-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JyfbGX/SBGcyS+izEFFzA0dEICfzElvSGxeLIxBT7gc8sYjHPEW1uJM4pKArsNl9 zrANgRva3LZwl194JCE9+Q== 0000909012-06-000327.txt : 20060315 0000909012-06-000327.hdr.sgml : 20060315 20060315154345 ACCESSION NUMBER: 0000909012-06-000327 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060131 FILED AS OF DATE: 20060315 DATE AS OF CHANGE: 20060315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEGADATA CORP CENTRAL INDEX KEY: 0000225628 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 112208938 STATE OF INCORPORATION: NY FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-07642 FILM NUMBER: 06688197 BUSINESS ADDRESS: STREET 1: 47 ARCH STREET CITY: GREENWICH STATE: CT ZIP: 11716 BUSINESS PHONE: 5165896800 MAIL ADDRESS: STREET 1: 47 ARCH STREET CITY: GREENWICH STATE: CT ZIP: 11716 FORMER COMPANY: FORMER CONFORMED NAME: MEGADATA COMPUTER & COMMUNICATIONS CORP DATE OF NAME CHANGE: 19770201 FORMER COMPANY: FORMER CONFORMED NAME: BELLOK DEVICES INC DATE OF NAME CHANGE: 19740314 10-Q 1 t302448.txt QUARTERLY REPORT 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, 2006 ---------------- 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 (I.R.S. Employer of 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) 622-4086 -------------- 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 a large accelerated filer, an accelerated filer or a non- accelerated filer, See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] ================================================================================ There were 4,091,448 shares of common stock with a par value of $0.01 per share outstanding as of March 10, 2006. INDEX Megadata Corporation and Subsidiaries Page PART I. Financial Information 3 Item 1. Financial Statements. Consolidated Balance Sheets - January 31, 2006 (unaudited) and October 31, 2005 (audited). 3 Consolidated Statements of Operations (unaudited) Three months ended January 31, 2006 and 2005. 4 Consolidated Statements of Cash Flows (unaudited) three months ended January 31, 2006 and 2005. 5 Notes to Consolidated Financial Statements (unaudited) - January 31, 2006. 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. 29 Item 4. Controls and Procedures. 29 PART II. Other Information 30 Item 6. Exhibits 30 Signatures 31 Page 2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Megadata Corporation and Subsidiaries Consolidated Balance Sheets
JANUARY 31, OCTOBER 31, 2006 2005 ---------------------------- (UNAUDITED) (AUDITED) ASSETS Current assets: Cash $ 130,466 $ 89,029 Accounts receivable, net 809,950 483,617 Inventory 253,500 166,118 Prepaid expenses and other current assets 108,185 170,191 ---------------------------- Total current assets 1,302,101 908,955 Property, plant and equipment, net 124,845 128,352 PASSUR network, net 2,205,389 2,275,884 Software development costs, net 991,188 947,626 Other assets 26,425 26,425 ---------------------------- Total Assets $ 4,649,948 $ 4,287,242 ============================ LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Accounts payable $ 600,376 $ 321,238 Accrued expenses and other current liabilities 497,267 559,908 Accrued expenses--related parties 181,072 81,564 Note payable-current portion 4,012 4,815 Notes payable--related party 9,989,880 -- Deferred income, current portion 887,565 712,333 ---------------------------- Total current liabilities 12,160,172 1,679,858 Note payable, less current portion 4,415 4,815 Deferred income, less current portion 98,449 106,505 Notes payable--related party -- 9,989,880 ---------------------------- 12,263,036 11,781,058 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 in 2006 and 2005 47,846 47,846 Additional paid-in capital 4,101,923 4,094,182 Accumulated deficit (10,139,382) (10,012,369) ---------------------------- (5,989,613) (5,870,341) Treasury Stock, at cost, 696,500 shares in 2006 and 2005 (1,623,475) (1,623,475) ---------------------------- Total stockholders' deficit (7,613,088) (7,493,816) ---------------------------- Total liabilities and stockholders' deficit $ 4,649,948 $ 4,287,242 ============================
SEE ACCOMPANYING NOTES. Page 3 Megadata Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited) THREE MONTHS ENDED JANUARY 31, 2006 2005 ----------------------------- Revenues: Subscriptions $ 906,584 $ 714,531 Maintenance 111,180 101,115 Other -- 16,500 ----------------------------- Total revenues 1,017,764 832,146 ----------------------------- Cost and expenses: Cost of sales 426,745 481,737 Research and development 99,266 101,357 Selling, general and administrative expenses 501,789 445,879 ----------------------------- 1,027,800 1,028,973 ----------------------------- Loss from operations (10,036) (196,827) Other income (expense): Interest income 1,360 405 Interest expense--related party (114,884) (102,809) ----------------------------- Loss before income taxes (123,560) (299,231) Provision for income taxes 3,453 5,159 ----------------------------- Net loss $ (127,013) $ (304,390) ============================= Net loss per common share--basic and diluted $ (.03) $ (.07) ============================= Weighted average number of common shares outstanding--basic and diluted 4,088,115 4,088,115 ============================= SEE ACCOMPANYING NOTES. Page 4 Megadata Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
THREE MONTHS ENDED JANUARY 31, 2006 2005 ------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (127,013) $ (304,390) Adjustments to reconcile net loss to net cash Provided by operating activities: Depreciation and amortization 210,458 183,954 Non cash stock compensation expense 7,741 -- Changes in operating assets and liabilities: Accounts receivable (326,333) (26,424) Inventories (87,382) (3,288) Prepaid expenses and other current assets 62,006 (37,840) Accounts payable 279,138 162,579 Deferred income 167,176 (41,321) Accrued expenses and other current liabilities 36,867 77,299 ------------------------------ Total adjustments 349,671 314,959 ------------------------------ Net cash provided by operating activities 222,658 10,569 CASH FLOWS FROM INVESTING ACTIVITIES PASSUR network (76,300) (32,000) Software development costs (94,521) (111,374) Capital expenditures (9,197) (2,177) ------------------------------ Net cash used in investing activities (180,018) (145,551) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable--related party -- 73,415 Payments on note payable (1,203) -- ------------------------------ Net cash (used in) provided by financing activities (1,203) 73,415 ------------------------------ Increase (decrease) in cash 41,437 (61,567) Cash--beginning of period 89,029 122,849 ------------------------------ Cash--end of period $ 130,466 $ 61,282 ============================== SUPPLEMENTAL INFORMATION Capital expenditures financed through note payable -- $ 14,000 ==============================
SEE ACCOMPANYING NOTES. Page 5 Megadata Corporation and Subsidiaries Notes to Consolidated Financial Statements January 31, 2006 (Unaudited) 1. NATURE OF BUSINESS Megadata Corporation (the "Company" or "we") is a provider of flight information, application software, and web-delivered collaborative decision tools to the aviation industry and organizations that serve, or are served by, the aviation industry. The Company has what it believes is a unique database of flight information, powered by a network of company-owned passive radars and several other data sources, that when combined with the Company's suite of data products, web-based software, and web-based collaborative decision tools, provide airlines and airports services that we believe are otherwise unavailable in most cases. The Company now provides services to over 40 airports and over 30 airlines and continues to expand services to each in this traditional market. In addition, the Company has created and implemented collaborative web-based software that allows the Company's customers to instantly share information to improve individual and joint decision making, creating additional value for its customers. 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, 2005 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, 2006 and its consolidated results of operations and cash flows for the three months ended January 31, 2006 and 2005. Management is addressing the working capital and stockholders' deficiencies and operating losses by aggressively marketing the Company's PASSUR(R) 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(R) network, which management believes will lead to continued growth in subscription-based revenues. In addition, 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 through March 8, 2007 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 6 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, 2006. 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 104 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. Page 7 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. For the period ended January 31, 2006, the provision for doubtful accounts was $3,000 compared to $6,000 recorded as of the fiscal year ended October 31, 2005. The Company monitors its outstanding accounts receivable balance and believes the $3,000 provision is reasonable. 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 consist primarily of direct labor, communication costs, depreciation of PASSUR(R) 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(R) systems necessary to make such systems compatible with new software applications as well as the ordinary repair and maintenance of existing PASSUR(R) network systems. Additionally, cost of sales in each reporting period is impacted by: (1) the number of PASSUR(R) network units added, which include the production, shipment and installation of these assets which are capitalized to the PASSUR(R) 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 PASSUR(R) NETWORK The PASSUR(R) Network installations, which include the direct and indirect production and installation costs incurred for each of the Company-owned PASSUR(R) systems (the "PASSUR(R) 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(R) systems and five years for related workstations. Units are not depreciated until the time they are placed into service. 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, 2006 are recoverable through anticipated future sales of such applicable products. DEFERRED INCOME Deferred income includes advances received on maintenance agreements and/or subscription services which are derived from the Company's PASSUR(R) 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. Page 9 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, 2006 and 2005 is equivalent to that of the Company's total net loss for those respective periods. STOCK BASED COMPENSATION PLANS Prior to November 1, 2005, the Company accounted for employee stock option plans based on the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, " Accounting for Stock Issued to Employees," and related Interpretations and had adopted the disclosure requirements of SFAS No. 123, " Accounting for Stock-Based Compensation" (SFAS No.123). Accordingly, compensation cost for stock options was measured as the excess, if any, of the quoted market price of the Company's stock at the grant date over the amount an employee must pay to acquire the stock. The Company granted stock options with exercise prices equal to the market price of the underlying stock on the date of grant, therefore, the Company did not record stock-based compensation expense under APB Opinion No. 25. In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, "Share-Based Payments" to require that compensation cost relating to share-based payment arrangements be recognized in the financial statements. Page 10 Effective November 1, 2005, the Company adopted SFAS No. 123R using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. Therefore, prior period financial statements have not been restated. The fair value of stock options were determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for stock options in footnote disclosures required under SFAS No. 123. Such fair value is recognized as expense over the service period, net of estimated forfeitures. The adoption of SFAS No.123R resulted in no cumulative change in accounting as of the date of adoption. The weighted average fair value of options outstanding during the three months ended January 31, 2006 was $.21. These options vest over a period of three years. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for the three months ended January 31, 2006: risk-free interest rates of 4.32%, volatility factor of the expected market price of the Company's Common Stock of 1.113, assumed dividend yield of 0%, and a weighted-average expected life of the option of 8 years. For the three months ended January 31, 2006, stock compensation expense of approximately $8,000 was charged to operations, consisting of $1,000 for options granted during the first quarter of fiscal 2006 and $7,000 for non vested options granted prior to October 31, 2005. As of January 31, 2006, there was $37,000 of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 3.5 years. The following table illustrates the effect on net income and net income per share for the three months ended January 31, 2005 as if the Company had consistently measured the compensation cost for the Company's stock option programs under the fair value method adopted on November 1, 2005: JANUARY 31, 2005 ---------------- Reported net loss ($ 304,000) Pro-forma stock compensation expense ($ 7,400) Pro-forma net loss ($ 311,400) ================ Reported basic and diluted net loss per common share $ (.07) ================ Pro-forma basic and diluted net loss per common share $ (.08) ================ Page 11 RECLASSIFICATIONS Certain reclassifications have been made to the prior year financial statements to conform to the current period presentation. 3. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS On January 27, 2006, the Company and its significant shareholder, G.S.Beckwith Gilbert, entered into a debt extension agreement pursuant to which the Company and Mr. Gilbert agreed to modify certain terms and conditions of an outstanding promissory note previously issued by the Company to Mr. Gilbert. Pursuant to the agreement, effective November 1, 2005, total principal and accrued interest, owed to Mr. Gilbert as of October 31, 2005, was aggregated into a new note with a principal amount of $9,989,880, with a maturity date of November 1, 2006 bearing an interest rate of 4.5%. On January 19, 2005, the Company and Field Point Capital Management Company (FPCM), a company 100% owned by Mr. Gilbert, entered into an agreement to share the services of an employee of the Company. Mr. Gilbert agreed to reimburse the Company for approximately 80% of the salary and taxes associated with the employee. The net costs incurred by the Company for the period ended January 31, 2006 was approximately $6,000. As of January 31, 2006, this employee was no longer employed by either the Company or FPCM. The Company paid approximately $13,000 to Surf-Tech Manufacturing, Inc. (a non-public corporation) for materials and labor in connection with the production of various replacement and upgrades to equipment used in PASSUR(R) systems during the three months ended January 31, 2006. 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. Page 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DESCRIPTION OF BUSINESS The Company is a provider of flight information, web-delivered software and web-delivered collaborative decision tools to the aviation industry and organizations which serve, or are served by, the aviation industry. Revenues consist primarily of subscription-based revenues, maintenance revenues from customer owned PASSUR(R) systems, kiosks, system sales and system upgrades revenues and other revenues from services and/or products provided which are not part of the subscription or maintenance business line. Over the past several years, the Company has been developing and selling information and software from its unique flight database, powered by the PASSUR(R) passive radar network, to airlines and airports, while simultaneously investing in growing the radar network and integrating additional information sets into the database. Because of its investments in this database and web-dashboard technologies, and the "vetting" of both by its airline and airport customers, the Company is now taking new versions of the information and software product to other segments of the aviation market: corporate aviation and its ancillary industries and online travel services. The Company has created and continues to create collaborative web-based software that allows all of its customers, both industrial and non-industrial, to instantly share information to improve individual and joint decision making, creating additional value for both its traditional and new customers. The Company sells subscription-based information and software products as well as the PASSUR(R) radar system (included in a sale is an annual maintenance contract and an additional charge for installation), PASSUR(R) Kiosks or LCDs, and consulting services. Under the subscription model, the customer signs a minimum one-year contract for access to the information services. The agreement also provides that the information from the PASSUR(R) Information Network cannot be resold or used for unauthorized purposes. When systems are sold, the Company retains both proprietary and distribution rights to the data generated from such systems and can distribute such data at the Company's sole discretion, with few exceptions. The sale of consulting services is only made in conjunction with the sale of its collaborative decision tools. The Company has incorporated strict levels of security in both the information generated by the PASSUR(R) Network and the availability of that information to the end users. Page 13 RESULTS OF OPERATIONS REVENUES The Company is a provider of information and decision support software supplied primarily from its PASSUR(R) Network. Revenues consist primarily of subscription-based revenues, maintenance revenues from customer-owned PASSUR(R) systems, revenues from system sales and system upgrades and revenues from other services and/or products provided, which are not part of the subscription or maintenance business line. Revenues during the three months ended January 31, 2006 increased by approximately $186,000, or 22%, as compared to the same period of fiscal 2005. 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 the ease of delivery through its web-based applications. These efforts resulted in both an increased number of new customers subscribing to the Company's suite of software applications and increased subscriptions from 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(R) 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, 2006, subscription-based revenues increased approximately $192,000, or 27%, when compared to the same period in fiscal 2005. Maintenance revenues increased approximately $10,000 for the three months ended January 31, 2006 when compared to the same period in fiscal 2005. The increase in subscription based revenues and maintenance revenues more than offset the decrease in other revenues of approximately $17,000. The Company's business plan is to continue to focus on increasing subscription-based revenues from the suite of software applications and developing new applications designed to address the needs of the aviation industry. However, the Company, from time to time, will sell a PASSUR(R) system at a customer's specific request. The Company shipped two and installed one Company-owned PASSUR(R) systems during the three months ended January 31, 2006. Such installations have been capitalized as part of the "PASSUR(R) Network." The Company intends to expand the PASSUR(R) Network by manufacturing, shipping and installing additional PASSUR(R) systems throughout fiscal 2006. Management anticipates that these future PASSUR(R) sites will provide increased coverage for the PASSUR(R) 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(R) 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, 2006 there were 44 Company-owned PASSUR(R) systems located at various airports throughout the continental United States. Management has decided to discontinue marketing various non-PASSUR(R) 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 did not record any non-PASSUR(R) revenues for the three months ended January 31, 2006 and 2005, respectively. Page 14 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(R) 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(R) 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(R) 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." which are depreciated and/or amortized over the respective useful lives and charged to cost of sales. 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, 2006, cost of sales decreased by approximately $55,000, or 11%, as compared to the same period in fiscal 2005. This decrease was primarily due to a decrease in outside consulting and an increase in the capitalization of manufacturing costs as well as PASSUR(R) Network costs. The decrease in costs is partially offset by an increase in salary and benefits, depreciation, and recruitment costs. Cost of sales includes labor, communication costs and allocated overhead costs. The Company does not deem it practical to bifurcate cost of sales between subscription based revenues and maintenance revenues. Also included in cost of sales is depreciation and amortization of the PASSUR(R) Network assets and software development costs; for the three months ended January 31, 2006 and 2005, these costs were approximately $198,000 and $175,000, respectively, and were reduced by the capitalization of manufacturing costs, PASSUR(R) Network assets and software development costs of approximately $74,000, $76,000 and $95,000, respectively. Page 15 RESEARCH AND DEVELOPMENT For the three months ended January 31, 2006 and 2005, research and development expenses remained relatively constant. 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. 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(R) customers. There were no customer-sponsored research and development activities during the three months ended January 31, 2006 and 2005. Research and development expenses are funded through current operations. SELLING, GENERAL AND ADMINISTRATIVE For the three months ended January 31, 2006, selling, general and administrative expenses increased by approximately $56,000, or 13%, as compared to the same period in fiscal 2005. The increase was primarily due to increased sales and marketing personnel and increased marketing for the three months ended January 31, 2006, as compared to the same period in fiscal 2005. The Company anticipates continued increases in its sales and marketing efforts in order to market new and existing products from the PASSUR(R) suite of software applications. The Company anticipates that its sales and marketing expenses may increase during fiscal 2006 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, 2006, as compared to the same period of fiscal 2005. For the three months ended January 31, 2006, interest expense-related party increased by approximately $12,000, or 12%, as compared to the same period of fiscal 2005. The increase is due to approximately $1,050,000 in higher debt as compared to the same period in fiscal 2005. Total debt at January 31, 2006 was $9,989,880 at an effective interest rate of 4.5 %. NET LOSS The Company incurred a net loss of $127,000, or $.03 per diluted common share, during the three months ended January 31, 2006. During the corresponding period of fiscal 2005, the Company incurred a net loss of $304,000, or $.07 per diluted common share. Despite the increase in total revenues of approximately 22% for the three months ended January 31, 2006, the costs associated with the placement, operation, development, maintenance and marketing of the Company-owned PASSUR(R) Network contributed to the loss. Page 16 LIQUIDITY AND CAPITAL RESOURCES At January 31, 2006, the Company's current liabilities exceeded current assets by $10,858,000. On that date, included in current liabilities, were notes payable related party of $9,989,880. At January 31, 2006, the Company's stockholders' deficit was $10,139,000. For the three months ended January 31, 2006, the Company incurred a net loss of $127,000. Management is addressing the working capital and stockholders' deficiencies and operating losses by aggressively marketing the Company's PASSUR(R) 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(R) Network" by continuing to install PASSUR(R) 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 March 8, 2007. 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 three months ended January 31, 2006, net cash provided by operating activities was approximately $223,000. Cash flows used in investing activities was approximately $180,000 and consisted primarily of capitalized software development and PASSUR(R) Network costs. Cash used by financing activities was approximately $1,000. No principal payments on notes payable - related party were made during the three months ended January 31, 2006. The Company recorded a net loss of approximately $127,000 for the three months ended January 31, 2006. To date, the Company has experienced increased revenues as a result of its subscription-based revenue model, but higher costs associated with the placement, operation, development, maintenance and marketing of the Company owned PASSUR(R) Network partially offset such increased revenues. 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 terrorist events of September 11, 2001, the continued war on terrorism and the uncertainty in the current economic climate. 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. Page 17 Interest by potential customers in the information and decision support software products obtained from the PASSUR(R) 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, 2006, 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 $ 405,302 $ 134,205 $ 271,097 -- Promissory Notes $ 9,989,880 $ 9,989,880 -- -- Other Long-Term Obligations $ 675,000 $ 75,000 $ 225,000 $ 375,000 ------------------------------------------------------------ Total contractual cash obligations $ 11,070,182 $ 10,199,085 $ 496,097 $ 375,000 ============================================================
o Obligations under "Operating Leases" relate to the manufacturing and research facility located in Bohemia, New York ($88,550 - fiscal 2006, $91,206 - fiscal 2007, $93,942 - fiscal 2008). Beginning August 1, 2005 rent for the Company's headquarters located in Greenwich, CT increased to $3,750 per month ($45,000 per year to June 30, 2009). All other operating leases are under a month-to-month arrangement, therefore, such obligations have been excluded from the above calculation (total monthly obligations total $500 per month). 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(R) 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. Page 18 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 are 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. 104, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS" ("SAB 104"). SAB 104 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) collectability 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(R) 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 104 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 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. Page 19 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 longer of the term of the license agreement or the expected useful life of such license arrangement, whichever is longer (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 104 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 with SFAS 86. Management uses its judgment in determining and evaluating whether development costs meet the criteria for immediate expense or capitalization. Page 20 The Company's net capitalized software costs at January 31, 2006 totaled $991,000. 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. 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 property plant and equipment, PASSUR(R) Network and software development costs which at January 31, 2006, approximated $125,000, $2,205,000 and $991,000, respectively. Long lived assets accounted for 71% of the Company's total assets. The carrying value of the long-lived assets is dependent on the forecasted and actual 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, 2006, 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 total net property, plant and equipment approximated $125,000, the total net PASSUR(R) Network approximated $2,205,000 and the total net software development costs approximated $991,000. The total depreciation and amortization expense related to capitalized assets for the three months ended January 31, 2006 approximated $159,000 and $51,000. 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 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(R) Network 5 to 7 years Software development costs 5 years The PASSUR(R) Network reflected on the Company's Consolidated Balance Sheets includes PASSUR(R) systems and the related software workstations used for the data derived from the PASSUR(R) systems. The PASSUR(R) Network is comprised of PASSUR(R) systems installed and supplying data to the Company network, related workstations with software and/or PASSUR(R) systems built but not yet installed in the Company network. PASSUR(R) Network assets which are not installed in the network are carried at cost and no depreciation is recorded. Once installed, the PASSUR(R) 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 three months ended January 31, 2006 approximated $210,000, the plant property and equipment component approximated $13,000, the PASSUR(R) Network component approximated $146,000 and software development costs approximated $51,000. STOCK-BASED COMPENSATION Prior to November 1, 2005, the Company accounted for employee stock option plans based on the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, " Accounting for Stock Issued to Employees," and related Interpretations and had adopted the disclosure requirements of SFAS No. 123, " Accounting for Stock-Based Compensation" (SFAS No.123). Accordingly, compensation cost for stock options was measured as the excess, if any, of the quoted market price of the Company's stock at the grant date over the amount an employee must pay to acquire the stock. The Company granted stock options with exercise prices equal to the market price of the underlying stock on the date of grant, therefore, the Company did not record stock-based compensation expense under APB Opinion No. 25. In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, "Share-Based Payments" to require that compensation cost relating to share-based payment arrangements be recognized in the financial statements. Effective November 1, 2005, the Company adopted SFAS No. 123R using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. Therefore, prior period financial statements have not been restated. The fair value of stock options were determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for stock options in footnote disclosures required under SFAS No. 123. Such fair value is recognized as expense over the service period, net of estimated forfeitures. The adoption of SFAS No.123R resulted in no cumulative change in accounting as of the date of adoption. Page 22 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 $127,000 for the three months ended January 31, 2006, $924,000 for the fiscal year ended October 31, 2005, $1,390,000 for the fiscal year ended October 31, 2004; $2,486,000 for the fiscal year ended October 31, 2003 and $2,110,000 for the fiscal year ended October 31, 2002. As of January 31, 2006, the Company's accumulated deficit was approximately $10,139,000. 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, 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, 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 industry has been impacted by budgetary constraints and airline bankruptcies due to the terrorist events of September 11, 2001, the war on terrorism and the uncertainty in the current economic climate. The aviation industry 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 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 March 8, 2007. 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 A LIMITED NUMBER OF CUSTOMER CONTRACTS ACCOUNTS 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 payments due to the Company 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 THE PASSUR(R) NETWORK COULD EXPERIENCE DISRUPTIONS, WHICH COULD AFFECT THE DELIVERY OF DATA. The Company's PASSUR(R) 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 materially adversely affect existing customer relationships and our business. 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 security regulations for its data in order to comply with current government regulations. Due to the continued growing security 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. Prosecuting infringers could be time consuming and costly, and irrespective of whether or not the Company is successful, could disrupt our business. 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(R) System and related technologies. The licensed patents expire in various years through 2013. We currently own three issued patents. In addition, eleven additional patents are 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(R) systems. The issued and allowed patents expire in various years through 2023. 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 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 The Company also owns a federal trademark registration in the mark PASSUR(R) for use with both the PASSUR(R) hardware system installation and the software products which use the data derived from PASSUR(R) and other sources. The PASSUR(R) federal registration will allow the Company to enforce its rights in the mark in the federal court system. The registration does not assure that others will be prevented from using similar trademarks in connection with related products and/or 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. Investigations of any claims from third parties alleging infringement of their intellectual property, whether with or without merit, can be expensive and could affect development, marketing, selling or delivery of our products. 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. 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(R) Network and to make new sales of its PASSUR(R) 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 and the impact such changes in regulation could have on the Company's business Additional uncertainties are related to a) the Company's ability to find and maintain the personnel necessary to sell, manufacture and service its products, b) its ability to adequately protect its intellectual property, c) its ability to secure future financing and d) its ability to maintain the continued support of its significant shareholder. Readers are cautioned not to place undue reliance on these forward-looking statements, which relate only to events as of the date on which the statements are made and which reflect management's analysis, judgments, belief or expectation only as of such date. 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. Page 27 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to market risk from potential changes in interest rates. The Company regularly evaluates these risks. The Company believes the amount of risk relating to interest rates is not material to the Company's financial condition or results of operations. The Company has not and does not anticipate entering into derivative financial instruments. ITEM 4. CONTROLS AND PROCEDURES. 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 were effective as the end of the period covered by this report 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. Page 28 PART II. OTHER INFORMATION ITEM 6. 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 Financial 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 Page 29 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 thereunto duly authorized. MEGADATA CORPORATION DATED: MARCH 14, 2006 By: /s/ James T. Barry ----------------------------- James T. Barry, President and Chief Executive Officer DATED: MARCH 14, 2006 By: /s/ Jeffrey P. Devaney ----------------------------- Jeffrey P. Devaney, Chief Financial Officer, Treasurer and Secretary Page 30 EX-31.1 2 exh31-1.txt RULE 13A-14(A)/15D-14(A) CERTIFICATIONS EXHIBIT 31.1 CERTIFICATION 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 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 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 officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or person performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 14, 2006 By: /s/ James T. Barry ----------------------------- James T. Barry Chief Executive Officer (Principal Executive Officer) EX-31.2 3 exh31-2.txt RULE 13A-14(A)/15D-14(A) CERTIFICATIONS EXHIBIT 31.2 CERTIFICATION 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 I, Jeffrey P. Devaney, 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 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 officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions) : a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 14, 2006 By: /s/ Jeffrey P. Devaney -------------------------------------------- Jeffrey P. Devaney Chief Financial Officer (Principal Financial and Accounting Officer) EX-32.1 4 exh32-1.txt SECTION 1350 CERTIFICATIONS EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Megadata Corporation (the "Company") on Form 10-Q for the fiscal quarter ended January 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James T. Barry, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ James T. Barry ----------------------- James T. Barry Chief Executive Officer March 14, 2006 EX-32.2 5 exh32-2.txt SECTION 1350 CERTIFICATIONS EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Megadata Corporation (the "Company") on Form 10-Q for the fiscal quarter ended January 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey P. Devaney, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Jeffrey P. Devaney ----------------------- Jeffrey P. Devaney Chief Financial Officer March 14, 2006 -----END PRIVACY-ENHANCED MESSAGE-----