SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant
to Section 13 or 15(d) of
the Securities Exchange Act of 1934
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2000
[ ] 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: 0-25380
ULTRADATA SYSTEMS, INCORPORATED
(Name of small business issuer in its charter)
Delaware 43-1401158
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
9375 Dielman Industrial Drive, St. Louis, MO. 63132
(Address of principal executive office) (Zip code)
Issuer's telephone number, including area code: (314) 997-2250
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to the Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year: $6,301,236
The aggregate market value at July 19, 2001 of the voting stock held by non-
affiliates, based on the closing price as reported by National Quotations
Bureau, was approximately $1,234,823. The aggregate market value has
been computed by reference to a share price of $0.38 (The price at which
stock was sold, or the average bid or asked price of such stock on July 19,
2001). All directors and more than five percent of stockholders of the
Registrant have been deemed "affiliates" for the purpose of calculating such
aggregate market value.
The number of shares outstanding of the issuer's common stock, as of
July 19, 2001, was 3,249,533
Transitional Small Business Disclosure Format: Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE: None
YOU SHOULD NOT RELY ON FORWARD LOOKING STATEMENTS
This annual report contains a number of forward-looking statements regarding
our future prospects. Among the forward-looking statements are descriptions
of our plans to restructure the marketing program for the Road Whiz line of
products, to introduce Triplink and GPS products to the market, and to develop
products based on a GPS/Internet technology. These forward-looking statements
are a true statement of our present intentions, but are neither predictions of
the future nor assurances that any of our intentions will be fulfilled. Many
factors beyond our control could act to thwart Ultradata in its efforts to
develop and market its products. Among these factors are:
* The difficulty of attracting mass-market retailers to a seasonal product
like the Road Whiz;
* The breadth and depth of competition in the GPS market, which will make
introduction of our product with a limited marketing budget difficult;
* The difficulty of attracting qualified engineering and marketing personnel
to our company.
There may also be factors that we have not foreseen which could interfere with
our plans. In addition, changing circumstances may cause us to determine that
a change in plans will be in the best interests of Ultradata. For this
reason, you should not place undue reliance on any of the forward-looking
statements in this report.
PART I
ITEM 1. BUSINESS
Overview
Since 1987 we have been engaged in the business of manufacturing and
marketing handheld computers that provide travel information. The products
are based upon a data compression technology that we developed, portions of
w hich we have patented. Recent developments in communications technology
have opened up new opportunities for us to use our technology. Therefore, we
still sell our handheld computers, but over the past three years we have been
expanding the scope of our operations:
* In 1998 we acquired an 18.9% interest in Talon Research & Development,
Ltd., which manufactured GPS (global positioning satellite) antennas
that can be combined with our database to create a variety of travel
products. We increased our interest in Talon to 24.9% in 1999. In
2000, an Employee Stock Option Plan was instituted at Talon that
increased the total shares outstanding by 10%, which resulted in
diluting our holding to 22.6%.
* In 1999 we helped to form a joint venture called Influence Data, LLC,
which provides travel services, including directions, over the Internet.
* Early in 2001 we introduced, in joint venture with Rand McNally, the
Rand McNally Triplink, a handheld computer that enables the user to
download travel information from the Rand McNally Website.
* During the first quarter of 2001 we shipped the first production units
of our Travel*Star 24, which combines our travel information with a GPS
antenna to enable a driver to obtain his location and directions to his
destination while he drives.
* We have begun development of an enhanced version of our GPS product that
will include a cellular transceiver to permit the driver to use the
product to access the Internet while traveling.
Each of our consumer products is designed to allow the consumer to access
useful information stored in a convenient manner. Our handheld computers
generally sell at retail prices between $19.95 and $49.95 per unit. The
products are in the three largest retail mass-market chains in the country
plus many other locations. The new TRAVEL*STAR 24 is offered at retail for
about $400, which should make it very competitive in the auto aftermarket.
Its portability and the fact that it requires no elaborate installation offer
advantages over the more expensive in-car systems.
Handheld Travel Computers
The Road Whiz(tm) Line of Products
Our core business is a line (currently 7 products) of hand-held computers
that utilize our proprietary data compression technology to provide a library
of information in a pocket-size box. Most of the products contain travel
information, customized to specific markets, and so the flagship products
have carried variations of the trademark "Road Whiz." Within the chip that
powers a Road Whiz can be found information regarding over 100,000 services
and amenities along the U.S. Interstate Highway System and directions on how
to reach the service or amenity of choice. Some versions of the Road Whiz
also contain information about services and attractions within the cities
linked by the Interstate Highway System. The service information provided
by a Road Whiz product includes directions and mileage to gas stations,
hotels, motels, hospitals, and 24-hour restaurants, as well as highway patrol
emergency numbers. We sell our handheld products through independent sales
representatives, mass merchandise retailers, catalog companies, department
stores, office supply stores, direct mail promotions, luggage stores and
selected television shopping channels.
Among the hand-held products we currently offer are the following:
Road Whiz Plus and Auto Pilot provide complete routing information for
over 90 cities, giving driving distances, driving time and detailed directions.
Both products are designed to be marketed by mass merchandise retailers, such
as Kmart and Kohl's. Ultra Road Whiz has similar capabilities, but is
designed primarily for sale on the QVC television network and to Wal-Mart.
In addition, we sell a unit containing the Road Whiz database but named
Car & Driver as a private label of the Target Stores chain.
The Road Whiz RV Special adds to the standard Road Whiz features useful
for an RV owner, such as the location of dump stations and the availability
of parking for recreational vehicles at restaurants.
AAA TripWizard is the product of a joint effort between Ultradata and
the American Automobile Association (AAA). During 1998, we entered into an
agreement with AAA to develop an expanded database to include AAA's diamond-
rated restaurants and lodging facilities, AAA-approved auto repair, camp
grounds and attractions, as well as the AAA ratings, where available, for the
facilities in our proprietary Interstate database. This expanded database has
been incorporated into a hand-held travel computer called the TripWizard.
TripWizard is being marketed to AAA's affiliates, consisting of 93 clubs,
1,100 offices and over 41 million members in the United States, as well as to
specialty retailers and Target.
Our New Marketing Strategy
After our initial public offering of securities in 1995, we were able to
commence widespread marketing of the handheld products. We priced them to the
upper range gift market ($49 to $129) and focused our marketing efforts on
direct sales through television and print ads, as well as through a sales
representative network. That strategy was successful in expanding our sales
for three years, while the products were new to the market. The expansion
of sales, however, did not bring with it a proportionate expansion of profits.
Too many of our marketing techniques were only marginally profitable, and as
our products lost some of their newness, marketing techniques such as direct
mailing produced diminishing returns. For that reason, beginning late in
1998 we revised our marketing strategy. The products now generally retail
for $19.95, and marketing is focused on mass market retailers and custom-
branded private label units. At this price point, we hope to gain sufficient
volume to achieve economies of scale with new low-cost manufacturing methods,
permitting us to operate profitably at a lower level of annual sales.
Distribution through mass merchandise channels accounted for over 92% of
our revenue in 2000. We expect that a small group of mass-market channels
will continue to dominate the market for our handheld computer products. In
April 2001 a new major retailer placed its initial orders for our products,
informing us that it planned to carry our Road Whiz Plus(tm) in its stores on
a plan-o-gram basis, which involves everyday sales and reorders of the product.
This brings to 5,000 the number of stores carrying the Road Whiz products.
The following table identifies the customers to whom over 10% of our sales
were made in either of the past two years as well as other mass market
retailers that carry our products.
Channel of Distribution 2000 Sales % of Sales 1999 Sales % of Sales
-----------------------------------------------------------------------------
Media Syndication Global $2,449,300 38.9% $ - -%
Preferred Customer's Guild $2,111,625 33.5% $ - -%
Kmart $ 454,270 7.2% $ 672,927 12.4%
Target $ 602,420 9.6% $ 267,388 4.9%
QVC $ - -% $ 1,102,246 20.3%
United Marketing Group $ - -% $ 582,260 10.7%
Kohl's $ - -% $ 575,184 10.6%
Central to the new marketing strategy is our effort to develop a variety
of distribution paths, so as to maximize our penetration of the potential
market for our products. To date, in addition to our sales to retailers, the
following types of distribution have been put in place:
* Private Branding. The leading example of the private label marketing
strategy was the introduction in 1998 of the AAA TripWizard as a joint
venture with the American Automobile Association.
* Direct Response Marketing. Our largest customers during 2000 were Media
Syndication Global and Preferred Customer's Guild. These distributors
specialize in multi-media direct response marketing and have resources
and expertise that can achieve high sales effectiveness at relatively
low promotional cost.
If our new marketing strategy is successful, the result will be an
increase in sales revenue with a significant reduction in selling and
administrative expense, as the costs attendant to direct retail marketing are
reduced. Even though the exponential growth rate that we achieved in 1996
and 1997 is unlikely to be replicated, stabilization of our core business at
even a modest level of profitability would provide a foundation on which we
could pursue dynamic growth through our entry into the GPS and Internet
markets.
Manufacturing
We do not manufacture any of our products. We retain assemblers to
manufacture the products. We procure the microprocessors and memory chips
and other unique items, and supply them to the assembler.
To date, there are two manufacturers to whom we have contracted most of
our assembly work. Once each year, these manufacturers quote prices to us
based upon estimated annual quantities. Then we place individual purchase
orders for production. Our arrangements with these manufacturers - up to the
point of a purchase order - are terminable at will by either party. If
either or both of the manufacturers became unavailable to us, alternate
sources would be readily available. Nevertheless, the sudden loss of one of
the manufacturers or unanticipated interruptions or delays from present
manufacturers would likely result in a temporary interruption to our planned
operations.
Backlog
As of March 31, 2001 our total backlog was approximately $37,390,
compared to backlog of approximately $110,805 on March 31, 2000. First
quarter backlog is typically low due to the seasonality of the business and
is not indicative of the year as a whole.
Patents
We own two patents that are utilized in our Road Whiz products. They
provide us a technological advantage which, to date, has prevented any
similar product from appearing. One patent covers our method of compressing
data relating to travel information. This compression technology permits our
travel products to store more data on smaller and less expensive memory
devices. The second patent covers the methodology that enables our travel
devices to account for changes that occur when the traveler crosses a state
border.
Database Research
A broad and accurate database is essential to the success of our products.
For this reason, we have developed a systematic approach to updating our ROAD
WHIZ database. At our corporate headquarters we employ three full-time
database research specialists, who survey and digest publicly available
geographic and demographic data provided, primarily, by travel services and
Chambers of Commerce across the country. In addition, a significant part of
the ROAD WHIZ( database is gathered and verified by our team of over 50 "Road
Helpers." Road Helpers are generally retirees and others that travel
extensively and report to us regarding the facilities they encounter. The
data provided by the Road Helpers is, in turn, reviewed and augmented by our
database specialists.
Competition
To date, we have not faced significant competition in selling our
handheld computer products. The primary reasons for the lack of competition
are:
* Our patented data compression technology permits the storage of unusually
large volumes of information in low-cost devices.
* Our database is unique, and it would be time-consuming to replicate it.
* We have fourteen years of experience in developing this line of products,
which gives us insight into the needs and desires of the traveling
consumer.
* We have a simple, low-cost design for our products, which employs a
minimum of parts.
* We have developed low-cost, but high quality manufacturing sources.
* The devices that perform functions similar to those performed by our
handheld products are considerably more expensive, and often lack the
data quality of our products.
These several factors have, thus far, served as a barrier to any
effective competition with our handheld products.
GPS Products
Talon Research & Development, Ltd.
We own 22.6% of Talon Research & Development, Ltd., a privately-held
enterprise located in Auckland, New Zealand. Talon manufactures and markets
electronic components and marine instruments that incorporate Global
Positioning Satellite ("GPS") receiver units. Among Talon's products are the
GPS receiver and antenna used in our Travel*Star 24(tm). Talon sells these
antennas to Ultradata at the lowest price it offers to any customer.
The prospects for significant growth at Talon appear promising. In
February of 2000, Talon was chosen to replace Magellan as the GPS hardware
supplier for certain models of the Palm Pilot, which opened a major sales
channel as well as marking a significant shift in market power toward Talon.
Talon also received an order in 2000 from Rand McNally for antennas for
30,000 GPS Palm Pilots. Finally, Talon has been expanding the international
distribution of its marine electronics products beyond its European base to
South America, South Africa, and China, and is projecting significant growth
in its marine electronics business as well as its OEM GPS receiver business.
As a result of all these events, Talon's sales in 2000 grew by 49% compared
with 1999.
Travel*Star 24 GPS Auto Navigational System
Taking advantage of our access to the Talon GPS receiver/antenna, we
have developed a low cost, portable navigation unit for the automotive after-
market, which we will market as the "Travel*Star 24." The Travel*Star 24
utilizes the Talon GPS receiver and antenna to pinpoint the longitude and
latitude of the moving vehicle. The unit is capable of calculating a route,
displaying visual directions and distance as well as audible turn-by-turn
prompts and warnings when the driver strays from the route. The Travel*Star
24 also includes an expanded version of the proprietary and unique Road Whiz
database, providing the driver directions to over 200,000 services across the
U.S.A. As the driver travels, the GPS signals are referenced to the service
database, so that the driver can instantly find businesses, hotels, service
stations, rest stops, restaurants, hospitals, tourist attractions, airports,
etc. in more than 250 metropolitan areas, as well as directions to over
12,000 smaller cities and towns.
While there are a wealth of potential users for a GPS-based navigation
system, we intend to target the Travel*Star 24 to the 12-volt automotive
after-market, which currently consists of over 150 million vehicles and grows
by 15 million vehicles annually.
Currently, between 600,000 and 1,000,000 GPS-based navigation systems
are sold annually. These include installed original equipment such as
"Neverlost" and "Visteon", which is generally priced in the $2,000 range;
low-end hand-held units of very limited capability (generally approximately
$200); and middle market units priced in the $600 to $1000 range. Examples
across this middle range can be found in the lines of Magellan, Garmin and
Lowrance. Travel*Star 24 will compete in this range, as we expect it to
have an initial retail price under $400. But the Travel*Star 24 should have
several competitive advantages over the middle market competitors:
* Travel*Star 24 provides audible prompts, whereas the competitors use a
"moving map" that requires the driver to take his eyes off the road;
* No other product in the middle price range can compute routes - the
routes must be entered by the user;
* Travel*Star 24 can plan a route to 12,000 towns and cities;
* Travel*Star 24 can be equipped with a low cost ($49.95) regional
cartridge that is expected to provide block-to-block navigation; and
* Travel*Star 24 incorporates Ultradata's proprietary data compression
technology to provide directions to over 200,000 services, a
functionality for which the competition offers nothing comparable.
* Door-to-door, turn-by-turn directions from one address to another can be
downloaded from a website through a PC to the Travel*Star 24 as an added
capability designed into the unit.
The Travel*Star 24 can easily fit into a briefcase or purse; so it is
portable to any rental vehicle. Beta testing has been ongoing since December
2000, and we shipped the first production units in the first quarter of 2001.
A date for full market launch has not yet been set.
Patents
We hold two additional patents that have potential utility in the GPS
market. Patent 5,943,653 was awarded in August, 1999 and covers the delivery
of electronic coupons in a handheld computer for discounts of services. The
technology can be combined with the GPS locational function to cause time and
site-specific coupons to be delivered to the driver offering, for example, a
discount at the upcoming hotel. We would, of course, receive a fee for each
customer that the hotel gained in this fashion.
The other related patent, which was awarded in May of 1999, covers a
method of integrating a GPS receiver into a radar detection device. By use
of this patented technology, it becomes practical to eliminate many false
radar detection alarms, as well as to provide audible warnings of speed zones.
Internet-Based Navigation
The Rand McNally Triplink(tm)
In June of this year we will begin marketing, in joint venture with Rand
McNally, an Internet appliance that provides textual driving directions
downloaded from the Rand McNally Website. Door-to-door driving directions to
and from a multitude of locations can be downloaded and stored in the handheld
unit, and later displayed by the unit one segment at a time, as needed. New
data can displace old data any time the unit is reconnected to the computer.
Thus, prior to each trip, the user can update his unit.
The premium unit in our TRIPLINK product line, the Rand McNally TRIPLINK,
includes the ROAD WHIZ Interstate services database in pre-programmed memory
as well as the download capability. The other unit in this line, the Rand
McNally POCKET TRIPLINK, is smaller and simpler, as it contains only the
driving directions. This product family provides a low-cost, easy-to-use
Internet appliance for Internet-connected computer users who travel.
www.DriveThere.com
In May of 1999 we formed a joint venture with Influence Incubator, LLC
("Influence") to create a vertical interest portal on the Web for travelers.
The joint venture, of which we own 33%, launched its Website, www.DriveThere.
com, in October, 1999. By creating affiliations with a large number of major
content providers, the joint venture was able to load the Website with a
wealth of travel-usable content, including driving directions, travel
suggestions, weather reports, information on products and services for
travelers (e.g. insurance, tires), a forum for auto sales, and contacts for
emergency roadside assistance. In addition, the shopping function on the
Website was a virtual department store for travelers, offering products
ranging from educational toys to amuse traveling children to the Road Whiz
to enlighten traveling parents.
In 2000, Influence withdraw operational support from Influence Data, LLC
as a result of difficulties in sustaining its commitments to a number of
operations in the dot.com sector. We have, therefore, written off the
balance of our equity in the joint venture on our balance sheet.
Nevertheless, we retain an interest in the brand equity in DriveThere.com,
pending joint discussions with Influence as to methods to exploit that asset.
GPS/Internet Auto Navigation and Tracking System
For some time we have been planning an effort to exploit the synergy
between the communications capabilities of the Internet and the locational
capabilities of a GPS antenna. If and when the capital resources become
available, we expect to commence development of a GPS/Internet auto navigation
and tracking system. The utility of the product will be to create a rich
link between the driver and a stationary source of communications, be it a
family member on a home PC or a hotel chain soliciting the driver's business.
The system is conceptually simple. We plan to modify the Travel*Star 24
to incorporate a cellular transceiver into the existing housing. Information
in the vehicle would originate in and be displayed on the Travel*Star 24,
which has a four-line text display and a menu-driven "soft key" user
interface. The Travel*Star 24 also has a built-in GPS receiver, and can
generate the necessary geo-coordinates to identify the vehicle's location.
The vehicle's identity, its geo-coordinates, and any outgoing messages would
be passed to the cellular transceiver for broadcast to the local phone cell,
then transferred via the Internet to the "Home Base" PC.
At the "Home Base", mapping software would be installed, which can
translate the geo-coordinates into a position display on a map. The person at
home could thus track the location and progress of the vehicle, using the
connectivity provided by the Internet. The same "Windows"-based software can
receive and display incoming messages, and generate pre-formatted outbound
messages and position queries. Similarly, pre-formatted messages can be sent
from the vehicle to the Internet site, where the messages are available to
friends and family.
The GPS/Internet System is in the planning stage only. There are a
number of technical tasks required to make the system operational, and we
have no certainty that we can accomplish these tasks. We will also require
additional capital resources or partners before we can undertake this project
in earnest.
Research and Development
Ultradata performs ongoing research and development, seeking to improve
existing products and to develop new products. These activities are primarily
conducted at our corporate headquarters, although we periodically engage
outside computer system design consultants to expedite the completion of the
development and test stages.
In 2000, the Company incurred $371,554 in research and development costs
compared to $358,357 in 1999. Research activities for 2000 were primarily
focused on continued development of TRAVEL*STAR 24 and the Triplink handheld
product. In addition, the Company capitalized $143,689 of costs incurred in
developing the software tools required to provide the database for the
TRAVEL*STAR 24. The capitalized amount was included in "Property, Plant and
Equipment" on our balance sheet.
Employees
The Company currently has 17 full-time employees, including six officers,
all of whom are located at the Company's headquarters in St. Louis, Missouri.
The Company employs four people in sales, customer service and shipping, two
people in database research, four people in executive management and
administration, four people in product development, one person in inventory
management, a president, and a chief executive officer. None of the Company's
employees belong to a collective bargaining union. In addition, a number of
part-time consultants are retained for database research, website development
and maintenance, and software development. The Company has not experienced
a work stoppage and believes that its employee relations are good.
Item 2. PROPERTIES
Our headquarters, principal administrative offices, and research and
development facilities are located in approximately 12,500 square feet of
leased office space in an industrial building located at 9375 Dielman
Industrial Drive, St. Louis, Missouri. The Company pays a monthly rent plus
31% of all building expenses under an operating lease that expires October
31, 2001. The Company maintains no manufacturing operations on site and
employs outside contractors to perform all of its manufacturing requirements.
Aggregate rental expense totaled $109,678 for 2000, compared to $114,247
in 1999. The Company believes that its facilities are adequate for the
Company's present and foreseeable requirements.
Item 3. LEGAL PROCEEDINGS
Legal proceedings have been filed by the Company against SmartTime to
recover funds loaned that SmartTime has refused to repay. These papers have
been served and court proceedings are pending to decide the outcome of the
dispute. The Company carries $150,000 on the balance sheet as an estimate of
the minimum net value to be recovered from SmartTime.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The following table sets forth the prices for the Company's Common
Stock (NASDAQ: ULTR) as quoted on the NASDAQ National Market for the eight
quarters starting January 1, 1999 and ending December 31, 2000. Until June
27, 2001, the Company's common stock was listed on the Nasdaq SmallCap Market.
Since that date, the stock has been quoted on the Pink Sheets.
Bid
Quarter Ending High Low
=====================================================
March 31, 1999 $ 2.75 $ 1.31
June 30, 1999 $ 2.63 $ 0.88
September 30, 1999 $ 2.44 $ 1.00
December 31, 1999 $ 2.06 $ 0.94
March 31, 2000 $ 7.00 $ 4.75
June 30, 2000 $ 2.63 $ 2.50
September 29, 2000 $ 1.75 $ 1.75
December 31, 2000 $ 1.38 $ 1.06
(b) Shareholders
At June 30, 2001, there were 104 registered stockholders of record of
the Company's Common Stock. Based upon information from nominee holders, the
Company believes the number of owners of its Common Stock exceeds 4,000.
(c) Dividends
The Company has never paid or declared any cash dividends on its Common
Stock and does not foresee doing so in the foreseeable future. The Company's
line of credit agreement precludes the payment of cash dividends. The
financing received from the sale of preferred stock in May of 2000 involved
the computation of imputed dividends provided in the form of warrants, options,
and stock as inducements associated with the preferred stock offering. These
dividends do not affect the earnings from operations of the Company but are
included in the earnings-per-share computation on the Income Statement. The
Company intends to retain any future earnings for the operation and expansion
of the business. Any decision as to future payment of dividends will depend
on the available earnings, the capital requirements of the Company, its
general financial condition, and other factors deemed pertinent by the Board
of Directors.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Overview
One factor has been dominant in causing our poor financial results over
the past two years: our inability to sustain the high level of sales of the
hand-held products at upscale retail prices that we realized in 1996 and 1997.
Beginning in 1998, we have been transforming our marketing efforts away from
a primary focus on the "upscale" market. Initially we devoted a large portion
of our effort to direct marketing through magazines, mailers and bill inserts,
as well as by televised appearances on the QVC Shopping Network. This
strategy generally proved to be a mistake, as the cost of the marketing effort
often exceeded the revenue we obtained from it. The one exception was our
on-going relationship with QVC, which was the source of over 19% of our
revenue in 1999. We expect QVC to again be a significant source of revenue
in 2001.
In 1999, therefore, we again shifted our focus, this time to mass market
retailing, of the sort you associate with Kmart, Kohl's, and Target Stores,
to name three of our new mass market customers. The reduction of our prices
to mass market levels required major adjustments to our cost structure. So
during the second half of 1999 and into 2000 we made the cuts and performed
the streamlining. That effort, however, was frustrated, in part, by the
worldwide shortage in read-only memory (ROM) chips during 2000, the result of
which was a $767,400 increase in our payments for chips. Nevertheless, our
overall results for 2000 indicate that we are heading in the right direction,
as we significantly reduced operating loss despite the increased chip expense.
Our plan, therefore, is to continue to pursue mass market outlets for our
handheld travel computers, with the expectation the reorientation of our
marketing focus and the ancillary restructuring of our cost structure will
eventually stabilize our handheld travel computers as a profitable line of
business. Once we have re-established the handheld units as a stable
foundation for our business, we can then devote our financial resources to
our development projects without fear of being left without adequate resources
to sustain operations.
Results of Operations
Sales. Sales for 2000 increased by $875,475, or 16.1%, to $6,301,236
from $5,425,761 in 1999. Over 92% of 2000 sales were attributable to mass-
market retailers, compared with 54% in 1999. Our plan is to pursue additional
mass-market outlets, and so continue the growth of sales in this fashion.
To this end, in April 2001 we added one more major retailer to our customer
list, bringing to 5,000 the number of stores carrying the Ultradata products.
Sales in 2001 should also be aided by our Triplink(tm) joint venture with
Rand McNally, although the full market program will not commence until
September. On the other hand, the fact that a small number of customers
accounts for nearly all of our sales puts us at the risk that loss of a
customer could reduce or reverse sales growth
Gross Profit. We have made considerable improvements in the efficiency
of manufacturing operations during the past two years. Nevertheless, our
gross margin in 2000 fell to 28.3% of sales, compared to 41.9% of sales in
1999, resulting in a $490,450 reduction in gross profit. The reasons for
the reduction were:
* The worldwide shortage of read-only memory (ROM) chips caused us to pay
$767,400 more for chips than we would have paid at 1999 prices. Indeed,
if the price of chips had remained stable, our gross margin for 2000
would have been 40.5%, an insignificant reduction from 1999.
* The fact that 72% of our sales were attributable to high-volume
syndicators, who market at relatively low margins.
* The write-off of $112,000 in bad debt owed by a single customer.
* The write-off of $150,000 in excess obsolete inventory in the last
quarter over and above our allocation of $11,000 per month. Management
decided in the fourth quarter to discontinue the Ultrafinder product,
rendering parts inventory specific to that product at Eastek obsolete.
We expect sales during 2001 to be spread among a wider number of
customers than in 2000. Moreover, chip prices for 2001 are expected to
approach 1999 levels. Therefore, we expect a gross margin of 40% to be
achievable.
Selling Expense. During 2000, we incurred $612,428 in advertising,
promotion, and marketing program expenses, as compared to $1,671,659 in 1999.
The result was an overall reduction of $1,059,231 in selling expense, despite
the 16.1% increase in sales. The primary reason for the reduction was the
fact that during 1999 we moved from our expensive direct mail and advertising
programs to a strategy of employing joint advertising strategies with our
mass-market customers. The transition was not effective until the latter
part of 1999, producing the dramatic reduction in selling expense that we
realized during 2000.
During 2000, we altered our method of accounting for advertising
allowances and slotting fees, as required by EITF Issue Number 00-25. The
effect of the change was to reduce revenues by the amount of these allowances
and fees, where we had previously accounted for them as selling expenses.
The resulting change affected revenues and gross margins but has no effect on
net earnings. For 2000, $184,166 was subtracted from revenue, gross margin
and selling expenses as compared to $140,865 for 1999. Our Statements of
Operations for both 2000 and 1999 reflect this change, in order to present
valid comparisons of results.
Research and Development Expense. Our research and development expense
in 2000 was not significantly different than in 1999. Our R&D efforts were
increased, however, in the second half of the year, utilizing for this purpose
the proceeds of our sale of preferred stock in May 2000. The increased
activity is reflected in our capitalization of $143,689 of costs in 2000 for
the internally developed software tools necessary for TRAVEL*STAR 24. This
brought the total capitalization balance to $274,604, to be amortized over 5
years starting in 2001.
Other Income (Expense). During 2000, Talon Research and Development
Company, Ltd. ("Talon") achieved a 55% increase in sales and a 40% increase
in earnings compared to 1999. Talon management have advised us that they
anticipate continued growth in 2001, albeit at a reduced rate due to market
conditions. At the same time, however, Talon adopted an Employee Stock
Ownership Plan (ESOP) during 2000. The issuance of shares to the ESOP
resulted in a reduction of our share of Talon's equity to 22.6% from 24.9%.
Therefore, our share of Talon's earnings for the year was offset, in part,
by the amortization of goodwill that followed from the reduction in our equity
in Talon. Talon, therefore, contributed $46,273 toward reducing our "Equity
in losses of unconsolidated affiliates" in 2000, compared to a loss of
($9,585) in 1999.
Near the end of 2000 our joint venture partner in Influence Data, LLC,
declared that it was unable to support the operations of DriveThere.com, as
the partner's overall business had been seriously impaired by the collapse of
the "dot com" market. We are reviewing with the partner possible avenues for
realizing value from the Website. In the meantime, however, we have written
the book value of our equity in Influence Data, LLC down to zero. The net
effect of our interest in the joint venture, therefore, was an expense during
2000 of ($286,610) included in "Equity in losses of unconsolidated affiliates"
and a one-time write-off of ($225,039) shown as "Impairment of investment".
Total other expense amounted to ($232,348) for 2000, as compared to
other income of $191,301 for the year ended December 31, 1999. Besides the
effect of our loss in equity in Influence Data, LLC, the year-to-year
comparison was affected by $127,473 in royalty income realized in 1999 from
a promotion by Idea Village in connection with Radio Shack, which was not
repeated in 2000.
Net Loss. Our net loss for 2000 was ($1,712,503), or ($0.54) per share,
basic and diluted, compared with ($1,997,250), or ($0.64) per basic and
diluted share in 1999. However, in 2000, we were required to record an
imputed dividend of $1,456,625 during 2000 as a result of our sale of Series
A redeemable convertible preferred stock in May 2000 (see Note 20). For that
reason, we have recorded a "net loss available to common shareholders" of
($3,169,128), or ($1.00) per basic and diluted common share.
LIQUIDITY AND CAPITAL RESOURCES
Our operating losses over the past three years have had an adverse
effect on our working capital. Nevertheless, at December 31, 2000 we still
had over $4.9 million in working capital, which we believe to be substantially
greater than most companies of our size. So we do have sufficient working
capital to sustain our operations and introduce our new products, provided
that we can realize our sales projections in our handheld business through
our strategy of developing mass-market customers and opening new distribution
channels.
Our cash position was aided in 2000 by the sale of Series A Preferred
Stock in May 2000 to two investment funds. In addition, despite the
significant operating loss we incurred, our operations consumed only
$188,281, primarily because our efforts to control accounts receivable led to
a $687,791 reduction in year-end receivables. At the same time, however,
$378,683 was used in investing activities, including $200,000 that we
contributed to Influence Data LLC, and $168,638 that we spent on capital
investments, primarily to develop software tools for compressing roadmap
topology into a format suitable for Travel*Star 24(tm). This latter amount
was capitalized, and will be amortized over five years. We expect our
capital expenditures during 2001 to be less than in 2000.
Our liabilities were reduced during 2000, and were equivalent to less
than nine percent of our current assets at year-end. Since we rely on
outside vendors for all of our manufacturing, our operations do not require
substantial capital expenditures other than for the periodic purchase of
tooling, test equipment, and fixtures. Currently we have no material capital
spending commitments outstanding.
The Company recently reached an agreement in principle with the holders of
the Series A Preferred Stock, and is presently preparing the definitive
agreements. The agreements will provide that the Series A shares will be
exchanged for convertible secured debt instruments with a face value equal to
the current conversion value of the Series A shares (i.e., face value plus
11.25% accrual since date of issue) plus 10% of the face value. The debt
instruments will provide that the Company will pay $70,000 per month through
October 2001 and $90,000 thereafter until the debt is fully satisfied. The
debtholders will retain the right to convert the outstanding debt, except
that the number of shares they may acquire on conversion will be limited to
20% of the trading volume for the quarter preceding conversion. The Company
has made this arrangement in order to relieve the threat of massive dilution
that the Preferred Stock presently poses to potential investors in the
Company's common stock. Management does not expect that the payments will
significantly affect the Company's ability to finance its ongoing business.
Because the Company has stabilized the cash requirements of our handheld
business, its working capital and cash reserves appear to be sufficient to
sustain over the coming year the level of business during 2000. There remains
one near-term liquidity issue: the cash needed for development of new products.
During 1999, the Company negotiated a lending agreement with Southwest Bank
of Missouri that provides a credit facility of $1 million. The credit is
secured by accounts receivable, inventories and equipment, with an interest
rate of 1% over Prime Rate. The credit facility expires on July 1, 2001.
Management has obtained a replacement facility with KBK Financial, an asset
based lender, to finance the purchase orders expected for the fourth quarter.
Impact of Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 requires derivatives to be
recognized as assets or liabilities on the balance sheet and measured at fair
value. Changes in the fair value of derivatives should be recognized in either
net income or other comprehensive income, depending on the designated purpose
of the derivative. This statement, as amended, is effective for the Company
on January 1, 2001, and the Company has not yet determined the effects this
statement will have on its financial position or results of operations.
Item 7. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
See Current Report on Form 8-K dated April 6, 2001.
Item 8. FINANCIAL STATEMENTS
The financial statements of Ultradata Systems, Incorporated, together
with notes and the Report of Independent Certified Public Accountants, are
set forth immediately following Item 13 of this Form 10-KSB.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table lists certain information regarding the officers and
directors of the Company as of May 31, 2001:
NAME AGE POSITION
=============================================================================
Monte Ross 69 Chief Executive Officer, Director
Ernest Clarke 61 President & Chief Financial Officer,
Director
Mark L. Peterson 44 Vice President-Engineering, Secretary,
Director
Leonard Missler 55 Vice President-Software Development
Duane Crofts 64 Vice President-Advanced Products
Donald Rattner 68 Director
H. Krollfeifer, Jr. 61 Director
Directors hold office until the annual meeting of the Company's
stockholders and the election and qualification of their successors.
Officers hold office, subject to removal at any time by the Board, until the
meeting of directors immediately following the annual meeting of stockholders
and until their successors are appointed and qualified.
Background of Directors and Executive Officers:
- Monte Ross founded the Company in 1986 and has served as its Chief
Executive Officer and Chairman since inception. He also served as
President until April 2001. For over 20 years prior to founding the
Company, Mr. Ross was employed by McDonnell Douglas Corporation in a
variety of positions. When he left McDonnell Douglas, Mr. Ross was
Director of Laser Systems, responsible for the group of approximately
400 employees, which developed the first laser space communication
system and first space laser radar. Mr. Ross is a Fellow of the
Institute of Electrical and Electronic Engineers and the past President
of the International Laser Communication Society. Mr. Ross was awarded
a Master of Science degree in Electrical Engineering by Northwestern
University in 1962. He is the father-in-law of Mark L. Peterson, the
Company's Vice President-Engineering.
- Ernest Clarke has been a Director of the Company since it was founded in
1986. He was elevated to President in April 2001. He had served as
Company's Vice President - Controller since June of 1999. From August
1990 to June 1999 he was Vice President - Government Programs. For over
20 years prior to joining Ultradata, Mr. Clarke was employed by McDonnell
Douglas Corporation in a variety of positions. When he left McDonnell
Douglas, Mr. Clarke was its Laser Product Development Manager with r
esponsibility to supervise over 40 engineers. Mr. Clarke was awarded a
Master of Science degree in Electrical Engineering by Stanford University
in 1966.
- Mark L. Peterson has been a Director of the Company since it was founded
in 1986. He has served as the Company's Vice President of Engineering
since 1988. He is responsible for the design of the Company's hand-held
products. During the four years prior to joining the Company, Mr.
Peterson was employed by McDonnell Douglas Corporation as an electronics
engineer for fiber optic products and satellite laser cross-link programs.
Mr. Peterson was awarded a Master of Science degree in Electrical
Engineering by Washington University in 1980. He is the son-in-law of
Monte Ross.
- Leonard Missler has served as Vice President - Software Development for
the Company since 1990. His primary responsibility has been the
development of software for the Company's hand-held products. For over
20 years prior to joining Ultradata, Mr. Missler was employed in
software and electronics development and management by Microterm, Inc.,
Magpower, Magnavox, and Interface Technology. At Microterm, his most
recent employer before joining the Company, Mr. Missler was the Director
of Operations. Mr. Missler was awarded a Master of Science degree in
Electrical Engineering by Washington University in 1970.
- Duane Crofts joined the Company as Vice President - Advanced Products in
1994. Prior to joining the Company, Mr. Crofts served for over five
years as a Program Director with McDonnell Douglas Corporation. In that
role he was responsible for engineering management, production management,
subcontract management, and program management. Mr. Crofts most recently
was manager of a multi-million dollar electro-optic development program.
Mr. Crofts was awarded a Bachelor of Science degree in Mechanical
Engineering by the University of Missouri at Rolla.
- Donald Rattner joined the Company in 1999 to serve as a member of the
Board of Directors. Mr. Rattner is a member/partner in BrookWeiner,
LLC, a Chicago-based accounting firm, and a member of the American
Institute of Certified Public Accountants and the Illinois CPA Society.
He has served on the boards of several corporations.
- H. Krollfeifer, Jr. joined the Company in 2000 to serve as a member of
the Board of Directors. Mr. Krollfeifer is retired after 35 years in
the equipment leasing and financing industry. He has worked closely
with The American Association of Equipment Lessors (AAEL), an industry
trade group for which he served as a speaker, lecturer, and teacher for
various educational programs starting in 1986. That organization
evolved into The Equipment Leasing Association of America (ELA), and Mr.
Krollfeifer was added to their training faculty in January 2000 where he
continues to serve on a part-time basis.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
None of the directors, officers, or beneficial owners of more than 10%
of Ultradata's common stock failed to file on a timely basis reports required
during 2000 by Section 16(a) of the Exchange Act.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by,
or paid by Ultradata to Monte Ross for services rendered in all capacities
to Ultradata during each of the fiscal years ended December 31, 2000, 1999,
and 1998. There was no other executive officer whose total salary and bonus
for the fiscal year ended December 31, 2000 exceeded $100,000.
Annual Long-term
Compensation Compensation
Name & Position Year Salary Bonus Other (1) Options
==============================================================================
Monte Ross, 2000 $ 156,278 $ - $ 6,000 (2)
Chief Executive Officer 1999 $ 142,588 $ - $ 6,000 (3)
1998 $ 154,999 $ - $ 6,000 (4)
(1) Includes premium payments for a life insurance policy on Mr. Ross, with
his estate as beneficiary.
(2) During 2000 the Board's Stock Option Committee awarded Mr. Ross options
to purchase an additional 7,000 shares of Common Stock at an exercise
price of $1.50.
(3) During 1999 the Board's Stock Option Committee awarded Mr. Ross options
to purchase an additional 10,000 shares of Common Stock at an exercise
price of $2.00.
(4) During 1998 the Board's Stock Option Committee awarded Mr. Ross options
to purchase an additional 6,000 shares of Common Stock at an exercise
price of $3.00.
Employment Agreements; Royalty Agreement
Messrs. Ross, Peterson, and Clarke have individual employment agreements
with Ultradata beginning September 1, 1994. Except as noted herein, the
terms of the employment agreements are substantially identical. The
agreements were extended in 1997 by action of the Board of Directors to
October 31, 2000, and again in 2000 to October 31, 2003. The agreements
provide for base salaries, which are adjusted annually by the Board of
Directors. If the majority of the Board cannot agree as to a level of
salary adjustment, the salary will increase by 10% for Mr. Clarke and Mr.
Peterson and 5% for Mr. Ross. The employment agreements restrict each
officer from competing with Ultradata for one year after the termination of
his employment unless that employee establishes that his employment by a
competitor will not involve the use of any information considered confidential
by Ultradata.
Leonard Missler, Vice President - Software Development, has a Royalty
Agreement with Ultradata dated September 14, 1989. The Agreement terminates
on September 13, 2009. Mr. Missler specifies in the Agreement that he will
keep confidential all of Ultradata's information regarding its technology and
products. In exchange, the Agreement provides that Ultradata will pay Mr.
Missler a royalty equal to 1% of net sales of Ultradata's ROAD WHIZ products
and 0.5% of net sales of other products incorporating the ROAD WHIZ database.
During the two years ended December 31, 2000 and 1999, royalty expense
totaling $60,645 and $39,820, respectively, was recognized.
STOCK OPTION AWARDS
The following tables set forth certain information regarding the stock
options acquired by the Company's Chief Executive Officer during the year
ended December 31, 2000 and those options held by him on December 31, 2000:
OPTION GRANTS IN CURRENT FISCAL YEAR
Percent
of total
options Potential realizable
Number of Granted value at assumed
Securities to annual rates of
Underlying Employees Exercise Appreciation
Option in fiscal Price Expiration for option term
Name Granted Year ($/share) Date 5% 10%
===============================================================================
Monte Ross 7,000 22.0% $ 1.50 12/31/05 $ 5,526 $ 12,210
AGGREGATED FISCAL YEAR OPTION VALUES
Number of securities
underlying Unexercised
options at Value of unexercised in-the-money
fiscal Year-end (#)(All Options at fiscal year end
Name Exercisable) (all exercisable)
==========================================================================
Monte Ross 80,500 $ -
Stock Option Plans
We have two stock option plans: the 1994 Incentive Stock Option Plan and
the 1996 Incentive Stock Option Plan. The material terms of the Plans are
identical. Our shareholders have approved the issuance of options for
500,000 shares under the Plans. So far, options for 471,348 shares have been
issued under the Plans, not including options that were issued and then
terminated when the employees left Ultradata. Of the 471,348, options have
been exercised to purchase 94,523 shares of common stock. Options to purchase
334,025 remain outstanding.
The Plans give the Board of Directors the authority to grant stock
options. All of our employees, as well as our Directors and consultants who
perform services for us are eligible to receive options. Some of these options
may qualify under Section 422 of the Internal Revenue Code, which gives tax
advantages to options that meet the qualifications. Stock options designed
to qualify under Section 422 are referred to as "incentive stock options."
All other stock options are referred to as "non-qualified stock options."
The most important provisions of the Plans are the following:
* The Board of Directors will determine the number of shares that an
employee may purchase and all other terms and conditions of each option.
* No option will have a term of more than 10 years.
* Every incentive stock option granted to a shareholder who owns 10% or
more of the voting power in Ultradata, will expire not later than five
years after the grant.
* The employee who holds an option may not transfer it, except by will or
through the laws of inheritance.
* The Plan limits the Board's authority to grant incentive stock options
to a single individual by requiring that the aggregate exercise price
of all stock options, incentive and otherwise, vesting in one employee
in any single calendar year may not exceed $100,000.
* There is no limit on vesting of non-qualified stock options.
* The exercise price for non-qualified stock options may not be less than
eighty-five percent (85%) of the fair market value of the shares on the
date of grant.
* The exercise price of an incentive stock option must be at least 100% of
the market price of a common share on the date the stock option is
granted.
* The exercise price of an incentive stock option granted to an employee
who owns 10% or more of the voting power in Ultradata may not be less
than 110% of the market price of a common share on the date the stock
option is granted.
* The Board may permit an employee to exercise an option and make payment
by giving a personal note.
During 2000 the Company issued additional incentive stock options to
purchase 36,043 shares of Common Stock at an exercise price between $1.50 and
$5.56. The following officers have received a cumulative total number of
options shown below since the inception of the plans at the weighted-average
exercise price given:
NAME Number of Shares Average Exercise Price
============================================================================
Monte Ross 80,500 $ 3.46
Mark L. Peterson 62,000 $ 3.13
Ernest Clarke 38,500 $ 3.32
Leonard Missler 26,500 $ 3.38
Duane Crofts 30,000 $ 3.28
REMUNERATION OF DIRECTORS
Outside Directors receive $500 per meeting and are reimbursed for out-
of-pocket expenses incurred on the Company's behalf.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to us with respect to
the beneficial ownership of our common stock by the following:
* each shareholder known by us to own beneficially more than 5% of our
common stock;
* Monte Ross;
* each of our directors; and
* all directors and executive officers as a group.
There are 3,215,571 shares of our common stock outstanding. Except as
otherwise indicated, we believe that the beneficial owners of the common stock
listed below have sole voting power and investment power with respect to their
shares, subject to community property laws where applicable. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. In computing the number of shares beneficially owned by
a person and the percent ownership of that person, we include:
* shares of common stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable within
60 days, and
* shares of common stock that would be issued today if the Series A
Preferred Stock held by that person were exercised today.
We do not, however, include these "issuable" shares in the outstanding
shares when we compute the percent ownership of any other person.
Name and Amount and
Address of Nature of Percentage
Beneficial Beneficial of Outstanding
Owner (1) Ownership Shares (8)
=================================================================
Monte Ross 434,500(2) 13.18%
Mark L. Peterson 162,282(3) 4.95%
Ernest Clarke 169,352(4) 5.20%
Donald Rattner 29,000 0.90%
H. Krollfeifer, Jr. 10,000 0.31%
All officers and
directors as a
group (7 persons) 870,873(5) 25.22%
BH Capital
Investments, L.P.
175 Bloor St. East,
7th Floor
Toronto, Ontario
Canada M4W3R8 258,653(6) 7.44%
Excalibur Limited
Partnership
33 Prince Arthur Avenue
Toronto, Ontario
Canada M5R1B2 258,653(6) 7.44%
Influence Incubator, LLC
9666 Olive Street Road
St. Louis, Missouri 63132 300,000(7) 8.53%
(1) Unless otherwise indicated, the address of each of these shareholders is
c/o Ultradata Systems, Incorporated, 9375 Dielman Industrial Drive, St.
Louis, Missouri 63132
(2) Includes 224,000 shares owned by Monte Ross, 100,000 shares owned by
Harriet Ross, and 30,000 shares owned by the Monte Ross and Harriet J.
Ross Living Trust. Mr. Ross and his wife share investment control over
the trust; they may revoke it or amend it at will; and they receive all
income from the trust during the life of either of them. Also includes
options to purchase 80,500 shares.
(3) Includes 91,964 shares owned by the Mark L. Peterson and Ryia Peterson
Living Trust and 8,318 owned by Ryia Peterson. Mr. Peterson and his wife
share investment control over the trust; they may revoke it or amend it
at will; and they receive all income from the trust during the life of
either of them. Also includes options for 62,000 shares.
(4) Includes options for 38,500 shares.
(5) Includes options for 237,500 shares.
(6) Represents for each shareholder: (a) 19,400 shares of Common Stock which
could have been acquired on June 12, 2001 on conversion of Series A
Convertible Preferred Stock (conversion being limited through December
31, 2001, to 10% of the trading volume for the 22 trading days preceding
conversion), plus (b) warrants to purchase 239,253 shares. After
December 31, 2001, conversion and exercise will be subject to a limit
that on conversion and exercise each shareholder may not acquire more
than 9.99% of the outstanding common stock. The limit may be waived by
the shareholder on 75 days notice to Ultradata, in which event the number
of shares into which the Preferred Stock is convertible will depend on the
market price at the time of conversion. The Company has reached an
agreement in principle with the holders of the Preferred Stock that will
limit the number of shares that can be issued on conversion of the
Preferred Stock to 20% of the trading volume for the preceding quarter.
(7) Represents options to purchase 300,000 shares.
(8) In determining the percentage of outstanding shares, all presently
exercisable options owned by the shareholder or the group are treated as
having been exercised.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1994 five of our officers and four employees purchased shares of our
common stock and gave us promissory notes in payment. On June 11, 1999 three
of the officers surrendered a portion of the shares they had purchased, and
we forgave a portion of their notes in exchange for the shares. The Board of
Directors agreed with the officers that they would value the surrendered
shares at the weighted average market price for the 30 trading days preceding
June 11, 1999. The table below shows data concerning the 1994 purchase and
1999 surrender of shares.
Shares Purchased Shares Surrendered
-------------------------------- ----------------------------
Total Price Average Total Price Average
Monte Ross 155,734 $254,500 $1.63 100,000 $215,000 $2.145
Mark Peterson 38,725 $ 63,375 $1.64 37,423 $ 80,459 $2.145
Leonard Missler 17,676 $ 21,250 $1.20 12,548 $ 26,978 $2.145
We have a written agreement with Leonard Missler, our Vice President -
Software Development. The agreement provides that, until September 13,
2009, we will pay Mr. Missler a 1% royalty on all net sales of ROAD WHIZ
products and 1/2% on net sales of other products incorporating the ROAD WHIZ
database. Because of this agreement, we paid $60,645 in royalties to Mr.
Missler in 2000 and $39,820 in 1999.
Steven H. Akre, Esquire, who was a member of our Board of Directors
until April 2001, performed legal services as general counsel for Ultradata
since it was founded. During 2000 we paid Mr. Akre $42,907 for legal
services, and during 1999 we paid the law firm with which Mr. Akre was then
associated $108,411 for legal services.
Item 13. EXHIBITS, LIST, AND REPORTS
(a) Financial Statements
List of Financial Statements Under Item 7 of this Report:
Report of Independent Certified Public Accountants
Balance Sheet as of December 31, 2000.
Statements of Operations for each year in the two-year period ended
December 31, 2000.
Statements of Stockholders' Equity for each year in the two-year
period ended December 31, 2000.
Statements of Cash Flows for each year in the two-year period ended
December 31, 2000.
Notes to Financial Statements for each year in the two-year period
ended December 31, 2000.
(b) Exhibits Index
Exhibit Number
3-a. Articles of Incorporation, and 1989 amendment (1)
3-a(1) Amendment to Articles of Incorporation dated March 4, 1991,
March 22, 1994, and November 18, 1994 (1)
3-a(2) Certification of Correction of Articles of Incorporation (1)
3-a(3) Amendment to Articles of Incorporation dated July 26, 1996 (2)
3-b. By-laws (1)
4-a. Specimen of Common Stock Certificate (1)
10-a. Lease dated May 23, 1990, as amended on November 31, 1993, for
premises at 9375 Dielman Industrial Drive, St. Louis, Missouri (1)
10-a(1) Lease Addendum dated October 17, 1995, for premises at 9375 Dielman
Industrial Drive, St. Louis, Missouri (1)
10-b. 1994 Stock Option Plan (1)
10-c Amended and Restated 1996 Stock Option Plan - filed as an Exhibit to
the Company's Registration Statement on Form S-8 (333-32098) and
incorporated herein by reference.
10-d. Employment Agreement with Monte Ross (1)
10-d(1) Extended Employment Agreement between the Company and Monte Ross (2)
10-e. Employment Agreement with Mark L. Peterson (1)
10-e(1) Extended Employment Agreement between the Company and Mark L.
Peterson (2)
10-f. Employment Agreement with Ernest Clarke (1)
10-f(1) Extended Employment Agreement between the Company and Ernest
Clarke (2)
10-g. Royalty Agreement dated September 14, 1989, between the Company and
Leonard Missler.(1)
10-g(1) Modification Agreement dated November 4, 1995, to Royalty Agreement
dated September 14, 1989, between the Company and Leonard
Missler. (1)
10-h Convertible Preferred Stock and Warrants Purchase Agreement dated
May 10, 2000 - filed as an exhibit to the Company's Current Report
on Form 8-K dated May 16, 2000 and incorporated herein by reference.
10-h(1) Certificate of Amendment of the Certificate of Designations,
Preferences and Rights of Series A Convertible Preferred Stock (4)
10-i Option Agreement between the Company and Influence Incubator, L.L.C.
dated May 30, 2000 - filed as an exhibit to the Company's Current
Report on Form 8-K dated May 30, 2000 and incorporated herein by
reference.
10-j Share Issue and Option Agreement dated March 23, 1998 among the
Company, Talon Research & Development Co., Limited, and certain
shareholders of Talon. (3)
10-k Variation of Option Deed dated August 27, 1998 between Talon
Research & Development Co., Limited, certain shareholders of Talon,
and the Company. (3)
10-l Deed made in 1999 relating to Variation of Option Deed between Talon
Research & Development Co., Limited, certain shareholders of Talon,
and the Company. (3)
16 Current Report on Form 8-K/A dated April 6, 2001
21 Subsidiaries - None.
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (33-85218 C) and incorporated herein by reference.
(2) Previously filed as an Exhibit to Form 10-KSB for the year ended December
31, 1997, and incorporated herein by reference.
(3) Previously filed as an Exhibit to Form 10-QSB for the quarter ended March
31, 2000, and incorporated herein by reference.
(4) Filed herewith.
(c) Reports on Form 8-K
None during the fourth quarter 2000.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of:
Ultradata Systems Incorporated
We have audited the accompanying balance sheet of Ultradata Systems
Incorporated as of December 31, 2000 and the related statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit. The financial statements of Ultradata Systems Incorporated as
of December 31, 1999 were audited by other auditors whose report dated
March 2, 2000 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ultradata Systems
Incorporated as of December 31, 2000 and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1(X) to the
financial statement, the Company has had recurring losses and a loss from
current operations of $1,712,503 and a negative cash flow from operations of
$188,281. These matters raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
June 5, 2001 (Except for Note 21(b)
as to which the date is July 3, 2001)
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Ultradata Systems, Incorporated
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of Ultradata Systems, Incorporated, for the year
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurances about whether the
financial statements are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and the cash flows of
Ultradata Systems, Incorporated for the year ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States
of America.
March 2, 2000
St. Louis, Missouri
(signed) BDO Seidman, LLP
ULTRADATA SYSTEMS, INCORPORATED
BALANCE SHEET
DECEMBER 31, 2000
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,842,983
Restricted cash 767,724
Trade accounts receivable, net of allowance
for doubtful accounts of $117,556 and
return reserve of $94,357 673,475
Inventories 1,780,255
Prepaid expenses and other current assets 229,637
---------
Total Current Assets 5,294,074
---------
PROPERTY AND EQUIPMENT - NET 617,794
---------
OTHER ASSETS
Deferred compensation trust investments,
available for sale 84,605
Investment in Talon Research and
Development, Ltd. 825,757
Investment in Influence Data, LLC -
Advances to affiliates 150,000
Advertising credits 62,421
Other assets 8,594
---------
Total Other Assets 1,131,377
---------
TOTAL ASSETS $ 7,043,245
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 164,319
Accrued expenses and other liabilities 218,996
---------
Total Current Liabilities 383,315
---------
LONG TERM LIABILITIES
Deferred rent 6,220
Deferred compensation liability 87,329
---------
Total Long Term Liabilities 93,549
---------
TOTAL LIABILITIES 476,864
---------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value,
4,996,680 shares authorized, none
issued and outstanding -
Series A convertible preferred stock,
3,320 shares authorized, 1,616 shares
outstanding with a stated value of $1,000 1,616,000
Common stock, $0.01 par value,
10,000,000 shares authorized, 3,519,586
issued and outstanding 35,196
Additional paid-in capital 9,861,970
Accumulated deficit (3,737,190)
Treasury stock (326,171 shares at cost) (942,311)
Notes receivable issued for purchase of
common stock (205,819)
Accumulated other comprehensive (loss) income, net (61,465)
---------
TOTAL STOCKHOLDERS' EQUITY 6,566,381
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,043,245
=========
See accompanying notes to financial statements.
ULTRADATA SYSTEMS INCORPORATED
STATEMENTS OF OPERATIONS
AS OF DECEMBER 31, 2000 AND 1999
2000 1999
-------------------------------
NET SALES $ 6,301,236 $ 5,425,762
COST OF SALES 4,516,970 3,151,046
---------- ----------
GROSS PROFIT 1,784,266 2,274,716
---------- ----------
OPERATING EXPENSES
Selling expense 612,428 1,671,659
General and administrative expenses 2,280,439 2,063,016
Research and development expense 371,554 358,357
---------- ----------
Total Operating Expenses 3,264,421 4,093,032
---------- ----------
OPERATING LOSS (1,480,155) (1,818,316)
---------- ----------
OTHER INCOME (EXPENSE)
Interest and dividend income 179,941 93,848
Equity in losses of unconsolidated
affiliates (240,337) (81,118)
Impairment of investment (225,039) -
Royalty income - 127,473
Loss on disposal of fixed assets (8,695) (6,969)
Realized gain on sale of securities 10,601 22,602
Other, net 51,181 35,466
---------- ----------
Total Other Income (Expense) (232,348) 191,302
---------- ----------
LOSS BEFORE INCOME TAX EXPENSE (1,712,503) (1,627,014)
Income tax expense - 370,236
---------- ----------
NET LOSS $(1,712,503) $(1,997,250)
========== ==========
LOSS PER SHARE
Net loss $(1,712,503) $(1,997,250)
Preferred stock dividends (1,456,625) -
---------- ----------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $(3,169,128) $(1,997,250)
========== ==========
Loss per share - basic and diluted $ (1.00) $ (0.64)
========== ==========
Weighted average shares outstanding
- basic and diluted 3,168,186 3,122,138
========== ==========
See accompanying notes to financial statements.
ULTRADATA SYSTEMS, INCORPORATED
STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Notes
Receivable
Additional For Other
Common Stock Preferred Stock Paid-in Common Treasury Stock Comprehensive Accumulated
Shares Amount Shares Amount Capital Stock Shares Amount Income Deficit Total
---------------------------------------------------------------------------------------------------------------------------------
Balance,
January 1, 1999 3,410,000 $34,100 - $ - $9,799,936 $(505,549) 255,200 $(900,281) $ 86,476 $ (27,437) $ 8,487,245
Purchase of 1,000
shares of
treasury stock
at cost - - - - - - 1,000 (2,125) - - (2,125)
Issuance of 80,000
shares of
treasury stock
for investment
in Influence
Data, LLC - - - - 45,418 - (80,000) 281,782 - - 327,200
Redemption of
149,971 shares
of common stock
to reduce notes
receivable - - - - - 321,687 149,971 (321,687) - - -
Accrued interest on
notes receivable
issued for purchase
of common stock - - - - - (13,255) - - - - (13,255)
Issuance of stock
options to non-
employee for
services performed - - - - 6,540 - - - - - 6,540
Other comprehensive
loss on available
for sale trust
securities - - - - - - - - (48,647) - (48,647)
Net loss, 1999 - - - - - - - - - (1,997,250) (1,997,250)
---------
Total Comprehensive
Loss - - - - - - - - - - (2,045,897)
---------
----------------------------------------------------------------------------------------------------------------------------------
Balance, December
31, 1999 3,410,000 34,100 - - 9,851,894 (197,117) 326,171 (942,311) 37,829 (2,024,687) 6,759,708
Exercise of
94,523 employee
stock options 94,523 945 - - 313,680 - - - - - 314,625
Issuance of
common stock
for services 5,500 55 - - 11,633 - - - - - 11,688
Issuance of stock
options for
Investment in
Influence Data,
LLC - - - - 55,981 - - - - - 55,981
Accrued interest on
notes receivable
issued for purchase
of common stock - - - - - (8,702) - - - - (8,702)
Issuance of
preferred stock
net of direct
offering costs - - 1,600 1,600,000 (359,625) - - - - - 1,240,375
Issuance of stock
options to non-
employee for
services performed - - - - 4,503 - - - - - 4,503
Issuance of common
stock in connection
with preferred
stock offering 9,563 96 - - (96) - - - - - -
Issuance of
preferred stock
in connection
with preferred
stock offering - - 16 16,000 (16,000) - - - - - -
Other comprehensive
loss - - - - - - - - (99,294) - (99,294)
Net loss, 2000 - - - - - - - - - (1,712,503) (1,712,503)
Total Comprehensive ---------
Income - - - - - - - - - - (1,811,797)
---------
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER
31, 2000 3,519,586 $35,196 1,616 $1,616,000 $9,861,970 $(205,819) 326,171 $(942,311) $(61,465) $(3,737,190) $ 6,566,381
===============================================================================================================================
See accompanying notes to financial statements.
ULTRADATA SYSTEMS, INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,712,503) $ (1,997,250)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Deferred income tax provision - 476,149
Depreciation and amortization 226,083 259,870
Inventory reserve for obsolescence 26,414 67,137
Equity in losses of unconsolidated
affiliates 240,337 81,118
Realized (gain) loss on investments (10,601) (22,602)
Non-cash compensation expense 16,191 6,540
Bad debt expense on advances to affiliates 122,683 31,000
Loss on disposal of property and equipment 8,695 6,969
Provision for doubtful accounts 121,001 -
Loss on investment impairment 225,039 -
Increase (decrease) in assets and liabilities:
Trade accounts receivable, net 687,791 1,621,698
Costs and estimated earnings on long-term
contracts - 95,534
Inventories (151,246) 1,148,759
Prepaid expenses and other current assets 84,053 696,834
Accounts payable 8,106 (784,008)
Accrued expenses and other liabilities (43,467) (1,358,867)
Tax benefit receivable - 231,227
Deferred rent (7,464) (7,464)
Deferred compensation trust liability (29,393) (33,980)
-------- ---------
Net Cash (Used In) Provided By
Operating Activities (188,281) 518,664
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in affiliated company (200,000) (66,813)
Deferred compensation trust investments (19,045) 30,158
Capital expenditures (168,638) (115,468)
Restricted cash (356,836) (398,373)
-------- ---------
Net Cash Used In Investing Activities (744,519) (550,496)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock at cost - (2,125)
Proceeds from issuance of redeemable
preferred stock and common stock warrants 1,240,375 -
Exercise of employee stock options 315,274 -
--------- ---------
Net Cash Provided By Financing
Activities 1,555,649 (2,125)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 622,849 (33,957)
CASH AND CASH EQUIVALENTS-BEGINNING OF YEAR 1,220,134 1,254,091
--------- ---------
CASH AND CASH EQUIVALENTS-END OF YEAR $ 1,842,983 $ 1,220,134
========= =========
See accompanying notes to financial statements.
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Basis of Presentation
The financial statements include the equity in earnings of unconsolidated
affiliates Talon Research & Development Co., Ltd. (Talon) of Auckland New
Zealand, and Influence Data, LLC. The investments in Talon and Influence
Data, LLC are accounted for using the equity method. The Company has a 22.6%
interest in Talon and a 33.3% interest in Influence Data, LLC (See Note 16).
(B) Use of Estimates
The financial statements have been prepared in conformity with generally
accepted accounting principles and, as such, include amounts based on
informed estimates and adjustments by management, with consideration given to
materiality. Actual results could vary from those estimates.
(C) Cash and Cash Equivalents
For financial statement presentation purposes, cash and cash equivalents
include deposits with initial maturities of less than three months, including
money market accounts with investments in marketable securities.
(D) Restricted Cash
Restricted cash includes a deposit maintained in conjunction with the
Company's agreement to guarantee Talon credit with the Bank of New Zealand
($765,000) and money-market funds related to the deferred compensation trust.
The cash amounts are restricted from use in operational activities of the
Company. The Talon guarantee expires on August 31, 2001 and the restriction
will be released.
(E) Revenue Recognition
Net sales are recognized when products are shipped. The Company has
established programs, which, under specified conditions, enable customers to
return product. The Company establishes liabilities for estimated returns at
time of shipment. In addition accruals for customer discounts and rebates are
recorded when revenues are recognized.
Revenue under the Company's long-term contract is recognized on the percentage
of completion method based upon incurred costs compared to total estimated
costs under the contract. Revisions to assumptions and estimates, primarily
in contract value and estimated costs, used for recording sales and earnings
are reflected in the accounting period in which the facts become known.
Royalties are earned based on sale of products.
(F) Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Provision for potentially
obsolete or slow moving inventory is made based on management's analysis of
inventory levels and future sales forecasts.
(G) Property and Equipment
Property and equipment are stated at cost. Maintenance and repairs are
expensed as incurred. Major improvements, which materially extend useful
lives, are capitalized. The Company capitalizes certain software development
costs in accordance with the American Institute of Certified Public Accountants
Statement of Position No. 98-1, "Accounting for the Costs of Software
Developed or Obtained for Internal Use." Costs incurred for the Company's
own personnel who are directly associated with software development are
capitalized. Capitalized software costs will be amortized over an estimated
useful life of five years. Depreciation is provided on the straight-line
basis over the estimated useful lives of the assets, generally five years.
Leasehold improvements are amortized over the shorter of the term of the
related lease or its useful life. The Company continually reviews property
and equipment to determine that the carrying values are not impaired.
(H) Long-Lived Assets
In accordance with SFAS 121, long-lived assets and certain identifiable
intangible assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. For purposes of evaluating the
recoverability of long-lived assets, the recoverability test is performed
using undiscounted net cash flows related to the long-lived assets. The
Company reviews long-lived assets to determine that carrying values are not
impaired. The Company recognized an impairment loss of $225,039 on its
investment in Influence Data, LLC during 2000 (See Note 16).
(I) Operating Lease
Lease expense on the corporate facilities is recognized on a straight-line
basis over the primary term of the lease. The lease provides for accelerating
rent over the lease term. Accordingly, deferred rent has been recorded in the
Company's balance sheet (See Note 7).
(J) Advertising
The Company expenses the production costs of advertising the first time
advertising takes place, except for direct response advertising, which is
capitalized and amortized over its expected period of future benefits. The
Company accounts for barter transactions under APB 29 "Accounting for
Nonmonetary Transactions". During 1999, the Company exchanged slow moving
inventory having a fair value of $249,685 after a write-down for obsolescence,
for advertising credits. The credits have no expiration date and can only be
used by the Company or an affiliate. The Company did not use any of these
advertising credits and as such has not recorded any advertising expenses
related to these credits during the year ended December 31, 2000. At December
31, 2000, the Company has included in prepaid expenses and other non current
assets the unused advertising credits of $249,685.
Advertising expense totaled $202,705 and $1,446,225 for fiscal years ended
December 31, 2000 and 1999.
(K) Goodwill
The excess of the purchase price of net assets acquired in equity investments
over their fair value is being amortized on a straight-line basis not to
exceed 10 years.
(L) Fair Value of Financial Instruments
FAS 107 "Disclosure About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. Cash
and cash equivalents, accounts receivable, accounts payable, and accrued
liabilities are reflected in the financial statements at fair value because
of the short-term maturity of the instruments.
(M) Research and Development Costs
Research and development costs consist primarily of expenditures incurred
bringing a new product to market or significantly enhancing existing products.
The Company expenses all research and development costs as they are incurred
unless they are associated with the development of tools or processes for
production used in-house rather than for product delivered to a customer.
(N) Deferred Compensation Trust Investments
Investments are stated at the estimated fair value in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", and consist of investments in U.S.
government agency securities or corporate stocks. The deferred compensation
trust represents contributions made by the Company to a Rabbi trust. The
amounts are restricted from use for operational purposes, and investment
decisions are made by the trust beneficiary.
Available-for-sale securities, which include any security for which the
beneficiary has no immediate plan to sell but which may be sold in the future,
are valued at fair value. Realized gains and losses, based on the amortized
cost of the specific security, are included in other income as investment
gains (losses). Unrealized gains and losses are recorded, net of related
income tax effects, as a separate component of equity.
(O) Royalty Expense
Royalty expense is recognized on a pro rata basis as units are sold.
(P) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
(Q) Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing net income (loss)
for the period by the weighted average number of shares of common stock
outstanding during the period. The assumed exercise of stock options and
warrants is included in the calculation of diluted earnings per share, if
dilutive.
(R) Stock-based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price greater than or equal to the fair value of the shares
at the date of grant. The Company accounts for stock options in accordance
with Accounting Principles Board Opinion No. 25 (APB Opinion No. 25)
"Accounting for Stock Issued to Employees." The Opinion requires that
compensation cost related to fixed stock option plans be recognized only to
the extent that the fair value of the shares at the date of grant exceeds the
exercise price. Accordingly the Company recognizes no compensation expense for
its stock option grants.
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 allows
companies to continue to account for their stock option plans in accordance
with APB No. 25, but encourages the adoption of a new accounting method based
on the estimated fair value of employee stock options. Pro forma net income
and income per share, determined as if the Company had applied SFAS No. 123,
are discussed with Note 13.
(S) Reclassifications
Certain 1999 balances have been reclassified to conform to the 2000
presentation. During 2000, the Company changed the way they account for
certain sales incentives, in accordance with EITF Issue No. 00-25
Accordingly, the Company has restated the 1999 financial statements to reflect
this change. The Company reduced sales and selling expense by $140,865.
(T) Impact of Recent Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (FAS No. 133). FAS No. 133 requires as derivatives to
be recognized as assets or liabilities on the balance sheet and measured at
fair value. Changes in the fair value of derivatives should be recognized in
either net income or other comprehensive income, depending on the designated
purpose of the derivative. This statement, as amended by FAS No. 137 and 138,
is effective on January 1, 2001, and will not have a material effect on the
Company's financial position or results of operations.
(U) Significant Customers
For the year ended December 31, 2000, the company relied on four customers for
approximately 39%, 34%, 10%, and 7% of consumer product sales. Accounts
receivable from those customers totaled $0, $0, $257,860, and $138,258,
respectively, at December 31, 2000.
For the year ended December 31, 1999, the customer relied on four customers
for approximately 20.3%, 12.4%, 10.7% and 10.6% of consumer product sales,
respectively.
(V) Concentrations of Credit Risk from Deposits in Excess of Insured Limits
The Company maintains its cash balances at one financial institution in
Missouri. The balances are insured by the Federal Deposit Insurance
Corporation up to $100,000. At December 31, 2000 the Company's uninsured
cash balances were approximately $2,719,200.
(W) Business Segments
The Company applies Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information". The
Company operates in one segment and therefore segment information is not
presented.
(X) Going Concern
As shown in the accompanying financial statements, the Company incurred a net
loss of $1,712,503 for the year ended December 31, 2000 and a negative cash
flow from operations of $188,281. These factors raise substantial doubt about
the company's ability to continue as a going concern.
The Company has continued its product design and development efforts to
introduce new products during 2001. The Company also continues to expand into
mass market retailers. In addition, the Company is pursuing asset based
financing to finance its expansion plans. Management believes that actions
presently taken to obtain additional funding provide the opportunity for the
Company to continue as a going concern.
NOTE 2 NATURE OF OPERATIONS
The principal business activity of Ultradata Systems, Incorporated (the
Company), located in St. Louis, Missouri, is the design, manufacture, and sale
of hand-held electronic information products. The Company sells the products
in the United States through direct marketing and through independent sales
representatives, mail order catalogs and mass market retailers.
NOTE 3 INVENTORIES
Inventories (net) at December 31, 2000 consist of the following:
Raw materials $ 746,572
Work in process 57,393
Finished goods 976,290
---------
$1,780,255
=========
At December 31, 2000, the Company has reserved $560,761 for obsolete inventory.
NOTE 4 PREPAID EXPENSES
Prepaid expenses at December 31, 2000 consist of the following:
Prepaid advertising $ 201,225
Other prepaid expenses 28,412
-------
$ 229,637
=======
NOTE 5 PROPERTY AND EQUIPMENT
Property, plant and equipment, as of December 31, 2000 consisted of:
Research and development
equipment $ 160,890
Production equipment 45,051
Tooling and test equipment 779,616
Office furniture and equipment 400,341
Sales displays 52,101
Leasehold improvements 141,671
Construction in progress-software 274,604
---------
1,854,274
Less accumulated depreciation
and amortization 1,236,480
---------
$ 617,794
=========
Depreciation and amortization expense for the years ended December 31, 2000
and 1999 totaled $226,083 and $259,870, respectively. Estimated costs to
complete construction in progress for TRAVEL*STAR 24( software development
tools at December 31, 2000 was $30,000. The Company plans to begin
amortization of these costs in June 2001 as production activities and
shipments to customers begin in earnest. The Company also plans to
capitalize similar software tools for future versions of the TRAVEL*STAR
product starting in 2001 and spend approximately $75,000 for this effort
during the year.
NOTE 6 COMPREHENSIVE INCOME (LOSS)
The Company follows SFAS No. 130, "Reporting Comprehensive Income". This
statement establishes standards for reporting and display of comprehensive
income and its components.
The components of other comprehensive income (loss), net, are as follows:
2000 1999
---------------------------
Unrealized loss on deferred compensation
investments:
Unrealized losses arising during the
period, net $ (50,874) $ (62,661)
Reclassification adjustment for gains
realized in net loss - 14,014
Foreign currency translation loss (48,420) -
------- -------
Other comprehensive loss $ (99,294) $ (48,647)
======= =======
NOTE 7 LEASES
The Company amended and expanded its corporate facilities lease as of
November 1, 1995. The lease is an operating lease, which expires October
31, 2001. The Company pays monthly rent plus 31% of all building expenses.
Rental expense totaled approximately $109,678 and $114,247 for the years ended
December 31, 2000 and 1999, respectively.
Future minimum lease payments and the related totals to be expensed for
financial reporting under the operating lease consist of the following:
Cash Payments Expense To Be Recognized
-----------------------------------------
Year Ending December 31, 2001 $ 89,153 $ 82,933
====== ======
NOTE 8 ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities at December 31, 2000 consist of the
following:
Accrued sales commissions and royalties $ 14,758
Accrued payroll 42,294
Accrued vacation 82,990
Accrued advertising 1,563
Other 77,391
-------
$ 218,996
=======
NOTE 9 DEFERRED COMPENSATION
Deferred compensation represents the market value of investments made by the
Company in conjunction with a deferred compensation arrangement with the
Company's CEO for services provided prior to 1991. Five annual payments
of $12,800 were paid through December 31, 1995 to a Rabbi trust for the
benefit of the Company's CEO. A distribution to the beneficiary of
$36,850 was made during 1999. The amortized cost and unrealized gain on the
investments were $74,465 and $10,140, respectively, at December 31, 2000.
NOTE 10 LINE OF CREDIT
In April 1999, the Company negotiated a lending agreement with Southwest Bank
of St. Louis that provided a credit facility of $1 million, secured by the
Company's accounts receivable and inventories, which expires on July 1, 2001.
The Bank reserved against this line of credit a Standby Letter of Credit
related to the guarantee of Talon's line of credit discussed below (See Note
16). There were no borrowings at December 31, 2000. As of May 1, 2001, the
Company was in default of certain covenants and agreed not to take any draws
on the line of credit.
The Company has renewed and increased its agreement to be guarantor on a line
of credit in the original amount of $400,000 issued to Talon GPS, LLC, by a
commercial bank in Hong Kong. The new amount that will be guaranteed is
$765,000, in accordance with an agreement whereby the Company is a guarantor
of Talon's line of credit in proportion to the Company's ownership share in
Talon. In connection with the Company's guarantee agreement with Talon, the
Company is contingently liable for an irrevocable letter of credit in favor
of a Hong Kong bank for an aggregate amount not to exceed $765,000. This
letter of credit is due to expire on August 31, 2001 (See Note 1 (D)). The
agreement also states that should the Company elect not to renew the Standby
Letter of Credit, Talon will have the right to repurchase its shares or any
portion thereof from the Company at the fair market value determined by an
appropriate expert.
NOTE 11 NOTES RECEIVABLE ISSUED FOR PURCHASE OF COMMON STOCK
Notes receivable issued for purchase of common stock represent unsecured
advances made by the Company to various employees for stock options exercised.
The notes bear interest at 6% per annum and are due, together with accrued
interest, on demand on either the termination of employment or the sale of
underlying stock, whichever comes first. During 2000, the notes earned $9,352
in interest.
NOTE 12 EARNINGS (LOSS) PER SHARE
A reconciliation of the numerator and denominator of the loss per share
calculations is provided for all periods presented. The numerator for basic
and diluted loss per share is net loss for all periods presented. The
denominator for basic and diluted loss per share for 2000 and 1999, as
follows:
For The Twelve Months Ended December 31,
2000 (a) 1999 (b)
----------------------------------------
Numerator:
Net earnings (loss) $ (1,712,503) $ (1,997,250)
Preferred Stock Dividend (c) (1,456,625) -
---------- ----------
Numerator for basic and diluted
loss per share - weighted average
shares (d) $ (3,169,128) $ (1,997,250)
========== ==========
Denominator:
Denominator for basic and diluted
loss per share - weighted average
shares (d) 3,168,186 3,122,138
========= =========
Basic and diluted loss per share (1.00) (0.64)
(a) Options to purchase 759,450 shares of common stock at prices between
$1.50 and $7.39 per share were outstanding at December 31, 2000, but
were not included in the computation of diluted loss per share because
they are anti-dilutive.
(b) Options to purchase 412,430 shares of common stock at prices between
$1.44 and $7.39 per share were outstanding at December 31, 1999, but were
not included in the computation of diluted loss per share because they
were anti-dilutive.
(c) See Note 20.
(d) Conversion of the preferred stock was not included in the weighted-average
shares and computation of diluted loss per share because the effect of the
preferred stock dividend was anti-dilutive.
NOTE 13 INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2000 and 1999
consist of:
2000
Current Deferred Total
------------------------------------------------------------------
Federal $ - $ - $ -
State - - -
------------------------------------------------------------------
$ - $ - $ -
==================================================================
1999
Current Deferred Total
-------------------------------------------------------------------
Federal $(105,913) $ 426,028 $ 320,115
State - 50,121 50,121
-------------------------------------------------------------------
$(105,913) $ 476,149 $ 370,236
===================================================================
Income tax expense for the years ended December 31, 2000 and 1999 differed
from amounts computed by applying the statutory U. S. federal corporate
income tax rate of 34% to income before income tax benefit as a result of the
following:
2000 1999
----------------------------------------------------------------------------
Expected income tax (benefit) expense $ (581,908) $ (553,185)
Increase (decrease) in income taxes
resulting from:
Valuation allowance increase 311,772 962,937
State income taxes, net of federal
expense (benefit) (16,884) 33,080
Nondeductible expenses for federal
income tax purposes 1,204 2,458
Foreign operations 106,813 3,642
Other, net 179,003 (78,696)
---------- --------
Income tax expense (benefit) $ - $ 370,236
========== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2000
include the following:
2000
------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforward $ 1,895,332
Note receivable reserved for financial
reporting purposes 202,283
Notes and accounts receivable reserves 72,050
Inventory reserves, principally due to
accruals for financial reporting purposes
and basis differences 190,658
Other 24,925
---------
Total deferred tax assets $ 2,385,248
---------
Deferred tax liabilities
Prepaid advertising (4,747)
Property, plant and equipment, principally
due to differences in depreciation basis (34,133)
Unrealized gain on deferred compensation
trust investments (3,448)
---------
Total deferred tax liabilities (42,328)
---------
Gross deferred tax asset 2,342,920
Valuation allowance (2,342,920)
---------
Net deferred tax asset $ -
=========
During 1999, the Company received tax refunds for carryback of net operating
losses of $337,140. A valuation allowance has been provided for those net
operating loss carryforwards and temporary differences in view of the
Company's continuing losses in 2000. The net operating loss carryforward of
approximately $5,500,000 will expire through 2021.
NOTE 14 EMPLOYEE BENEFIT PLANS
(a) Employee Saving and Retirement Plan (Section 401-k plan)
Effective January 1, 1998, the Board of Director's approved a savings and
retirement plan covering all full-time employees. Subject to approval by
the Board of Directors, the Company fully matches employee contributions
up to 3% of total compensation paid to participating employees and one-
third of one percent is matched for each percentage of participating
employee contributions between 4% and 6% of total compensation. Expense
attributable to Company contributions totaled $40,586 and $43,015 during
the years ended December 31, 2000 and 1999, respectively.
(b) Incentive Stock Option Plans
At December 31, 2000, the Company has two fixed stock option plans, which
are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation
cost has been recognized for its fixed stock option plans. Had compensation
cost for the Company's two fixed stock option plans been determined
consistent with SFAS No. 123, the Company's net loss and loss per share
would have been increased to the pro forma amounts indicated below:
2000 1999
---------------------------------
Net loss available to common shareholders
As Reported $ (3,169,128) $ (1,997,250)
Pro Forma $ (3,192,372) $ (2,163,741)
Basic and diluted loss per share
As Reported $ (1.00) $ (0.64)
Pro Forma $ (1.01) $ (0.69)
Under the 1994 Incentive Stock Option Plan, the Company may grant
incentive stock options to its employees, officers, directors, and
consultants of the Company to purchase up to 175,000 shares of common
stock. Under the 1996 Incentive Stock Option Plan the Company may grant
incentive stock options to its employees, officers, directors, and
consultants of the Company to purchase up to 175,000 shares of common
stock. In December 1998, the Board of Directors approved an extension of
the 1996 Incentive Stock Options plan to provide for 100,000 additional
shares to be made available for future grant. Under both plans, the
exercise price of each option equals the market price of the Company's
stock on the date of grant, and the options' maximum term is five years.
Options are granted at various times and are exercisable immediately.
During 1999, the Company cancelled incentive stock options to purchase
17,300 shares of common stock at exercise prices ranging from $3.00 to
$4.00 per share.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 2000 and 1999, respectively:
dividend yield of zero for all years; expected volatility of 77.25% and
68%; risk-free interest rates of 5.79% and 6.30%; expected lives of five
years for both plans.
A summary of the status of Company's two fixed stock option plans as of
December 31, 2000 and 1999, and the changes during the years then ended
is presented below:
2000 1999
------------------------ --------------------
Weighted Weighted
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
-----------------------------------------------------------------------------
Outstanding at beginning
of year 412,430 $ 3.70 326,192 $ 4.25
Granted (including
repriced options) 36,403 $ 3.73 103,538 $ 1.98
Forfeit (23,860) $ 3.39 (17,300) $ 3.73
Exercised (94,523) $ 3.33 - $ -
-----------------------------------------------------------------------------
Outstanding at end of year 330,450 $ 3.69 412,430 $ 3.70
=============================================================================
Option exercisable at year
end 330,450 412,430
Weighted average fair
value of options granted
to employees during the
year $1.00 $0.65
Options Outstanding Options Exercisable
--------------------------------------- -------------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 2000 Life Price 2000 Price
------------------------------------------------------------------------------
$1.00 - 1.99 34,385 4.9 $ 1.51 34,385 $ 1.51
2.00 - 2.99 56,965 3.9 2.00 56,965 2.00
3.00 - 3.99 32,550 2.9 3.00 32,550 3.00
4.00 - 4.99 194,892 3.5 4.00 194,892 4.00
5.00 - 5.99 1,658 4.5 5.01 1,658 5.01
7.00 - 7.39 10,000 0.7 7.39 10,000 7.39
------- -------
330,450 330,450
======= =======
NOTE 15 COMMITMENTS AND CONTINGENCIES
On September 14, 1989, the Company entered into a royalty agreement relating
to its ROAD WHIZ product. After 20,000 ROAD WHIZ units are sold, the
agreement provides for a 1% royalty payment on net sales of the ROAD WHIZ
product and 0.5% on the Company's other products, which incorporate the ROAD
WHIZ database. Royalty payments are made quarterly until September 13, 2009.
During the years ended December 31, 2000 and 1999, royalty expense totaled
$60,645 and $39,820, respectively.
On December 29, 1998, the Company entered into a three-year royalty agreement
with a consultant with regard to the AAA TripWizard for 1% of sales to
customers other than their own, for which they earn their normal independent
sales representative commissions. During the years ended December 31, 2000
and 1999, expense totaled $10,958 and $950, respectively.
On September 15, 1998, the Company entered into a three-year royalty agreement
with AAA related to the AAA TripWizard. The terms are automatically renewable
for one year and amount to 10% of the wholesale price on sales other than
through AAA stores and $1.00 per unit on AAA sales. This agreement recognizes
the benefit of the AAA logo and data and their promotion of the product through
their travel stores. During the year ending December 31, 2000 royalty expenses
totaled $55,320 compared to $33,250 for 1999.
NOTE 16 INVESTMENT IN AFFILIATES
In May 1999, the Company formed a joint venture with Influence Content, LLC,
a website developer, to form Influence Data, LLC. The Company issued 80,000
shares of common stock (at quoted market price) from the treasury and options
(valued at market upon the Black-Scholes method) to purchase 160,000 shares of
common stock for a one-third interest in Influence Data, LLC. The original
value of the investment, based on the consideration given to form the joint
venture was $327,200.
On May 30, 2000 the Company entered into a new agreement with Influence
Content, LLC, to cancel the option agreement dated May 4, 1999, which issued
options for 160,000 common shares, and issue new options for 300,000 common
shares of the Company. In addition, the Company was required to pay $200,000
as additional capital contributions in connection with this agreement. The
additional capital contribution contained the following provisions: the
capital contribution shall not increase the Company capital account in
Influence Data, LLC, nor be included for purposes of maintenance of the
capital account. Furthermore, such capital contribution shall not serve to
relieve or reduce the capital contribution obligations, if any, of the Company
under the terms of the Influence Data, LLC, Operating Agreement. The Company
has recorded an additional amount of $255,982 in goodwill in addition to the
original $327,000 investment value recorded by the Company during the year
ended December 31, 1999. The $255,982 is comprised of the $200,000 in cash
paid by the Company and $55,982 additional cost value of the options issued
as a result of the May 30, 2000 agreement. The fair value of the common stock
options are estimated on the date of the grant using the Black Scholes option
model with the following weighted average assumptions: dividend yield of zero,
expected volatility of 40.0%, risk-free interest rate of 5.74%, and an expected
life of five years.
The Company's 33% interest in Influence Data, LLC is accounted for using the
equity method of accounting and is stated at amortized cost plus equity in
undistributed earnings since acquisition. The equity in earnings of Influence
Data, LLC is adjusted for the annual amortization of the difference between
the acquisition cost and the Company's proportionate share of Influence Data,
LLC's members' equity net assets. Amortization is computed on a straight-line
basis over ten years. The unamortized difference between the investment cost
and the Company's proportionate share of Influence Data, LLC is $156,053 at
December 31, 1999. The Company's share of the losses for 1999 totaled
$60,386. As discussed above, the losses were increased by $11,147 to bring
the equity in loss of affiliate to $71,533 for 1999. During 2000, the
Company's proportionate share of losses through September 30, 2000 was
$227,226. During the fourth quarter of 2000, the Company was notified that
Influence Data, LLC was having funding problems and ceasing operations. The
Company also recognized an impairment loss on its investment of $225,039.
On March 23, 1998, the Company acquired an 18.9% interest in Talon for
$282,500. In August 1998, the Company acquired an option to purchase
additional shares in Talon for $312,147. During 1999, the option to purchase
additional shares was amended, and the above amount was utilized to purchase
an additional 6% interest in Talon. Legal and consulting costs associated
with the acquisition and option to purchase additional shares are capitalized
as part of the cost of the investment, and totaled $124,108 during December
31, 1999.
The Company's 22.6% interest in Talon is accounted for using the equity method
of accounting and is stated at amortized cost plus equity in undistributed
earnings since acquisition. The Company's interest decreased from 24.9% based
on a 10% increase in Talon's outstanding shares due to incorporation of an
employee stock option plan for Talon employees in 2000. The equity in earnings
of Talon is adjusted for the annual amortization of the difference between
acquisition cost and the Company's proportionate share of Talons' net assets.
Amortization is computed on a straight-line basis over nine years. The
unamortized difference between the investment cost and the Company's
proportionate share of talon is $487,458 and $568,655 at December 31, 2000
and 1999, respectively. The Company's share of the earnings for 2000 and
1999 were $173,383 and $61,496 after accounting for the differences between
New Zealand GAAP and US GAAP. As discussed above, the earnings were further
reduced by amortization of $90,488 and $71,081 and a write-down of goodwill
of $32,794 associated with the change in ownership during 2000, bringing the
equity in (loss) gain of affiliate to $46,273 and $(9,585) for the years 2000
and 1999, respectively. The Company's equity in earnings of affiliate from
inception was $165,008 as of December 31, 2000 (See Note 10).
In addition to the above transactions, the Company has purchased certain
electronic components, including parts for TRAVEL*STAR 24, which have been
sold to Talon at cost. These sales totaled $0 and $3,530 for the years ended
December 31, 2000 and 1999, respectively. A net balance of $70,144 was
receivable from Talon by the Company at December 31, 2000 and is included in
trade accounts receivable.
NOTE 17 ADVANCES TO AFFILIATES
On July 1, 1998, the Company entered into a joint development and marketing
agreement with a privately held company based in McLean, Virginia. The
Company transferred certain software and documentation of its' service software
in exchange for a promissory note bearing interest at prime rate of $400,000.
In addition, the Company leased computer equipment to the affiliate at
favorable rates. The Company advanced $50,000 in a promissory note, due June
30, 2000 with interest at 6.36% to expand equipment capabilities to support
the proposed network. The agreement also includes a provision for the Company
to advance to the affiliate up to $400,000 in additional funds to complete
network development, of which $200,000 was advanced as of December 31, 2000.
These advances were incorporated in a promissory note due January 1, 2002,
which provides for the Company to be entitled to one-half, (50%), of the
operating revenue of SmartTime Networks (excluding only non-reoccurring
engineering services provided by the affiliate). The agreement also provides
for the optional conversion of the loan into a 10% equity interest in the
privately held company, at the Company's sole discretion. The Company has
reserved $594,950 at December 31, 2000. The remaining receivable balance is
$150,000 at December 31, 2000.
NOTE 18 SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 2000, the Company recorded adjustments that increased
net loss by approximately $466,500. These adjustments included $225,000
related to the write-off of Influence Data, LLC, $138,500 for an increase in
the inventory reserve for obsolescence and write-off of a bad debt from a
customer, and $103,000 of other various expenses related to overseas
manufacture and import. These adjustments compare to $450,000 of adjustments
in the fourth quarter of 1999.
NOTE 19 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental non-cash investing and financing activities were as follows:
Year ended December 31, 2000
-----------------------------
The Company issued 300,000 common stock options to Influence data, LLC with
an aggregate fair value of $55,982.
Year ended December 31, 1999
-----------------------------
The Company issued 80,000 shares of treasury stock and options to purchase
160,000 shares of its common stock, with an aggregate fair value of $327,200,
for a one-third ownership interest in Influence Data, LLC.
The Company redeemed 149,971 shares of common stock in exchange for related
notes receivable of $321,688.
The Company exchanged slow-moving inventory for advertising credits from a
third party valued at $249,685.
NOTE 20 CONVERTIBLE PREFERRED STOCK
On May 16, 2000, the Company received from two investors gross proceeds of
$1,600,000 for Series A Convertible Preferred Shares (the "Preferred Shares")
and Common Stock Purchase Warrants ("Warrants"). The Preferred Shares have
no voting rights, except as to matters which directly affect the rights of
holders of Preferred Shares. The holders of Preferred Shares are not entitled
to any cash dividends. However, they accrue an additional 11.25% per annum
(or 22.5% if the Common Stock is delisted by NASDAQ) for purposes of
conversion, redemption, and liquidation ($113,625 at December 31, 2000).
Among the rights attendant to the Preferred Shares are:
1. The Preferred Shares have a liquidation preference, upon the liquidation
of Ultradata or its bankruptcy or certain other events, equal to their
face value plus an accrued amount equal to 11.25% from the date of their
issuance (22.5% if the Common Stock is delisted by NASDAQ).
2. The Preferred Shares, combined with the additional 11.25% per annum,
may be converted into Common Stock at any time at the option of the
holders. If not previously converted, the Preferred Shares will
automatically convert into Common Stock on May 15, 2003. The conversion
rate will be the lower of $3.50 or 75% of the 5-day average closing bid
price, subject to certain anti-dilution rights and to the Floor. The
"Floor" was initially $2.50 and has since adjusted to $2.00. It applies
only during the first 18 months after issuance of the Preferred Shares.
Moreover, if the conversion price for any 20 trading days during months
13 through 18 after issuance less than $2.00 for the Floor, the Floor
will reduce to $1.50. The intrinsic value of this beneficial conversion
feature has resulted in deemed dividends of $811,189.
3. At the time the shares were issued, Ultradata undertook to obtain
shareholder approval of the conversion of the new securities and to
register the underlying common stock for public resale. If Ultradata
had not satisfied those conditions, the Investors had a right to
require Ultradata to repurchase any Preferred Shares that could not be
converted into free-trading common stock due to that limitation. The
redemption price would have been the greater of (a) 130% of face value
plus 11.25% of face value from date of issuance or (b) the difference
between the conversion price of the unconvertible share and the 5-day
average closing asked price. The conditions were satisfied in July
2000 and August 2000, respectively, and the Preferred Shares are no
longer redeemable.
The Warrants will permit the Investors to each purchase up to 239,253
shares of Common Stock (a total of 478,506 shares) for a price of
$5.00 per share until May 15, 2003. The Company has recorded the
estimated fair value of the Warrants, $284,089, as additional paid-in
capital and included as a dividend to preferred stockholders.
The placement was arranged by a consultant. In compensation for their
services, The Company paid $202,000 to the consultant, 12% of the gross
proceeds of the placement, and issued to the consultant (a) an option
to purchase, on the same terms as the Investors, 160 Preferred Shares,
equal to ten percent of those sold to Investors, and (b) an option to
purchase 128,000 common shares. The value of the options was credited
to additional paid-in capital. The Company also paid another consultant
in connection with the placement a fee of 9,570 shares of the Company's
common stock with an estimated fair value of $31,868 and included as a
dividend to preferred stockholders.
The fair value of the warrants and common stock options is estimated on
the day of the grant using the Black-Scholes option model with the
following weighted-average assumptions: dividend yield of zero, expected
volatility of 40.0%, risk-free interest rate of 5.4%, and expected lives
of between 2.5 and 3.0 years.
The Company made a number of covenants to the Investors in the Agreement,
which included the following:
1. Until November 16, 2000, Ultradata will not issue any securities for
the purpose of financing itself without the approval of the Investors.
2. The Investors will have a right of first refusal on any sale of
securities by Ultradata until May 10, 2001.
The two Investors have committed to purchase additional preferred stock
and warrants in certain circumstances as of the date of this report,
both covenants have expired.
Preferred stock dividends are comprised of the following:
Value of common shares issued $ 31,868
Value of warrants issued 284,089
Value of options issued 215,854
Beneficial conversion feature of
preferred stock 811,189
Cumulative preferred stock dividend 113,625
---------
Total $ 1,456,625
=========
In June 2001, the Company reached an agreement in principle with the
holders of the Series A Preferred Stock whereby the Series A shares
will be exchanged for secured debt instruments in a principal amount
equal to the current conversation value of the Series A shares plus 10%
of the face value. Under this arrangement, the Company will pay $70,000
per month through October 2001 and $90,000 thereafter until the debt
is satisfied.
NOTE 21 SUBSEQUENT EVENTS
(A) Conversion of Preferred Stock
During March 2001, preferred shareholders converted 28 shares of preferred
stock into 56,118 shares of common stock.
(B) Factoring Agreement
On July 3, 2001, the Company entered into an accounts receivable factoring
agreement for a maximum facility of $500,000. Under the agreement, the
factor advances 80% of the face value of the receivables sold by the
Company. The Company is charged a variable percentage fee based upon the
length of the collection period. All of the Company's accounts receivable,
contracts, inventories, and intangibles are pledged as collateral under
this agreement.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Ultradata Systems, Incorporated
By:
/s/ Monte Ross
Monte Ross, Chairman
In accordance with the Exchange Act, this report has been signed below
by the following persons, on behalf of the registrant and in the capacities
and on the dates indicated.
July 20, 2001
/s/ Monte Ross
Monte Ross
Chief Executive Officer and Chairman of the Board
July 20, 2001
/s/ Ernest Clarke
Ernest Clarke
Chief Financial and Accounting Officer, Director
July 20, 2001
/s/ Mark L. Peterson
Mark L. Peterson
Director
July 20, 2001
/s/ Donald Rattner
Donald Rattner
Director
July 20, 2001
/s/ H. Krollfeifer, Jr.
H. Krollfeifer, Jr.
Director
* * * * * * * * * * * *
EXHIBIT 10-h(1)
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS OF
SERIES A CONVERTIBLE PREFERRED STOCK OF
ULTRADATA SYSTEMS, INCORPORATED
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
The undersigned officer of Ultradata Systems, Incorporated, a Delaware
corporation (the "Corporation"), pursuant to the provisions of Section 242 of
the General Corporation Law of the State of Delaware, does hereby make this
Certificate of Amendment of the Certificate of Designations, Preferences and
Rights of Series A Convertible Preferred Stock, originally filed with the
office of the Secretary of State of the State of Delaware on May 12, 2000,
(the "Series A Certificate of Designations"), and does hereby state and
certify that pursuant to the authority expressly vested in the Board of
Directors of the Corporation by its Certificate of Incorporation, as amended,
originally filed with the office of the Secretary of State of the State of
Delaware on January 9, 1989, the Board of Directors of the Corporation duly
adopted a resolution proposing and declaring advisable the following amendment
to the Series A Certificate of Designations:
RESOLVED, that the Series A Certificate of Designations is hereby amended as
follows:
(1) by striking out the definition of "Conversion Price" appearing at the
end of Section 5(b) in its entirety and substituting the following:
"Conversion Price" means, as of any Conversion Date or other date of
determination, the lower of (x) the Base Price and (y) 75% of the
average of the Closing Bid Prices on the Principal Market of the
Common Stock in the five (5) Trading Days immediately preceding such
date; provided, however, that the Conversion Price will be reduced an
additional 5% if the securities of the Corporation are not listed on
the Principal Market, each in effect as of such date and subject to
adjustment as provided herein.
(2) by striking out the definition of "Floor Price" appearing at the end
of Section 5(b) in its entirety.
(3) by adding a new Section 5(j) as follows:
(j) Conversion Cap. Except as otherwise provided herein, beginning on
the date of this amendment and ending December 31, 2001, the Corporation
shall not be required to issue any shares of Common Stock upon
conversion of the Series A Convertible Preferred Stock in any rolling
30-calendar day period, collectively and in the aggregate, in excess
of 10% of the cumulative trading volume of the Corporation's Common
Stock for the twenty two (22) trading days prior to and including the
date of conversion as reported by Bloomberg (the "Conversion Cap").
Provided, further, that any portion of the Conversion Cap not utilized
during any 30-day period shall not be carried forward to any subsequent
periods.
Through December 2001, no Investor shall be issued, upon conversion of
Series A Convertible Preferred Stock, shares of Common Stock in an
amount greater than the product of (x) the Conversion Cap amount
multiplied by (y) a fraction, the numerator of which is the number of
shares of Series A Convertible Preferred Stock issued to such Investor
pursuant to the Securities Purchase Agreement and the denominator of
which is the aggregate amount of all the Series A Convertible Preferred
Stock issued to the Investors pursuant to the Securities Purchase
Agreement (the "30-Day Cap Allocation Amount"). In the event that
any Investor shall sell or otherwise transfer any of such Investor's
Series A Convertible Preferred Stock, the transferee shall be allocated
a pro rata portion of such Investor's 30-Day Cap Allocation Amount. In
the event that any holder of Series A Convertible Preferred Stock shall
convert all of such holder's Series A Convertible Preferred Stock into
a number of shares of Common Stock that, in the aggregate, is less than
such holder's 30-Day Cap Allocation Amount, then the difference between
such holder's 30-Day Cap Allocation Amount and the number of shares of
Common Stock actually issued to such holder shall be allocated to the
respective 30-Day Cap Allocation Amounts of the remaining holders of
Series A Convertible Preferred Stock on a pro rata basis in proportion
to the number of Series A Convertible Preferred Stock then held by each
such holder. In no event shall this Section 5(j) limit the Investors'
mandatory redemption rights under Section 6 hereof.
The aforesaid Resolution was duly adopted by the written consent of the holders
of more than sixty-six and two-thirds percent (66b%) of the outstanding shares
of Series A Convertible Preferred Stock, in accordance with Section 242 of the
General Corporation Law of the State of Delaware and Section 20 of the Series
A Certificate of Designations.
IN WITNESS WHEREOF, Monte Ross, Chief Executive Officer of the Corporation,
under penalties of perjury, does hereby declare and certify that this is the
act and deed of the Corporation and the facts stated herein are true and
accordingly has signed this Certificate of Amendment of Certificate of
Designations as of this 9th day of March 2001.
ULTRADATA SYSTEMS, INCORPORATED
By: /s/ Monte Ross
Name: Monte Ross
Title: Chief Executive Officer
* * * * * * * * * * * *
EXHIBIT 16
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 1
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) April 6, 2001
ULTRADATA SYSTEMS, INCORPORATED
(Exact name of Registrant as Specified in its Charter)
Delaware 0-25380 43-1401158
(State of Incorporation) (Commission File (IRS Employer
Number) Identification No.)
9375 Dielmann Industrial Drive, St. Louis, MO 63132
(Address of principal executive offices)
(314) 997-2250
Registrant's Telephone Number
Amendment No. 1
This amendment is being filed to include Exhibit 1 and to respond to the
statement in the last paragraph of Exhibit 1.
Item 4. Change in Registrant's Certifying Accountant
On April 6, 2001, BDO Seidman, LLP ("BDO Seidman"), Ultradata's
principal independent accountant, resigned from its engagement to audit
Ultradata's financial statements for the year ended December 31, 2000.
The report of BDO Seidman on Ultradata's financial statements for the
year ended December 31, 1999 did not contain an adverse opinion or a
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope, or accounting principles.
Ultradata and BDO Seidman have not, in connection with the audits of
Ultradata's financial statements for the years ended December 31, 2000 or
December 31, 1999, had any disagreement on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreement, if not resolved to BDO Seidman's satisfaction, would have
caused BDO Seidman to make reference to the subject matter of the disagreement
in connection with its reports.
Advice regarding management during 2000 audit
---------------------------------------------
During the audit of Ultradata's financial statements for the year 2000,
BDO Seidman informed the Audit Committee of Ultradata's Board of Directors
that information had come to its attention which it believed indicated that
members of Ultradata's management, including its Chief Executive Officer, had
attempted to mislead one of Ultradata's customers. Based on that information,
BDO Seidman orally advised the Audit Committee that it was unwilling to rely
on the representations of Ultradata's Chief Executive Officer.
On April 5, 2001, Ultradata's Board of Directors met to review the
evidence regarding the conduct of its Chief Executive Officer and to consider
BDO Seidman's statement that it could not rely on the Chief Executive
Officer's representations. As a result of that review, the Board of Directors
adopted a number of internal controls procedures, including the preparation of
a code of business ethics, the appointment of an ombudsman to facilitate
implementation of the code of business ethics, and the separation of the
office of Chief Executive Officer from the office of President. The Board
determined, however, that further remedial action was not warranted by the
facts presented, having concluded (1) that there has never been an allegation
of wrongdoing by the Chief Executive Officer other than this one event; (2)
that the type of conduct in which the Chief Executive Officer engaged was not
uncommon in wholesale marketing, and (3) that the customer which was the
subject of this event had been fully informed of the relevant facts in writing
on two occasions and had stated its intent to remain a customer of Ultradata.
On April 6, 2001, Ultradata reported to BDO Seidman the actions taken by the
Board of Directors, and BDO Seidman resigned from its engagement.
Advice regarding likelihood of a modification of opinion on 2000 financials
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On February 9, 2001, BDO Seidman orally advised the Audit Committee that
it would require Ultradata's management to make representations that would
support a determination that Ultradata is able to continue as a going concern.
Because BDO Seidman subsequently determined that it was unwilling to rely on
management's representations, there was no determination made as to
Ultradata's ability to continue as a going concern. At no time did BDO
Seidman advise the Audit Committee that it was likely to modify its opinion to
reflect substantial doubt as to Ultradata's ability to continue as a going
concern.
Advice regarding internal controls during 1999 audit
----------------------------------------------------
In a report to the Board of Directors dated April 29, 2000, BDO Seidman
advised the Board that Ultradata personnel had not received sufficient
training regarding accounting issues or SEC reporting, as a result of which
said personnel were unable to provide the information necessary to adequately
determine the proper accounting on a timely basis. In response to this advice
and after further discussion with BDO Seidman, Ultradata retained a consultant
to assist in preparation of its reports to the SEC.
In the same report dated April 29, 2000, BDO Seidman advised the Board
that Ultradata did not perform certain quarter-end and year-end closing
procedures necessary to insure the accuracy of its general ledger, including
the coordination of the receipt of audited financial statements from
Ultradata's significant equity investees. In response to this advice,
Ultradata's one remaining significant equity investee has accelerated the
preparation of its audited financial statements.
Advice regarding internal controls during review of March, 2000 quarterly
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report
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In a letter to the Audit Committee of Ultradata's Board of Directors
dated July 31, 2000, BDO Seidman advised that Ultradata's procedures in the
first quarter of 2000 with respect to incorporation of financial information
from a significant equity investee into Ultradata's quarterly report had been
inadequate. In response to this advice, Ultradata filed an amendment to the
quarterly report.
Ultradata has authorized BDO Seidman to respond fully to inquiries from
the successor accountant concerning the subject matter discussed in this
report.
On April 12, 2001, Ultradata retained the firm of Weinberg & Company,
P.A., C.P.A. to audit Ultradata's financial statements for the year ended
December 31, 2000. At no time during the past two fiscal years or any
subsequent period did Ultradata consult with Weinberg & Company, P.A., C.P.A.
regarding either the application of accounting principles to a specified
transaction or the type of audit opinion which might be rendered on
Ultradata's financial statements or any matter of the sort described above
with reference to BDO Seidman.
EXHIBITS
1. Letter from BDO Seidman, LLP. (A portion of this exhibit has been
omitted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidentiality under Rule 24b-2).
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 hereunto duly authorized.
ULTRADATA SYSTEMS, INCORPORATED
Dated: April 25, 2001 By:/s/ Monte Ross
Monte Ross
Chief Executive Officer
* * * * *
Exhibit 1
NOTE: CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR A PORTION OF THIS EXHIBIT.
THAT PORTION HAS BEEN REMOVED FROM THIS FILING, AND HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE
24-b-2. THE PLACE WHERE THE PORTION HAS BEEN REMOVED IS INDICATED THUS:
* * * (Confidential Treatment) * * *
April 17, 2001
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC 20549
Dear Sir or Madam:
We have been furnished with a copy of the response to Item 4 of Form 8-K for
the event that occurred on April 6, 2001 which has been filed April 13, 2001,
by our former client Ultradata Systems, Inc. We agree with the statements
made in response to that item insofar as they relate to our firm, except as
follows:
We were advised by the Audit Committee of the results of an independent
counsel's investigation undertaken to determine the legality of actions by
management * * * (Confidential Treatment) * * * . The Audit Committee
developed a series of recommended actions to be voted upon at the April 5,
2001 Board meeting. Upon learning of the Board's decision to reject the
Committee's recommendations regarding a management member, we notified the
Company and the Audit Committee of our resignation on April 6, 2001,
indicating that we had determined we could no longer rely upon management
representations.
We had previously advised the Audit Committee that had we been able to issue
our report on the annual financial statements for the year ended December 31,
2000, that opinion would have likely been modified to reflect substantial
doubt as to the registrant's ability to continue as a going concern.
Very truly yours,
/s/ BDO Seidman, LLP