-----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, RDY4pan6PbfO23K+4Bum4u7bWR0GWQM84fkt5UYD6UTu/bYLDyjNCDtfdDBwv+5n V/QtRzi/OptxJab4GVX5xg== 0000909012-07-000925.txt : 20070614 0000909012-07-000925.hdr.sgml : 20070614 20070614154755 ACCESSION NUMBER: 0000909012-07-000925 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070430 FILED AS OF DATE: 20070614 DATE AS OF CHANGE: 20070614 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: 07919991 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 t303503.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ========================= FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended APRIL 30, 2007 -------------- 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 11-220893 (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) 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 June 12, 2007. INDEX Megadata Corporation and Subsidiary Page PART I. Financial Information 3 Item 1. Financial Statements. Consolidated Balance Sheets - April 30, 2007 (unaudited) and October 31, 2006 (audited). 3 Consolidated Statements of Operations (unaudited) Six months ended April 30, 2007 and 2006. 4 Consolidated Statements of Operations (unaudited) Three months ended April 30, 2007 and 2006. 5 Consolidated Statements of Cash Flows (unaudited) Six months ended April 30, 2007 and 2006. 6 Notes to Consolidated Financial Statements (unaudited) - April 30, 2007. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk. 23 Item 4. Controls and Procedures. 23 PART II. Other Information 24 Item 1a. Risk Factors 24 Item 5. Submission of Matters to a Vote of Security Holders 24 Item 6. Exhibits 25 Signatures 26 Page 2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
Megadata Corporation and Subsidiary Consolidated Balance Sheets APRIL 30, OCTOBER 31, 2007 2006 ------------ ------------ (UNAUDITED) (AUDITED) ASSETS Current assets: Cash $ 312,530 $ 215,366 Accounts receivable, net 808,607 669,108 Inventory, net 714,185 735,847 Prepaid expenses and other current assets 215,067 167,905 ------------ ------------ Total current assets 2,050,389 1,788,226 Property, plant and equipment, net 230,658 145,326 PASSUR network, net 3,339,081 2,839,519 Software development costs, net 1,337,408 1,198,520 Other assets 57,225 57,225 ------------ ------------ Total Assets $ 7,014,761 $ 6,028,816 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Accounts payable $ 386,058 $ 311,213 Accrued expenses and other current liabilities 686,196 614,805 Accrued expenses--related parties 250,879 330,160 Note payable-current portion 2,408 4,815 Deferred income, current portion 821,841 805,389 ------------ ------------ Total current liabilities 2,147,382 2,066,382 Deferred income, less current portion 38,208 41,340 Notes payable--related party 11,914,880 11,214,880 ------------ ------------ 14,100,470 13,322,602 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 4,787,948 in 2007 and 2006 47,879 47,879 Additional paid-in capital 4,230,487 4,191,264 Accumulated deficit (9,740,600) (9,909,454) ------------ ------------ (5,462,234) (5,670,311) Treasury Stock, at cost, 696,500 shares in 2007 and 2006 (1,623,475) (1,623,475) ------------ ------------ Total stockholders' deficit (7,085,709) (7,293,786) ------------ ------------ Total liabilities and stockholders' deficit $ 7,014,761 $ 6,028,816 ============ ============ SEE ACCOMPANYING NOTES.
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Megadata Corporation and Subsidiary Consolidated Statements of Operations (Unaudited) SIX MONTHS ENDED APRIL 30, 2007 2006 ----------- ----------- Revenues: Subscriptions $ 2,456,831 $ 1,810,852 Maintenance 205,432 213,487 Other 31,592 9,392 ----------- ----------- Total revenues 2,693,855 2,033,731 ----------- ----------- Cost and expenses: Cost of revenues 931,014 844,387 Research and development 188,493 206,878 Selling, general and administrative expenses 1,142,125 1,005,107 ----------- ----------- 2,261,632 2,056,372 ----------- ----------- Income (loss) from operations 432,223 (22,641) Other income (expense): Interest income 4,612 2,788 Interest expense--related party (264,809) (227,396) ----------- ----------- Income (loss) before income taxes 172,026 (247,249) Provision for income taxes 3,172 6,504 ----------- ----------- Net income (loss) $ 168,854 $ (253,753) =========== =========== Net income (loss) per common share--basic $ .04 $ (.06) =========== =========== Net income (loss) per common share--diluted $ .03 $ (.06) =========== =========== Weighted average number of common shares outstanding--basic 4,091,448 4,091,448 =========== =========== Weighted average number of common shares outstanding-- diluted 5,500,660 4,091,448 =========== =========== SEE ACCOMPANYING NOTES.
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Megadata Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited) THREE MONTHS ENDED APRIL 30, 2007 2006 ----------- ----------- Revenues: Subscriptions $ 1,289,459 $ 904,268 Maintenance 102,716 102,307 Other -- 9,392 ----------- ----------- Total revenues 1,392,175 1,015,967 ----------- ----------- Cost and expenses: Cost of revenues 471,632 417,642 Research and development 78,746 107,612 Selling, general and administrative expenses 595,814 503,318 ----------- ----------- 1,146,192 1,028,572 ----------- ----------- Income (loss) from operations 245,983 (12,605) Other income (expense): Interest income 1,551 1,428 Interest expense--related party (132,560) (112,512) ----------- ----------- Income (loss) before income taxes 114,974 (123,689) Provision for income taxes -- 3,052 ----------- ----------- Net income (loss) $ 114,974 $ (126,741) =========== =========== Net income (loss) per common share--basic $ .03 $ (.03) =========== =========== Net income (loss) per common share-diluted $ .02 $ (.03) =========== =========== Weighted average number of common shares outstanding--basic 4,091,448 4,091,448 =========== =========== Weighted average number of common shares outstanding-diluted 5,500,310 4,091,448 =========== =========== SEE ACCOMPANYING NOTES.
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Megadata Corporation and Subsidiary Consolidated Statements of Cash Flows (Unaudited) SIX MONTHS ENDED APRIL 30, 2007 2006 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 168,854 $ (253,753) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 498,443 426,464 Non cash stock compensation expense 39,223 15,333 Provision for inventory reserve 15,000 (227,207) Provision for doubtful accounts receivable 11,090 (2,790) Changes in operating assets and liabilities: Accounts receivable (150,589) (206,360) Inventories 6,662 172,097 Prepaid expenses and other current assets (47,162) 50,084 Accounts payable 74,844 265,934 Deferred income 13,321 10,014 Accrued expenses and other current liabilities (7,891) 193,061 ----------- ----------- Total adjustments 452,941 696,630 ----------- ----------- Net cash provided by operating activities 621,795 442,877 CASH FLOWS FROM INVESTING ACTIVITIES PASSUR network (819,185) (441,660) Software development costs (272,514) (168,900) Capital expenditures (130,524) (10,766) ----------- ----------- Net cash used in investing activities (1,222,223) (621,326) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options -- 800 Proceeds from notes payable--related party 700,000 225,000 Payments on note payable (2,408) (2,408) ----------- ----------- Net cash provided by financing activities 697,592 223,392 ----------- ----------- Increase in cash 97,164 44,943 Cash--beginning of period 215,366 89,029 ----------- ----------- Cash--end of period $ 312,530 $ 133,972 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Interest-related party $ 335,270 -- SEE ACCOMPANYING NOTES.
Page 6 Megadata Corporation and Subsidiary Notes to Consolidated Financial Statements April 30, 2007 (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, provides airlines and airports services that we believe are otherwise unavailable in most cases. The Company now provides services to over 40 airports as well as 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, 2006, filed with the Securities and Exchange Commission ("SEC"); the consolidated financial data included herein should be read in conjunction with that report. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company's consolidated financial position at April 30, 2007, and its consolidated results of operations and cash flows for the six months ended April 30, 2007 and 2006. Management is addressing the Company's working capital and stockholders' deficiencies 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. Page 7 If the Company's business plan does not generate sufficient cash flow from operations to meet the Company's operating cash requirements, the Company will attempt to obtain external financing. If such external financing is not consummated, the Company has a commitment to receive additional financial support through June 5, 2008, from its significant shareholder and Chairman. Funds for discretionary projects in some cases may be beyond the scope of normal operating requirements 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. 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, 2007. 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. 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 agreement, whichever is longer, which typically does not exceed five years. The Company recognizes initial set up fee revenues and associated costs on a straight-line basis over the estimated life of the customer relationship period, typically 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 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. Page 8 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 April 30, 2007, the provision for doubtful accounts was approximately $20,000 compared to $9,000 recorded as of the fiscal year ended October 31, 2006. The Company monitors its outstanding accounts receivable balance and believes the $20,000 provision is reasonable. COST OF REVENUES The Company has not segregated its cost of revenues between cost of system revenues and cost of subscription and maintenance revenues, as it is not practicable to segregate such costs. Costs associated with system revenues 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 revenues 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 revenues 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 revenues. INVENTORIES Inventories are valued at the lower of cost or market with cost being determined using the first-in, first-out (FIFO) method. Costs included in inventories consist of materials, labor and manufacturing overhead that are related to the purchase and production of inventories. The Company values its inventory during the interim period based on perpetual inventory records. PASSUR(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 revenues 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. Page 9 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 April 30, 2007 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 and initial set up 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. Page 10 NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed based on the weighted average number of shares outstanding. Diluted net income (loss) per share is based on the sum of the weighted average number of common shares outstanding and common stock equivalents. For the second quarter of 2006, basic net loss per share equaled diluted net loss per share because the effect of common stock equivalents was anti-dilutive, and therefore excluded from the calculation of diluted net loss per share. Shares used to calculate net income (loss) per share are as follows: FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED APRIL 30, ENDED APRIL 30, --------------------------------------------- 2007 2006 2007 2006 --------- --------- --------- --------- Basic weighted average shares outstanding 4,091,448 4,091,448 4,091,448 4,091,448 Effect of dilutive stock options 1,408,862 -- 1,409,212 -- --------- --------- --------- --------- Diluted weighted average shares outstanding 5,500,310 4,091,448 5,500,660 4,091,448 ========= ========= ========= ========= Weighted average shares which are not included in the calculation of diluted net income (loss) per share because their impact is anti-dilutive Stock options 301,638 1,683,000 301,288 1,683,000 STOCK BASED COMPENSATION Effective November 1, 2005, the Company adopted SFAS No. 123R "Share - Based Compensation" 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. 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. For the six and three months ended April 30, 2007 and 2006, stock compensation expense of approximately $39,000 and $15,000, and $19,000 and $8,000, respectively, was primarily charged to Selling, General and Administrative expense. Page 11 3. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS During the six months ended April 30, 2007, G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, loaned the Company an additional $700,000 in exchange for promissory notes bearing interest payable in cash at 4.5% per annum and maturing on June 5, 2008, bringing the principal amount of notes due to Mr. Gilbert to $11,914,880, adding accrued interest of $177,406 brings a total of $12,092,286 owed to Mr. Gilbert, on April 30, 2007. During fiscal 2006 Mr. Gilbert lent the Company an additional $1,225,000, bringing the total loan to $11,214,880 adding accrued interest of $247,867, results in a total of $11,462,747 owed to Mr. Gilbert on October 31, 2006, which has been extended to mature on June 5, 2008. The notes are secured by the Company's assets. The notes payable are classified as long-term as of April 30, 2007 and October 31, 2006. During the six months ended April 30, 2007, the Company paid approximately $2,000 to Surf-Tech Manufacturing, Inc. (a non-public corporation) for materials and labor in connection with the production of various replacement, new and upgraded equipment for PASSUR(R) systems. 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 consulting and other 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 including corporate aviation and its ancillary industries, as well as 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. The Company now provides services to over 45 airports, including 8 of the top 10, to dozens of airlines, including 7 of the top 10, and to a wide audience of FBO's as well as corporate flight departments, including some of the largest in the world. We have a national and international database primarily powered by a network of company-owned passive radars. Our PASSUR radar network covers 43 of the top 50 U.S. airports and over 110 airports throughout the world. Revenues consist predominantly 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 and six months ended April 30, 2007 increased by approximately $376,000, or 37%, and $660,000, or 32%, respectively, as compared to the same periods of fiscal 2006. 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 as well as 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 and six months ended April 30, 2007, subscription-based revenues increased approximately $385,000, or 43%, and $646,000, or 36%, respectively, when compared to the same periods in fiscal 2006. During the three and six months ended April 30, 2007, maintenance revenues were about the same as those in the comparable periods in fiscal 2006. There was no other revenue recognized in the three months ended April 30, 2007 and approximately $32,000 of other revenue in the six months ended April 30, 2007, representing no change and an approximate increase of $22,000, respectively, when compared to the same periods in fiscal 2006. 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 and installed six Company-owned PASSUR(R) systems during the six months ended April 30, 2007. 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 2007. As of April 30, 2007, the Company had completed all systems in process outstanding as of October 31, 2006 and was in the process of manufacturing an additional thirty systems. Management anticipates that these new PASSUR(R) systems will be located at new sites which 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 Page 14 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 April 30, 2007, there were 59 Company-owned PASSUR(R) systems located at various airports throughout North America and Europe. COST OF REVENUES 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 revenues 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 revenues in each reporting period is 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 revenues. The Company has not segregated its cost of revenues between cost of system sales and cost of subscription and maintenance services, as it is not practical to segregate such costs. During the three and six months ended April 30, 2007, cost of revenues increased by approximately $54,000, or 13%, and $87,000, or 10%, respectively, as compared to the same period in fiscal 2006. This increase was primarily due to an increase in personnel costs, data feeds, and depreciation. The increase in costs was partially offset by a decrease in communication costs and an increase in the capitalization of PASSUR(R) Network costs as a result of the shipments and installations of PASSUR(R) units as well as higher software costs. Cost of revenues includes labor, communication costs and allocated overhead costs. The Company does not deem it practical to bifurcate cost of revenues between subscription based revenues and maintenance revenues. Included in cost of revenues is depreciation and amortization of the PASSUR(R) Network assets and software development costs. For the three months ended April 30, 2007 and 2006, total depreciation and amortization costs were approximately $256,000 and $216,000, respectively. Cost of revenues for the same periods were reduced by the capitalization of labor and overhead manufacturing costs including PASSUR(R) Network assets and software development costs of approximately $381,000 and $285,000, respectively. For the six months ended April 30, 2007 and 2006, total depreciation and amortization costs were approximately $498,000 and $426,000, respectively. Costs of revenues in the same periods were reduced by the capitalization of labor and overhead manufacturing costs resulting from additions to the PASSUR(R) Network assets and capitalized software development costs of approximately $687,000 and $525,000, respectively. Page 15 RESEARCH AND DEVELOPMENT For the three and six months ended April 30, 2007 and 2006, research and development expenses decreased by approximately $29,000, or 27%, and $18,000, or 9%, respectively, as compared to the same periods of fiscal 2006. The decrease in costs was primarily due to the capitalization of costs related to software development. 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 and six months ended April 30, 2007 and 2006. Research and development expenses are funded through current operations. SELLING, GENERAL AND ADMINISTRATIVE For the three and six months ended April 30, 2007, selling, general and administrative expenses increased by approximately $92,000, or 18%, and $137,000, or 14%, respectively, as compared to the same period in fiscal 2006. The increase was primarily due to increased personnel costs during the three and six months ended April 30, 2007. 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 2007 resulting from these efforts, while efforts to maintain and expand cost reduction initiatives continue to be identified and implemented. OTHER INCOME (EXPENSE) Other interest income did not change significantly for the three and six months ended April 30, 2007, as compared to the same periods of fiscal 2006. For the three and six months ended April 30, 2007, interest expense-related party increased by approximately $20,000 or 18%, and $37,000, or 16%, respectively, as compared to the same periods of fiscal 2006. The increase is due to approximately $1,700,000 in higher debt as compared to the same period in fiscal 2006. Total debt at April 30, 2007 was approximately $11,915,000 at an effective interest rate of 4.5%. NET INCOME (LOSS) The Company earned net income of $115,000, or $.02 and $169,000, or $.03 per diluted common share, during the three and six months ended April 30, 2007. During the corresponding period of fiscal 2006, the Company incurred a net loss of $127,000, or $.03 and $254,000, or $.06 per diluted common share. The increase in total revenues of approximately 37% and 32% for the three and six Page 16 months ended April 30, 2007, which were partially offset by an 11% and 10% increase in expenses associated with the placement, operation, development, maintenance and marketing of the Company-owned PASSUR(R) Network, contributed to net income for the three and six months ended April 30, 2007. LIQUIDITY AND CAPITAL RESOURCES At April 30, 2007, the Company's current liabilities exceeded current assets by $97,000. At April 30, 2007, the Company's stockholders' deficit was $9,741,000. For the six months ended April 30, 2007, the Company earned net income of $169,000. Management is addressing the Company's working capital and stockholders' deficiencies 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 June 5, 2008. 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. Funding for other discretionary projects in some cases may be beyond the scope of normal operating requirements and, therefore, may not be approved and/or funded. For the six months ended April 30, 2007, net cash provided by operating activities was approximately $622,000. Cash flow used in investing activities was approximately $1,222,000 and consisted primarily of capitalized software development and PASSUR(R) Network costs. Cash provided by financing activities was approximately $698,000. No principal payments on notes payable - related party were made during the six months ended April 30, 2007. The Company recorded net income of approximately $169,000 for the six months ended April 30, 2007. During this period, the Company experienced increased revenues as a result of its subscription-based revenue model, but also had higher costs associated with the placement, operation, development, maintenance, and marketing of the Company-owned PASSUR(R) Network which partially offset such increased revenues. The Company is actively addressing the increasing costs associated with supporting the growth of 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 or other aviation related businesses. Page 17 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(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, losses may occur. The extent of such profits or losses will be dependent on sales volume achieved and the success of Company cost reduction initiatives. CONTRACTUAL OBLIGATIONS As of April 30, 2007, the Company had contractual obligations as follows:
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD LESS THAN 1 - 3 MORE THAN TOTAL 1 YEAR YEARS 3 YEARS ------------------------------------------------------- Operating Leases $ 316,194 $ 139,874 $ 176,320 -- Promissory Notes-Related Party $11,914,880 -- 11,914,880 -- Other Long-Term Obligations $ 600,000 $ 150,000 $ 225,000 $ 225,000 ----------- ----------- ----------- ----------- Total Contractual Obligations $12,831,074 $ 289,874 $12,316,200 $ 225,000 =========== =========== =========== ===========
o Obligations under "Operating Leases" relate to the manufacturing and research facility located in Bohemia, New York ($93,014 - fiscal 2007, $97,734 - fiscal 2008, and $100,603 - fiscal 2009). Rent for the Company's headquarters located in Greenwich, CT is $45,000 per year through June 30, 2009. All other operating leases are under a month-to-month arrangement; therefore, such obligations have been excluded from the above calculation (aggregate monthly obligations for these other operating leases are $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 such payments will continue until the last licensed patent expires in 2013. The Company's future 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. As of April 30, 2007, the Company had $113,000 of accrued royalty payments included in accrued expenses and other accrued liabilities of which $75,000 was for fiscal 2006. 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 as well as consulting and other services and/or products provided which are not part of the subscription or maintenance business line. 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. 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. Page 19 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. From time to time, the Company will receive one-time fees for initial customer set up. These fees and associated costs are recognized over the estimated life of the customer relationship period, 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 revenues. 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 which were 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. The Company's net capitalized software costs at April 30, 2007 totaled $1,337,000. 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. Page 20 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"). At each reporting period the Company reviews long-lived assets for impairment to determine if the carrying amount of an asset may not be recoverable. 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, the PASSUR(R) Network, and software development costs, which at April 30, 2007, approximated $231,000, $3,339,000 and $1,337,000, respectively - these long lived assets accounted for 70% 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 considers the undiscounted cash flows generated from current contractual revenue sources and the anticipated forecast revenue derived from each asset. It then evaluates these revenues on an overall basis to determine if any impairment issues exist. As of April 30, 2007, based upon management's evaluation of the above asset groups, no impairments of these asset groups exist. If these forecasts are not met, the Company may have to record impairment charges not previously recorded. DEPRECIATION AND AMORTIZATION As of April 30, 2007, the total net property, plant and equipment approximated $231,000, the total net PASSUR(R) Network approximated $3,339,000, and the total net software development costs approximated $1,337,000. The total depreciation and amortization expense related to capitalized assets for the three and six months ended April 30, 2007 approximated $256,000 and $498,000, respectively. Management judgment is required in order to determine the estimated depreciable lives that are used to calculate the annual depreciation and amortization expense. Depreciation and amortization is 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 assets 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. Page 21 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 six months ended April 30, 2007 was approximately $498,000. Of such total depreciation and/or amortization, the plant, property and equipment component approximated $45,000, the PASSUR(R) Network component approximated $320,000 and software development costs approximated $133,000. STOCK-BASED COMPENSATION Effective November 1, 2005, the Company adopted SFAS No. 123R, "Share - Based Compensation" 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. 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.123R. 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. 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") 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 Page 22 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 23 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 of the end of the period covered by this report (i) to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and (ii) to ensure that information required to be disclosed by the Company in the reports that it submits under the Exchange Act is accumulated and communicated to management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. 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 24 PART II. OTHER INFORMATION ITEM 1A. RISK FACTORS There were no material changes to the risk factors described in the form 10-K. ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Shareholders at the Company's Annual Meeting on April 18, 2007 voted to: (1) Elect the following to the Board of Directors: FOR WITHHOLD --- -------- G.S. Beckwith Gilbert 3,683,166 2,200 James T. Barry 3,683,166 2,200 John R. Keller 3,683,566 1,800 Paul L. Graziani 3,683,566 1,800 Richard R. Schilling 3,683,566 1,800 Bruce N. Whitman 3,683,566 1,800 James J. Morgan 3,683,566 1,800 (2) Ratify the appointment of BDO Seidman, LLP as the Company's independent public accountants for the fiscal year ending October 31, 2007. FOR AGAINST ABSTAIN --- ------- ------- 3,677,532 2,300 5,533 Page 25 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 26 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: JUNE 14, 2007 By: /s/ James T. Barry ---------------------- James T. Barry, President and Chief Executive Officer DATED: JUNE 14, 2007 By: /s/ Jeffrey P. Devaney -------------------------- Jeffrey P. Devaney, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) Page 27 EXHIBIT INDEX - --------------- ---------------------------------------------- ----------------- PAPER (P) OR EXHIBIT NO. DESCRIPTION ELECTRONIC (E) - --------------- ---------------------------------------------- ----------------- - --------------- ---------------------------------------------- ----------------- Certification of Chief Executive Officer 31.1 pursuant to Rule 13a-14(a) or 15d-14(a) E of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - --------------- ---------------------------------------------------------------- Certification of Chief Financial Officer 31.2 pursuant to Rule 13a-14(a) or 15d-14(a) E of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - --------------- ---------------------------------------------------------------- Certification of Chief Executive Officer 32.1 pursuant to 18 U.S.C. Section 1350, as E adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - --------------- ---------------------------------------------------------------- Certification of Chief Financial Officer 32.2 pursuant to 18 U.S.C. Section 1350, as E adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - --------------- ---------------------------------------------------------------- Page 28 EX-31.1 2 exh31-1.txt 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: June 14, 2007 By: /s/ James T. Barry -------------------- James T. Barry Chief Executive Officer (Principal Executive Officer) Page 29 EX-31.2 3 exh31-2.txt 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: June 14, 2007 By: /s/ Jeffrey P. Devaney ----------------------- Jeffrey P. Devaney Chief Financial Officer (Principal Financial and Accounting Officer) Page 30 EX-32.1 4 exh32-1.txt 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 April 30, 2007 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 June 14, 2007 Page 31 EX-32.2 5 exh32-2.txt 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 April 30, 2007 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 June 14, 2007 Page 32 -----END PRIVACY-ENHANCED MESSAGE-----