of SFAS No. 123,
as amended by SFAS No. 148, to stock-based compensation for the three months
ended January 31, 2004 and 2003:
THREE MONTHS ENDED
--------------------------
JANUARY 31, JANUARY 31,
2004 2003
--------------------------
Reported net loss $257,000 $595,000
Pro-forma stock compensation
expense $ 5,500 $ 10,000
-------- --------
Pro-forma net loss $262,500 $605,000
======== ========
Reported basic and diluted net
loss per common share $ .07 $ .17
======== ========
Pro-forma basic and diluted net
loss per common share $ .07 $ .17
======== ========
Page 11 of 33
Megadata Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
3. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During the three months ended January 31, 2004, G.S. Beckwith Gilbert, the
Company's significant shareholder and Chairman, loaned the Company an additional
$400,000 in exchange for promissory notes bearing interest payable in cash at
4.5% per annum and maturing on November 1, 2004. As of January 31, 2004, the
aggregate principal amount of notes due to Mr. Gilbert was $8,866,465. The notes
are secured by the Company's assets.
Effective November 1, 2003, the Company and Mr. Gilbert modified certain terms
and conditions of the outstanding notes as of October 31, 2003. The modified
terms provided for a new maturity date of November 1, 2004 as well as the
issuance of 600,000 shares of the Company's common stock as payment of annual
interest on the outstanding notes as of November 1, 2003. On January 15, 2004,
pursuant to the Debt Agreement entered into by the Company and Mr. Gilbert on
November 1, 2003, the Company issued to Mr. Gilbert 600,000 shares of common
stock, at the fair-market value on such date of issuance, representing the
annual payment of interest on such note for fiscal 2004.
Effective November 15, 2003, the Company and Mr. Gilbert entered into a
subsequent Debt Agreement whereby any additional promissory notes issued to Mr.
Gilbert will mature on November 1, 2004 and bear interest at 4.5% per annum,
payable in cash.
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. Effective November 1, 2003, the Company's monthly rent for space
leased from FPCM was reduced to $500 per month and its obligation for such lease
is on a month-to-month basis. For the three months ended January 31, 2004,
services rendered by FPCM to the Company totaled $1,500.
Page 12 of 33
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, 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 information is primarily derived from its PASSUR(TM) System.
PASSUR (Passive Secondary Surveillance Radar) is a passive radar, which, without
emitting any active signals, receives aircraft identification and altitude
information from aircraft transponder transmissions, which are interrogated by
existing secondary surveillance radars. In the past year, several additional
data sources have been added to the Company's database to provide an integrated
data solution.
Revenues are generated from information and decision support products that
provide a range of services to airlines, airports and aviation-related
companies. The Company's strategy is to gain baseline acceptance as an
affordable, web-based, solution provider to the aviation industry, to grow the
number of web-based solutions an individual customer uses and to team with
partners to provide a greater range of solutions, as well as cost-effectively
expand the reach of its marketing and distribution. Three years ago, the Company
transitioned its business model from selling PASSUR systems to selling
subscriptions to its PASSUR network services.
The objectives of the Company's strategy are to (1) increase subscription sales
per customer by providing multiple solutions for customers with primarily
web-based products that target different needs and problems, (2) increase
subscription sales per airport location (airport, airlines and other
aviation-related customers) by identifying as many customers as possible, (3)
reduce the selling cycle and cost per sale through the shift to web-based
products and partnering with decision support software partners, and (4)
increase available market share by identifying national and international
opportunities for the Company's information and decision support products.
The Company generates revenue by selling either (1) subscription-based
information that is derived from a PASSUR system, which is part of the Company's
"PASSUR Network," or (2) equipment, which is typically 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, the Company retains both proprietary and distribution rights to the
information derived from such system and can distribute such information in the
Company's sole discretion.
Page 13 of 33
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. Additionally,
over the past several years, the Company began development and eventually
deployed several new products derived primarily from the information generated
from its PASSUR Network, including FlightSure(TM), FlightNewsLive(TM),
AirportMonitorV.1(TM), OpsNet(TM) (formerly IROPSNet(TM)), AirportMonitorV.2(TM)
and PASSUR Pulse v.1.0(TM). THE Company currently has "PASSUR Pulse v.2.0(TM)"
and "WebPC(TM)" still in development. The Company anticipates the completioN and
release of "PASSUR Pulse v.2.0" and "WebPC" during mid-fiscal 2004.
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. In addition, more than 10 airlines and 40 airports utilize
the information, data and software derived from the Company's PASSUR Network. As
of January 31, 2004 there were over 50 PASSUR system installations worldwide.
The Company has incorporated the strictest levels of security in both the
information generated by the PASSUR Network and the availability of that
information to the end users.
RESULTS OF OPERATIONS
REVENUES
The Company is a provider of information and decision support software supplied
primarily from its PASSUR Network. Revenues consist primarily of
subscription-based revenues, maintenance revenues from customer-owned PASSUR
systems, system sales and system upgrade revenues and other revenues from
services and/or products provided which are not part of the subscription or
maintenance business line. Revenues during the three months ended January 31,
2004 increased by approximately $188,000, or 38%, to $686,000 from $498,000 for
the same period of fiscal 2003. This increase was primarily due to the continued
development and deployment of new software applications, increased effectiveness
of the Company's marketing efforts, industry acceptance of the Company's
applications, the wide selection of products which address customers' needs and
ease of delivery through web-based applications. These efforts resulted in an
increased number of new customers subscribing to the Company's suite of software
applications and increased subscriptions from its suite of applications to
existing customers.
Management continues to concentrate its efforts on the sale of information and
decision support product applications utilizing data primarily derived from the
Company-owned PASSUR Network. Such efforts include the continued development of
new product applications as well as enhancements and maintenance of existing
applications. As a result, during the three months ended January 31, 2004,
subscription-based revenues increased approximately $239,000, or 72%, when
compared to the same period in fiscal 2003. This increase offset the decrease in
Page 14 of 33
maintenance revenues of approximately $54,000, or 33%, when compared to the same
period in fiscal 2003. The decrease in maintenance revenues for the three months
ended January 31, 2004 as compared to the same period in fiscal 2003 was
primarily due to the fact that the three months ended January 31, 2003 included
maintenance revenues performed during the prior fiscal year (fiscal 2002) which
could not be recorded as revenue in fiscal 2002 due to contractual documentation
required to record revenue under the Company's accounting principles were not
finalized during such period due to the delinquency from customers.
The Company's business plan is to continue to focus on increasing
subscription-based revenues from the suite of software applications and
development of new applications designed to address the needs of the aviation
industry. However, the Company, from time to time, will sell a PASSUR system at
a customer's specific request.
The Company did not ship or install any Company-owned PASSUR systems during the
three months ended January 31, 2004. Such installations would be capitalized as
part of the "PASSUR Network." The Company intends to expand the PASSUR Network
by shipping and installing additional PASSUR systems throughout fiscal 2004.
Management anticipates that these future PASSUR sites will provide increased
coverage for the PASSUR Network and increase the Company's potential for new
customers at such locations as well as provide existing customers with
additional data solutions. The Company will continue to market the data
generated from the PASSUR Network directly to airlines, airports and
aviation-related companies and anticipates that the data derived from the
network will ultimately be sold to multiple users at each specific network site.
As of January 31, 2004, there were 38 Company-owned PASSUR systems located at
various airports throughout the continental United States.
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 revenues of approximately
$2,300 for the three months ended January 31, 2004, as compared to approximately
$400 for the same period in fiscal 2003.
COST OF SALES
Costs associated with system sales consist primarily of purchased materials,
direct labor and overhead costs. Costs associated with subscription and
maintenance revenues consist primarily of direct labor, depreciation of PASSUR
Network assets, amortization of software development costs, communication costs
and allocated overhead costs. 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 network systems. Additionally, cost of sales in each
reporting period are impacted by: (1) the number of PASSUR Network units added
to the asset account, which includes the production, shipment and installation
of these assets; and (2) capitalized costs associated with software development
programs, collectively referred to as "Capitalized Assets." After the positive
impact of the Capitalized Assets is recognized in cost of sales, these
Capitalized Asset costs are then depreciated and/or amortized over the
respective useful lives of the Capitalized Assets and charged to cost of sales.
Page 15 of 33
The Company has not segregated its cost of sales between cost of system sales
and cost of subscription and maintenance services, as it is not practical to
segregate such costs. During the three months ended January 31, 2004, cost of
sales increased by approximately $122,000, or 49%, as compared to the same
period in fiscal 2003. This increase was primarily due to the increases in
depreciation and amortization of PASSUR Network and software development assets,
allocated overhead costs and lower capitalized assets charged to cost of sales
for the period ended January 31, 2004 as compared to the same period in fiscal
2003.
Costs associated with subscription and maintenance revenues include labor,
communication costs and allocated overhead costs. The Company does not deem it
practical to bifurcate these costs between subscription revenues and maintenance
revenues. For the three months ended January 31, 2004 and 2003, costs directly
associated with subscription revenues included depreciation and amortization of
the PASSUR Network assets and software development costs, totaling approximately
$163,000 and $130,000, respectively, and were reduced by the capitalization of
PASSUR network assets and software development costs of approximately $44,000
and $184,000, respectively.
RESEARCH AND DEVELOPMENT
For the three months ended January 31, 2004 and 2003, research and development
expenses approximated $96,000 and $107,000, respectively. The Company's research
and development efforts include activities associated with the enhancement,
maintenance and improvement of the Company's existing hardware, software and
information products. However, commencing mid-fiscal 2002, personnel who had
been utilized on such research and development activities were either redeployed
from research and development activities or were replaced by outside software
contractors at a more cost-effective rate. The costs associated with outside
contractors are charged directly to cost of sales, as these costs impact the
amount of labor associated with capitalized software programs which also impacts
cost of sales or charged to research and development if it's related to research
and development activities.
The Company anticipates that it will continue to invest in research and
development to develop, maintain and support the existing and newly developed
applications for its PASSUR customers. There were no customer-sponsored research
and development activities during the three months ended January 31, 2004 and
2003. Research and development expenses are funded through current operations.
SELLING, GENERAL AND ADMINISTRATIVE
For the three months ended January 31, 2004, selling, general and administrative
expenses decreased by approximately $211,000, or 38%, as compared to the same
period in fiscal 2003. The decrease was primarily due to cost-reduction
initiatives enacted throughout fiscal 2003. Such initiatives resulted in
decreased costs associated with outside consultants; certain allocated overhead
costs as well as the reduction of selected general and administrative employees
throughout fiscal 2003. In particular, during the three months ended January 31,
2004, the Company no longer employed three Company executives during the three
months ended January 31, 2004 who were employed during the same period in fiscal
2003.
Page 16 of 33
The Company anticipates continued increases in its sales and marketing efforts
in order to market new and existing products from the PASSUR suite of software
applications. The Company anticipates that its sales and marketing expenses may
increase during fiscal 2004 resulting from these efforts, while efforts to
maintain and expand cost reduction initiatives are identified and implemented.
OTHER INCOME (EXPENSE)
Other interest income and interest expense did not change significantly for the
three months ended January 31, 2004, as compared to the same period of fiscal
2003.
Interest expense-related party decreased by $51,000, or 36%, for the three
months ended January 31, 2004, as compared to the same period of fiscal 2003.
The decrease is due to the payment of interest on outstanding debt, which was
paid in the form of Company common stock, which was at an effective interest
rate lower than that charged for the same period of fiscal 2003 pursuant to the
Debt Agreement entered into by the Company and its significant shareholder dated
November 1, 2003.
NET LOSS
The Company incurred a net loss of $257,000, or $.07 per diluted common share,
during the three months ended January 31, 2004. During the corresponding period
of fiscal 2003, the Company incurred a net loss of $595,000, or $.17 per diluted
common share. Despite the increase in total revenues of approximately 38% for
the three months ended January 31, 2004, the increased costs associated with the
placement, operation, development, maintenance and marketing of the
Company-owned PASSUR Network contributed to the loss.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2004, the Company's current liabilities exceeded current assets
by $9,030,000. At January 31, 2004, the Company's stockholders' deficit was
$5,438,000. For the three months ended January 31, 2004, the Company incurred a
net loss of $257,000.
Management is addressing the working capital and stockholders' deficiencies and
operating losses by aggressively marketing the Company's PASSUR information
capabilities in its existing product lines, as well as in new products, which
are continually being developed and deployed. The Company intends to increase
the size and related airspace coverage of its owned "PASSUR Network" by
continuing to install PASSUR systems throughout the United States and certain
foreign countries. In addition, management believes that expanding its existing
software suite of products, which addresses the wide array of needs of the
aviation industry, through the continued development of new product offerings,
will continue to lead to increased growth in the Company's customer base and
subscription-based revenues. Additionally, if the Company's business plan does
not generate sufficient cash-flows from operations to meet the Company's
operating cash requirements, the Company will attempt to obtain external
financing, and if such external financing is not consummated, the Company has a
commitment to receive additional financial support from its significant
shareholder and Chairman through the end of fiscal 2004. Such commitment for
financial support may be
Page 17 of 33
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 three months ended January 31, 2004, net cash used from operating
activities was approximately $312,000. Cash flows used in investing activities
was approximately $44,000 and consisted primarily of capitalized software
development costs. Cash flows provided by financing activities were
approximately $400,000, of which approximately $400,000 was in notes payable -
related party. No principal payments on notes payable - related party were made
during the three months ended January 31, 2004.
The Company recorded a net loss of approximately $257,000 for the three months
ended January 31, 2004. To date, the Company has experienced increased revenues
as a result of its subscription-based revenue model. The Company is actively
addressing the increasing costs associated with supporting its business, and
plans to identify and reduce any unnecessary costs as part of its cost-reduction
initiatives. Additionally, the aviation market has been impacted by budgetary
constraints and airline bankruptcies due to the downturn in the current economy,
the terrorist events of September 11, 2001 and the continued 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 may continue to be issued. 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 decision support software
products obtained from the PASSUR Network remains strong and the Company
anticipates an increase in future revenues. However, the Company cannot predict
if such revenues will materialize. If sales do not increase, additional losses
may occur. 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, 2004, the Company had contractual obligations as
follows:
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
- ----------------------- ----------------------
LESS THAN 1 MORE THAN
TOTAL YEAR 1 - 3 YEARS 3 YEARS
-------------------------------------------------
Operating Leases $ 148,563 $ 84,087 $ 64,476 --
Promissory Notes $8,866,465 $8,866,465 -- --
Other Long-Term Obligations $ 675,000 $ 75,000 $ 225,000 $ 375,000
---------- ---------- ---------- ----------
Total contractual cash
obligations $9,690,028 $9,025,552 $ 289,476 $ 375,000
========== ========== ========== ==========
o Obligations under "Operating Leases" relate to the manufacturing and
research facility located in Bohemia, New York. All other operating leases
are under a month-to-month arrangement; therefore, these month-to-month
obligations have been excluded from above calculation (total monthly
obligation totals $500 per month).
Page 18 of 33
o Obligations under "Other Long-Term Obligations" relate to the minimum
royalty payments due to a third party for exclusive licensing rights of
certain patents relating to the PASSUR System. The annual minimum royalty
payments total $75,000 and are effective until the last licensed patent
expires in 2013. The Company's annual royalty payment may exceed the
minimum royalty amount of $75,000 based upon certain sales thresholds
exceeded in any given year; however, the minimum annual royalty obligation
will never be less than $75,000. Historically, the Company has not exceeded
such thresholds to date.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL
The Company's discussion and analysis of its financial condition and results of
operations is based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities based upon accounting policies management has
implemented. The Company has identified the policies and estimates below as
critical to its business operations and the understanding of its results of
operations. The impact and any associated risks related to these policies on the
Company's business operations is discussed throughout "Management's Discussion
and Analysis of Financial Condition 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 revenues can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the fee is fixed and determinable;
and (4) collectibility is reasonably assured. The Company also recognizes
revenue in accordance with 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) PASSUR system sales, including system upgrade sales;
and (3) one-time license fees. The Company recognizes revenues 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 the customer's receipt of such
data or services. In accordance with SOP 97-2, the Company recognizes revenue
from the licensing of its software products or performance of maintenance when
all of the following criteria are met: (1) the Company has entered into a
Page 19 of 33
legally binding agreement with a customer; (2) the Company has delivered the
products or services; (3) license/maintenance agreement terms are deemed fixed
or determinable and free of contingencies or uncertainties that may alter the
agreement such that it may not be complete and final; and (4) collection is
probable. The Company records revenues pursuant to individual contracts on a
month-by-month basis, as outlined by the applicable agreement(s). 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.
The Company's software licenses generally do not include acceptance provisions.
An acceptance provision generally allows a customer to test the software for a
defined period of time before it commits to a binding agreement to license the
software. If a subscription agreement includes an acceptance provision, the
Company will not recognize revenue until the earlier of the receipt of a written
customer acceptance or, if not notified by the customer to cancel the
subscription agreement, the expiration of the acceptance period.
From time to time, the Company will receive one-time payments from customers for
rights, including but not limited to the rights to use certain data at an agreed
upon location(s) for a specific use and/or for an unlimited number of users.
Such one-time payments are in the form of license fees. These fees are
recognized as revenue ratably over the term of the license agreement or expected
useful life of such license arrangement, whichever is longer, but is 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 where the Company capitalizes costs
incurred with development of new hardware/software products, a product
specification is designed and/or a working model of the respective project is
developed as the guideline for the 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 amortization commences over a five-year period 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
Page 20 of 33
with SFAS 86. Management uses its 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, 2004 totaled
$690,000. 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, 2004 approximated
$2,794,000 and $690,000, respectively. Long-term fixed assets accounted for 72%
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.
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, 2004, based
upon management's evaluation of the above asset groups, no impairments exist of
these asset groups. If these forecasts are not met, the Company may have to
record impairment charges not previously recorded.
DEPRECIATION AND AMORTIZATION
The Company's total net capitalized assets at January 31, 2004 were $3,575,000,
representing 74% of the Company's consolidated net assets. The total net
property, plant and equipment approximated $91,000, the total net PASSUR Network
approximated $2,794,000 and the total net software development costs
approximated $690,000. The total depreciation and amortization expense related
to capitalized assets at January 31, 2004 approximated $171,000. Management
judgment is required in order to determine the estimated depreciable lives that
are used to calculate the annual depreciation and amortization expense.
Page 21 of 33
Depreciation and amortization are provided on the straight-line basis over the
estimated useful lives of the respective assets, as follows:
Property, plant and equipment 3 to 10 years
PASSUR Network 5 to 7 years
Software development costs 5 years
The PASSUR Network reflected on the Company's Consolidated Balance Sheets
represents PASSUR systems and the related software workstations used from the
data derived from the PASSUR systems. The PASSUR Network is comprised of PASSUR
systems installed and supplying data to the Company network, related
workstations with software and/or PASSUR systems built but not yet installed
into the Company network. PASSUR Network assets which are not installed into the
network are carried at cost and no depreciation is recorded. Once installed, the
PASSUR systems are depreciated over seven years and the related workstations are
depreciated over five years.
All of the Company's capitalized assets are recorded at cost (which may also
include salaries and related overhead costs incurred during the period of
development) and depreciated and/or amortized over the asset's estimated useful
life for financial statement purposes. The estimated useful life represents the
projected period of time that the asset will be productively employed by the
Company and is determined by management based on many factors, including
historical experience with similar assets, technological life cycles and
industry standards for similar assets. Circumstances and events relating to
these assets are monitored to ensure that changes in asset lives or impairments
(see "Impairment of Long-Lived Assets" above) are identified and prospective
depreciation expense or impairment expense is adjusted accordingly.
The total depreciation and/or amortization for the period ended January 31, 2004
for property, plant and equipment approximated $8,000, the PASSUR Network
approximated $130,000 and software development costs approximated $33,000.
STOCK-BASED COMPENSATION
The Company currently measures compensation expense for stock option grants
using the intrinsic value method prescribed for in APB No. 25 "ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES." Under this method, the Company does not record
compensation expense when stock options are granted provided that the exercise
price is not less than the fair market value of the stock when the option is
granted. In accordance with SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION," and SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE," the Company discloses its pro-forma net loss and
pro-forma net loss per common share as if the fair value-based method has been
applied in measuring compensation expense for stock option grants.
Page 22 of 33
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 $257,000 for the three months ended January
31, 2004, $2,486,000 for the fiscal year ended October 31, 2003, $2,110,000 for
the fiscal year ended October 31, 2002 and $1,629,000 for the fiscal year ended
October 31, 2001. As of January 31, 2004, the Company's accumulated deficit was
approximately $7,956,000. 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 to control the costs associated with its 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 DEPENDENT ON THE AVIATION INDUSTRY. IF THE COMPANY DOES
NOT EXECUTE ITS BUSINESS PLAN OR IF THE MARKET FOR ITS SERVICES FAILS TO DEVELOP
DUE TO 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 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
currently 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 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 the downturn in the current economy, 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 and its business, financial
condition and operating results.
Page 23 of 33
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, but not limited to:
o Delays and/or decreases in the signing and invoicing of new customer
contracts;
o The length of time needed to initiate and complete customer contracts;
o Revenues recognized from one-time sales events (selling or upgrading
systems) versus subscription-based sales;
o The introduction and market acceptance of new and enhanced products and
services;
o The costs associated with providing existing and new products and services;
o Economic conditions in the United States and the impact on the aviation
industry from the terrorist events of September 11, 2001 and continued war
or terrorism; and
o The potential for future terrorist acts against the aviation industry.
Accordingly, quarter-to-quarter comparisons of the Company's results of
operations should not be relied on as an indication of performance. It is
possible that in future periods results of operations may be below those
expected based upon previous performance.
THE COMPANY MAY BE UNABLE TO RAISE ADDITIONAL FUNDS TO MEET OPERATING CAPITAL
REQUIREMENTS IN THE FUTURE.
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, 2004. 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 the aviation industry, in 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 and execute its
business plan. These funds in some cases may be beyond the scope of normal
operating requirements, for which the Company has a commitment from its
significant shareholder and Chairman, and, therefore, may not be approved and/or
funded. In such case, the Company may be required to seek alternate sources of
financing (which may not be available on favorable terms or at all) or abandon
such activities by either: 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 its growth could be adversely
affected.
Page 24 of 33
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 OUR 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 collect
revenue generated by such customers. As a result of this concentration of our
customer base, an inability to replace one or more of these large customer
contracts could materially adversely affect our business, financial condition,
operating results and cash flow.
THE SOFTWARE BUSINESS FOR THE AVIATION INDUSTRY IS HIGHLY COMPETITIVE, AND
FAILURE TO ADAPT TO THE CHANGING INDUSTRY NEEDS COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS, BUSINESS AND FINANCIAL CONDITION.
The industry in which the Company competes is marked by rapid and substantial
technology change, the steady emergence of new companies and products, as well
as evolving industry standards and changing customer needs. The Company competes
with many established companies in the industry it serves, and some of these
companies may have substantially greater financial, marketing and technology
resources, larger distribution capabilities, earlier access to potential
customers and greater opportunities to address customers' various information
technology requirements. As the aviation industry seeks to be more cost
effective due to the continued economic downturn, product pricing becomes
increasingly important for our customers. As a result, the Company may
experience increased competition from certain, low-price competitors. To remain
competitive, we continue to develop new products and enhance existing products.
We may be unsuccessful in our ability to sell new products and/or product
releases that meet the needs of our industry in light of low-cost, less
functional alternatives available in the market. In addition, the pricing of new
products or releases of existing products may be above that required by the
marketplace. The Company's inability to bring such new products or enhancements
to existing products to the market in a timely manner or the failure of these
products to achieve industry acceptance could adversely affect our business,
financial condition, operating results and cash flow.
THE COMPANY DEPENDS UPON CERTAIN KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN
THESE EMPLOYEES.
The Company's future performance depends on the continued services of its key
technical and engineering personnel. 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 which could have an adverse affect on our business.
Page 25 of 33
THE PASSUR NETWORK COULD EXPERIENCE DISRUPTIONS, WHICH COULD AFFECT THE DELIVERY
OF DATA.
The Company's PASSUR Network infrastructure is maintained and hosted by AT&T
through an existing frame-relay network. If AT&T experiences system failures or
fails to adequately maintain the frame-relay network, the Company may experience
interruption of delivery of data / software services and customers may terminate
or elect not continue to subscribe to these services in the future. The
Company's network infrastructure may be vulnerable to computer viruses,
break-ins, denial of service attacks and similar disruptive problems caused by
third parties, which 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.
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 PROPERTY 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 2013. We currently have five additional patents pending with the
United States Patent Office, some of which relate to newly developed internet
based software applications, derived in large part from the data generated from
the Company's PASSUR systems. We also intend to seek additional patents on our
products and technological advances and/or software applications, when
appropriate. There can be no assurance that 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.
Page 26 of 33
The Company has filed applications for trademark registration of PASSUR in the
Untied States. However, 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.
DEFENDING AGAINST INTELLECTUAL PROPERTY CLAIMS COULD POSE SIGNIFICANT LEGAL AND
PROFESSIONAL COSTS AND, IF UNSUCCESSFUL, COULD ADVERSELY AFFECT THE COMPANY.
We cannot guarantee that our future products, technologies and software
applications will not inadvertently infringe valid patents or other intellectual
property rights held by third parties. We may be subject to legal proceedings
and claims from time to time relating to the intellectual property of others.
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 disrupt our business. We may incur substantial
expenses in defending against these third party claims, regardless of their
merit. Successful infringement claims against the Company may result in
significant monetary liability and could adversely affect our business,
financial condition, operating results and cash flow.
THIRD PARTIES COULD CLAIM THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL PROPERTY
RIGHTS, AND DEFENDING SUCH CLAIMS COULD ADVERSELY AFFECT THE COMPANY.
Investigation of any claims from third parties alleging infringement of their
intellectual property, whether with or without merit, can be expensive and could
adversely affect development, marketing, selling or delivery of our products. As
the number of software patents issued increases, additional claims, with or
without merit, could be asserted. Defending against such claims is time
consuming and might result in significant legal expenses or settlement with
unfavorable terms that could adversely affect our business, financial condition,
operating results and cash flow.
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" and
"Risk Factors" above) contain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 regarding the Company's
future plans, objectives and expected performance. The words "believe," "may,"
"will," "could," "should," "would," "anticipate," "estimate," "expect,"
"project," "intend," "objective," "seek," "strive," "might," "likely result,"
"build," "grow," "plan," "goal," "expand," "position," or similar words, or the
negatives of these words, or similar terminology, identify forward-looking
statements. These statements are based on assumptions that the Company believes
are reasonable, but are subject to a wide range of risks and uncertainties, and
a number of factors could cause the Company's actual results to differ
materially from those expressed in the forward-looking statements referred to
above. These factors include, among others, the uncertainties related to the
ability of the Company to sell data subscriptions from its PASSUR Network and to
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make new sales of its PASSUR systems and other product lines as a result of
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 Company's products and their use in flight dispatch
information services and the impact of those uncertainties on the Company's
business, and its significant shareholder's continued financial support.
Additional uncertainties are related to the Company's ability to find and
maintain the personnel necessary to sell, manufacture and service its products,
its ability to adequately protect its intellectual property and its ability to
secure future financing. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis,
judgments, belief or expectation only as of the date hereof. The forward-looking
statements made in this Quarterly Report on Form 10-Q relate only to events as
of the date on which the statements are made. The Company undertakes no
obligation to update any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
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. DISCLOSURE CONTROLS AND PROCEDURES.
Under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 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. The Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of its disclosure controls and procedures as of the end of period covered by
this report. Based on that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective to ensure that required information will be
recorded, processed, summarized and reported on a timely basis in the Company's
reports filed under the Exchange Act.
The Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, has evaluated the Company's internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) to determine whether any changes occurred during the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
Based on that evaluation, there has been no such change during the period
covered by this report.
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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:
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
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On January 23, 2004, the Company filed a report on
Form 8-K disclosing under Item 5, Other Events and
Required FD Disclosure, the issuance of 600,000
non-assessable shares of common stock to G.S.
Beckwith Gilbert on January 15, 2004, pursuant to the
Debt Agreement by and between the Company and G.S.
Beckwith Gilbert dated November 1, 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: MARCH 16, 2004 By: /s/ James T. Barry
---------------------
James T. Barry, President and
Chief Executive Officer
DATED: MARCH 16, 2004 By: /s/ Louis J. Petrucelly
-----------------------
Louis J. Petrucelly,
Chief Financial Officer,
Treasurer and Secretary
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