10-Q 1 t23176.txt QUARTERLY REPORT 7/31/01 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 JULY 31, 2001 ------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _______________ Commission file number 0-7642 ------ MEGADATA CORPORATION ---------------------- (Exact name of registrant as specified in its charter) NEW YORK 11-2208938 ----------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 47 ARCH STREET, GREENWICH, CONNECTICUT 06830 -------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 629-8757 ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- ====================================================================== There were 3,473,115 shares of common stock with a par value of $0.01 per share outstanding at September 14, 2001. INDEX Megadata Corporation and Subsidiaries Page ---- Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - July 31, 2001 and October 31, 2000. 3 Consolidated Statements of Operations - Nine months ended July 31, 2001 and 2000. 4 Consolidated Statements of Operations - Three months ended July 31, 2001 and 2000. 5 Consolidated Statements of Cash Flows - Nine months ended July 31, 2001 and 2000. 6 Notes to Consolidated Financial Statements - July 31, 2001 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Part II. Other Information Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 15 Page 2 Part I. Financial Information
Megadata Corporation and Subsidiaries Consolidated Balance Sheets JULY 31, OCTOBER 31, 2001 2000 -------------- ---------------- (UNAUDITED) ASSETS Current assets: Cash $ 26,226 $ 69,090 Accounts receivable 147,602 175,188 Inventories 393,924 253,049 Prepaid expenses and other current assets 17,278 13,535 ----------- ----------- Total current assets 585,030 510,862 Property, plant and equipment, net 185,554 196,949 PASSUR network, net 1,794,543 1,624,186 Software development costs 225,341 -- Other assets 15,785 16,085 ----------- ----------- $ 2,806,253 $ 2,348,082 =========== =========== LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY Current Liabilities: Accounts payable $ 293,416 $ 242,565 Accrued expenses and other current liabilities 341,525 313,427 Accrued expenses--related parties 68,847 85,174 Notes payable--related party 2,550,000 800,000 Deferred income 189,791 138,909 Installment notes payable 1,592 10,806 ----------- ----------- Total current liabilities 3,445,171 1,590,881 Notes payable--related party, less current portion -- 150,000 Installment notes payable, less current portion -- 2,985 ----------- ----------- 3,445,171 1,743,866 Stockholders' (deficiency) equity: Common shares--authorized 10,000,000 shares, par value $.01 per share; issued 4,169,615 in 2001 and 2000 41,696 41,696 Additional paid-in capital 3,659,132 3,659,132 Accumulated deficit (2,716,271) (1,473,137) ----------- ----------- 984,557 2,227,691 Less cost of 696,500 common shares held in treasury 1,623,475 1,623,475 ----------- ----------- Total stockholders' (deficiency) equity (638,918) 604,216 ----------- ----------- $ 2,806,253 $ 2,348,082 =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Page 3
Megadata Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited) NINE MONTHS ENDED JULY 31, 2001 2000 ------------- -------------- Revenues: Systems $ 20,650 $ 876,156 Subscription and maintenance 670,624 438,010 Other 28,078 68,075 ----------- ----------- Net sales 719,352 1,382,241 ----------- ----------- Cost and expenses: Cost of sales 556,792 485,704 Research and development 189,085 99,040 Selling, general and administrative expenses 1,105,002 930,050 ----------- ----------- 1,850,879 1,514,794 ----------- ----------- Loss from operations (1,131,527) (132,553) Other income (expense): Interest income 3,091 5,080 Interest expense (2,818) (3,356) Interest expense--related party (109,713) (85,956) Other income -- 8,110 ----------- ----------- Loss before income taxes (1,240,967) (208,675) Provision for income taxes 2,167 -- ----------- ----------- Net loss $(1,243,134) $ (208,675) =========== =========== Net loss per common share--basic and diluted $ (.36) $ (.08) =========== =========== Weighted average number of common shares outstanding--basic and diluted 3,473,115 2,563,435 =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 4
Megadata Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited) THREE MONTHS ENDED JULY 31, 2001 2000 ------------- -------------- Revenues: Systems $ 20,650 $ 491,000 Subscription and maintenance 301,551 120,101 Other 9,875 18,925 ----------- ----------- Net sales 332,076 630,026 ----------- ----------- Cost and expenses: Cost of sales 139,722 222,567 Research and development 77,358 37,736 Selling, general and administrative expenses 417,695 391,232 ----------- ----------- 634,775 651,535 ----------- ----------- Loss from operations (302,699) (21,509) Other income (expense): Interest income 464 1,216 Interest expense (581) (1,099) Interest expense--related party (48,400) (33,362) ----------- ----------- Net loss $ (351,216) $ (54,754) =========== =========== Net loss per common share--basic and diluted $ (.10) $ (.02) =========== =========== Weighted average number of common shares outstanding--basic and diluted 3,473,115 2,667,105 =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 5
Megadata Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) NINE MONTHS ENDED JULY 31, 2001 2000 ----------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(1,243,134) $(208,675) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 164,377 82,048 Changes in operating assets and liabilities: Accounts receivable 27,586 (476,436) Inventories (140,875) (291,246) Prepaid expenses and other current assets (3,743) 42,706 Other assets 300 4,617 Accounts payable 50,851 363,791 Accrued expenses, accrued expenses-related parties and other current liabilities 11,771 9,586 Deferred income 50,882 3,274 ----------- --------- Total adjustments 161,149 (261,660) ----------- --------- Net cash used in operating activities (1,081,985) (470,335) CASH FLOWS FROM INVESTING ACTIVITIES PASSUR network (296,896) (490,035) Software development costs (225,341) -- Capital expenditures\ (26,443) (37,036) ----------- --------- Net cash used in investing activities (548,680) (527,071) CASH FLOWS FROM FINANCING ACTIVITIES Payments of notes payable--related party -- (25,000) Proceeds from notes payable--related party 1,600,000 800,000 Payments of installment notes (12,199) (25,559) ----------- --------- Net cash provided by financing activities 1,587,801 749,441 ----------- --------- Decrease in cash (42,864) (247,965) Cash--beginning of period 69,090 299,276 ----------- --------- Cash--end of period $ 26,226 $ 51,311 =========== =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Page 6 Megadata Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) July 31, 2001 1. BUSINESS Megadata Corporation (the "Company") operates in one reportable segment: as a supplier of information, data services, software, and communication products for the aviation industry, primarily for airlines, airline affiliates, and airports. The Company's principal product is the PASSUR (Passive Secondary Surveillance Radar) System and its affiliated products and services. PASSUR is an integrated operations control and management system used by airlines at their dispatch and station control centers. In addition, major airports worldwide use the PASSUR system as part of an integrated noise management and monitoring system, as well as for operations control. The Company, through a 1998 restructuring plan, has developed a new method of delivering information to its customers. The Company now sells subscription and information services from a growing domestic and international PASSUR network of flight tracking systems. The Company will also continue to sell stand-alone PASSUR systems at a customer's request. The Company is transitioning from being a supplier of passive surveillance systems (a capital equipment business) to a provider of subscription based information and decision support services supplied by the Company's PASSUR network. To enhance its subscription service, the Company provides its own proprietary software suite, called PASTRACK. PASTRACK enables the customer to benefit from the algorithms and functionality already experienced by airline and airport customers over the past several years. As a result, a larger audience of aviation and aviation-related organizations can utilize the information generated from the PASSUR network, thus creating additional demand for the Company's services. Currently, PASSUR flight track coverage is available for 22 of the top 40 airports in the United States. The Company generates revenue by selling either (1) equipment - a PASSUR system (usually included is an annual maintenance contract and an additional charge for installation), or (2) information to an airport or airline subscriber derived from a PASSUR system usually owned by the Company (the PASSUR network). The customer subscribes to the information on a monthly basis pursuant to a subscription agreement, which may be a multi-year arrangement. The agreement also provides that the information from the PASSUR system cannot be resold or used for unauthorized purposes. Page 7 Megadata Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) July 31, 2001 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The financial information contained in this Form 10-Q represents condensed financial data and, therefore, does not include all footnote disclosures required to be included in financial statements prepared in conformity with accounting principles generally accepted in the United States. Such footnote information was included in the Company's annual report for the year ended October 31, 2000 on Form 10-K filed with the Securities and Exchange Commission ("SEC"); the condensed 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 consolidated financial position of Megadata Corporation at July 31, 2001 and its consolidated results of operations for the three and nine month periods ended July 31, 2001 and 2000 and its cash flows for the nine months ended July 31, 2001 and 2000. The results of operations for the interim periods stated above are not necessarily indicative of the results of operations for the fiscal year ending October 31, 2001. 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 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 price established by management. The Company recognizes revenue on the sale of products and systems when the products or systems are shipped. Installation charges, if any, are recognized on the date of installation. Services and maintenance revenues are recognized on a straight-line basis over the service contract period. Revenue for data subscription services is recognized on a monthly basis upon the execution of an agreement and the customer's receipt of the data. Page 8 of 8 Megadata Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) July 31, 2001 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES Inventories, which are comprised of raw material parts and components, PASSUR's in progress and finished goods are stated at the lower of cost (first-in, first-out method) or market for the current quarter. The Company values its inventory on an interim basis based on perpetual inventory records. PASSUR NETWORK The PASSUR network installations, which include the production and installation costs incurred for each Company owned PASSUR system (the "PASSUR Network") are recorded at cost, net of accumulated depreciation. Depreciation is computed on the straight-line method over the useful life of the assets, which is estimated at seven years. All development costs related to the software included in the PASSUR Network were charged to operations during their development period. SOFTWARE DEVELOPMENT COSTS Software development costs are capitalized in accordance with Financial Accounting Standards Board Statement No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE Marketed ("Statement 86"). Statement 86 requires capitalization of these costs beginning when a product's technological feasibility has been established, and ending when the product is available for general release to customers. Software development costs will be amortized when the products are available for general release over their estimated useful lives of three years. EARNINGS PER SHARE The Company follows the provisions of SFAS No. 128, EARNINGS PER SHARE. For the three and nine month periods ended July 31, 2001, the effects of outstanding stock options were excluded from the diluted loss per share computation, as the effect would have been antidilutive. Page 9 Megadata Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) July 31, 2001 3. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In fiscal 2001, G.S. Beckwith Gilbert, the Company's controlling shareholder, Chairman and Chief Executive Officer, loaned the Company an additional $1,600,000 in exchange for promissory notes bearing interest at 9% per annum and maturing on December 31, 2001. As of July 31, 2001, the total of notes due to Mr. Gilbert aggregated $2,550,000 and are secured by the Company's assets. Effective October 1998, the Company began leasing space from Field Point Capital Management Company ("FPCM"), a company 100% owned by Mr. Gilbert, at $1,000 per month rent. For the nine months ended July 31, 2001, services rendered by FPCM to the Company, including rent and medical benefits, totaled $30,934. Page 10 Megadata Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS REVENUE As described earlier in footnote 1 to the financial statements, the Company is transitioning from a seller of equipment to a seller of information and this change in management focus contributed to the decline in revenue for the first nine months of fiscal 2001. Revenue during the nine months ended July 31, 2001, decreased by approximately $663,000, or 48%, as compared to the corresponding period ended July 31, 2000. This decrease was primarily due to the fact that the Company did not sell any PASSUR systems or upgrades during the first nine months of fiscal 2001, which resulted primarily from the Company's strategy to replace one time system sales with recurring revenue. Management is concentrating its efforts on the sale of information from the Company owned PASSUR network rather than on system sales; subscription and maintenance revenue increased approximately $233,000, or 53%, for the nine months ended July 31, 2001, when compared to the same period of fiscal 2000. This increase partially offset the decrease in PASSUR System sales or upgrades revenue of approximately $856,000, or 98%, for the first nine months of fiscal 2001 as compared to the same period for fiscal 2000. The Company will sell complete systems only at a customer's specific request. Revenue during the quarter ended July 31, 2001 decreased approximately $298,000, or 47%, as compared to the corresponding period ended July 31, 2000. However, as noted above, subscription and maintenance revenue for the three months ended July 31, 2001 increased approximately $181,000, or 151% when compared to the same period of fiscal 2000. The decrease in revenues was primarily attributable to the lack of system sales for the quarter ended July 31, 2001 as compared to July 31, 2000, partially offset by the increase in subscription and maintenance revenues. The Company is installing additional PASSUR's in its network from completed PASSUR units built in the prior fiscal year. The Company will market the data generated by the network directly to airline, airport, and aviation-related customers. Management has decided to discontinue marketing various non-PASSUR product offerings; however, these products continue to contribute slightly to the revenue base from the sale of existing inventory, along with minor service and repair revenues. The Company recorded non-PASSUR revenue of approximately $28,000 for the nine months ended July 31, 2001 versus approximately $68,000 for the nine months ended July 31, 2000. Page 11 COST OF SALES During the nine months ended July 31, 2001, cost of sales increased by approximately $71,000, or 15%, over the same period of 2000. The increase is primarily due to unabsorbed manufacturing overhead. During the prior nine months ended July 31, 2000, the Company produced PASSUR units for anticipated customer sales and for subsequent inclusion in the Company's PASSUR network. During the first six months of fiscal 2001, no PASSUR units were produced which resulted in all manufacturing overhead expenses being charged directly to cost of sales. However, during the three months ended July 31, 2001, the Company began production on 10 PASSUR units for eventual inclusion in its inventory and/or PASSUR network. During the quarter ended July 31, 2001, cost of sales decreased by approximately $83,000, or 37%, over the same quarter of 2000. During the three months ended July 31, 2000, the Company produced and completed PASSUR units for anticipated customer sales and for inclusion in the Company's PASSUR network. During the three months ended July 31, 2001, the Company began production on 10 PASSUR units, which were not completed by July 31, 2001. Unabsorbed manufacturing overhead charges incurred during the quarter were charged directly to cost of sales. RESEARCH AND DEVELOPMENT The Company's research and development expenses increased approximately $90,000, or 91% for the nine months ended July 31, 2001 as compared to the same period of fiscal 2000. The Company will continue to invest in research and development to develop additional applications for its PASSUR customers. Research and development efforts include activities associated with the enhancement and improvement of the Company's existing hardware, software and information products. There were no customer sponsored research and development activities during the nine months ended July 31, 2001 and 2000. During the quarter ended July 31, 2001, research and development expenses increased by approximately $40,000, or 105%, over the same quarter of 2000. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased by approximately $175,000, or 19%, during the first nine months of fiscal 2001 as compared to the same period in fiscal 2000. Selling, general and administrative expenses increased by approximately $26,000, or 7%, during the three months ended July 31, 2001 as compared to the same period in fiscal 2000. Increases occurred in salaries, professional and consulting fees, travel, promotion and advertising expenses. The Company is continuing to increase its sales and marketing efforts in order to market existing and new products. The Company expects that its sales and marketing expenses in fiscal 2001 will continue to grow as part of the Company's effort to focus on the new business strategy. The Company is also increasing its presence at industry conventions throughout the United States and Europe. Page 12 OTHER INCOME (EXPENSE) Interest income and interest expense did not change significantly for the three and nine months periods ended July 31, 2001 as compared to the same periods of fiscal 2000. Interest expense-related party increased by approximately $24,000, or 28% for the nine-month period ended July 31, 2001, and by approximately $15,000, or 45% for the three month period ended July 31, 2001 as compared to the same periods of fiscal 2000. The increases are due to additional borrowings during the current fiscal year. The Company did not have any other income for the three and nine-month periods ended July 31, 2001, as compared to $8,110 for the nine month period ended July 31, 2000. NET LOSS The Company incurred a net loss of $1,243,134, or $.36 per diluted common share, during the nine month period ended July 31, 2001. In the same period of fiscal 2000, the Company incurred a net loss of $208,675, or $.08 per diluted common share. The Company's loss in the current period is primarily a result of the lack of PASSUR system sales and higher costs as described above, offset in part by increased subscription and maintenance revenues. During the quarter ended July 31, 2001, the Company incurred a net loss of $351,216, or $.10 per diluted common share. In the same period of fiscal 2000, the Company recorded a net loss of $54,754, or $.02 per diluted common share. LIQUIDITY AND CAPITAL RESOURCES At July 31, 2001, the Company's current liabilities exceeded current assets by $2,860,141, of which $2,550,000 were notes due to a related party who is a significant shareholder; and at July 31, 2001, the Company's stockholders' deficit was $638,918. For the nine months ended July 31, 2001, the Company incurred a net loss of $1,243,134. Management is addressing the working capital and stockholders' deficiencies and operating losses by aggressively marketing its PASSUR information capabilities in existing and new products as well as increasing the size of the Company owned PASSUR network, which management believes will lead to increased data subscription revenue. In addition, the Company will attempt to obtain external financing, and if such external financing is not consummated, the Company has a commitment to receive additional financial support from the significant shareholder referred to above through the end of fiscal 2001. The significant shareholder is considering extending such commitment should it be required. Net cash used by operating activities for the first nine months of fiscal 2001 was approximately $1,082,000. Cash flow provided by financing activities of approximately $1,588,000 came primarily from $1,600,000 in the form of notes payable - related party. No principal payments on notes payable - related party were made during the nine months ended July 31, 2001. Page 13 Cash flow used in investing activities for the first nine months of fiscal 2001 was approximately $549,000 and consisted primarily of investments in the Company's PASSUR network as well as capitalized software development costs. The Company has been unprofitable for the first three quarters of fiscal 2001. The Company anticipated increased revenues for the fourth quarter of fiscal 2001, which could have reduced the Company's current loss by the end of fiscal 2001. However, as a result of the recent terrorist events of September 11, 2001, impacting the aviation industry, and the fact that the aviation market is extensively regulated by government agencies, particularly the Federal Aviation Authority and The National Transportation Safety Board, management anticipates that new regulations relating to air travel will be issued. Since substantially all of the Company's revenue is derived from either airports or airlines, it is premature to evaluate the impact, if any, that any new regulations or changes in the economic situation of the aviation industry could have on the future operations of the Company, either positively or negatively. Interest by potential customers in the Company's PASSUR systems and in data obtained from the PASSUR Network remains strong and the Company anticipates an increase in future revenue. However, the Company cannot predict if such revenue will materialize. If sales do not increase, additional losses may occur and could continue. The extent of such profits or losses will be dependent on sales volume achieved. RISK FACTORS; FORWARD LOOKING STATEMENTS The Management's Discussion and Analysis and the information provided elsewhere in this Quarterly Report on Form 10-Q (including, without limitation, "Liquidity and Capital Resources" above) contain forward-looking statements regarding the Company's future plans, objectives, and expected performance. These statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks and uncertainties, and a number of factors could cause the Company's actual results to differ materially from those expressed in the forward-looking statements referred to above. These factors include, among others, the uncertainties related to the ability of the Company to sell data subscriptions from its PASSUR network, and to make new sales of its PASSUR and other product lines due to potential competitive pressure from other companies or other products as well as the current uncertainty in the aviation industry due to the recent terrorist events. Other uncertainties, which could impact the Company, are uncertainties with respect to future changes in governmental regulation affecting the product and its use in flight dispatch and the impact such changes could have on the Company's ability to obtain financing commitments. Additional uncertainties are related to the Company's ability to find and maintain the personnel necessary to sell, manufacture, and service its products. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company does not have any significant financial instruments that are sensitive to market risks. Page 14 Part II. Other Information ITEM 1. LEGAL PROCEEDINGS. NONE ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. NONE ITEM 5. OTHER INFORMATION. NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) The Company did not file any reports on Form 8-K during the three months ended July 31, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. DATED: SEPTEMBER 14, 2001 /s/ G. S. BECKWITH GILBERT -------------------------- G. S. Beckwith Gilbert, Chairman, and Chief Executive Officer DATED: SEPTEMBER 14, 2001 /s/ JAMES T. BARRY ------------------ James T. Barry, Chief Operating Officer, and Chief Financial Officer Page 15