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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, 1998
( )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
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
9375 Dielman Industrial Drive, St. Louis, MO. 63132
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(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 X No
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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: $7,234,075
The aggregate market value at March 31, 1999 of the voting stock held
by non-affiliates, based on the closing price as reported by NASDAQ National
Market System (NMS), was approximately $3,938,065. The aggregate market value
has been computed by reference to a share price of $1.6875 (The price at which
stock was sold, or the average bid or asked price of such stock on March 31,
1999. 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
March 31, 1999, was 3,154,793.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: Yes NO X
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DOCUMENTS INCORPORATED BY REFERENCE: None
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FORWARD-LOOKING STATEMENTS: NO ASSURANCES INTENDED
This Item (1) contains certain forward-looking statements regarding the
Company, its business prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. A major risk inherent in the implementation of the Company's revised
business plan, referred to herein is executing the plan within the constraint of
financial resources available to the Company at this time. Factors that may
affect such forward-looking results, including statements about backlog, the
Company's ability to successfully develop new products for new markets; customer
acceptance of new products; the possibility of the Company losing a large
customer or key personnel; the Company's ability to manage growth and to
successfully integrate recent strategic marketing and product development
alliances; the impact of competition on the Company's revenues; delays in the
Company's introduction of new products; the possibility of the Company failing
to keep pace with emerging technologies, and the preparation by the Bank and
acceptance by the Company of complete documentation, including, among other
items, loan covenants.
Accordingly, no assurances can be given that events or results
mentioned in any such forward-looking statements will in fact occur. When used
in this discussion, words such as "believes" and phrases such as "are expected"
and similar expressions are intended to identify forward-looking statements, but
are not the exclusive means of identifying forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this report. The Company undertakes no
obligation to revise any forward-looking statements in order to reflect events
or circumstances that may subsequently arise. Readers are urged to carefully
review and consider the various disclosures made by the Company in this report
and in the Company's reports filed with the Securities and Exchange Commission.
The analysis of the Company's financial condition, capital resources and
operating results should be viewed in conjunction with the accompanying
consolidated financial statements, including the notes thereto.
PART I
Item 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Ultradata Systems, Incorporated ("The Company") is engaged in the
manufacture and marketing of hand-held data retrieval devices that employ
proprietary data compression technology developed by the Company. The Company
was formed, as a corporation in 1986, named Laser Data Technologies, Inc. The
name was changed, in November 1994, to Ultradata Systems, Inc., to better
reflect the Company's business orientation.
The Company's primary focus is in research, development, and marketing of
electronic consumer travel products which utilize the Company's proprietary data
compression technology for storing large quantities of information on, and
retrieving it rapidly from, a microprocessor memory chip. Each of the Company's
consumer products is designed to allow the consumer to access useful information
stored in a convenient manner. The Company's products generally sell at retail
prices between $19.95 and $99.95 per unit. Travel*Star GPS, introduced in early
1998 using global positioning satellite data, sold at retail prices ranging from
$299.95 to $399.95.
CONSUMER PRODUCTS
The Company's Consumer Products Division primarily develops and markets
hand-held travel computers, the majority of which bear the ROAD WHIZ(TM)
registered trademark. Various models contain custom developed data to provide
the traveler with directions and information regarding the services available
along the U.S. Interstate Highway System. Some versions include city information
as well. The travel database contained in most of the models offered by the
Company is proprietary and contained on a memory chip built into each unit. The
travel database contains over 100,000 services. This service information
includes destination, mileage, gas stations, hotels, motels, hospitals, 24-hour
restaurants, and highway patrol emergency numbers along the United States
Interstate Highway System. During 1998, the Company entered into an agreement
with the American Automobile Association (AAA) to develop an expanded data base
which includes restaurants, lodging facilities, camping and service facilities
approved by AAA. This database containing in excess of 100,000 facilities, and,
where available, their AAA rating or AAA approved status, will be incorporated
in a custom hand-held travel computer called the Trip Wizard(R). This unit is
expected to be available in April 1999.
The hand-held travel computers made by the Company provide routing and
services similar to other travel software products in the market. The Company's
database containing in excess of 100,000 services, is proprietary to the
Company's travel computers. The Company sells its 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. A major factor in the sales decline
experienced in 1998 was the inability to secure new private label volume to
replace a 1997 private label premium program. This program accounted for $6.9
million, representing 52.1% of 1997 consumer sales. The private label market is
viewed as an important strategic growth opportunity for the Company. The
Company's agreement with the American Automobile Association (AAA) represents an
important commitment to private label products. Trip Wizard(R) will be marketed
to AAA's affiliates, consisting of 93 clubs, 1,100 offices and over 41 million
members in the United
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States, as well as to specialty retailers.
MAJOR PRODUCT OFFERINGS
ROAD WHIZ(TM) FAMILY
The ROAD WHIZ(TM) hand-held travel computer was introduced during 1990.
Since 1990, the Company has developed enhanced travel computer versions, based
on the of the ROAD WHIZ(TM), including ROAD WHIZ(TM) PLUS, ROAD WHIZ(TM) ULTRA
or ROAD WHIZ(TM) COMPANION, ROAD & CITY, TOWN & COUNTRY, and UltraFinder(TM) .
The strategy for the Road Whiz(TM) family of products is to expand its line of
travel computers to include additional features and functions at generally lower
retail prices.
AUTO PILOT
This product is a ROAD WHIZ(TM) type unit similar to the Town &
Country, described below, and utilizes the Company's proprietary technology and
designs. Completion of the agreement is dependent upon satisfactory test
marketing of the product, which is ongoing, and at the sole discretion of
Telebrands. Auto Pilot will be manufactured and marketed by Telebrands, upon
completion of a signed agreement with Telebrands. Telebrands will employ a broad
range of television advertising, including spot ads and an infomercial to
generate product awareness and mail order sales, before presenting the product
in mass merchandise retail, drug and other retail outlets. Telebrands "As Seen
On TV" logo has reserved space commitments for its products in a broad range of
retail outlets. The proposed agreement calls for a minimum of 1 million units in
1999. For each unit sold the Company receives a royalty. During 1998, Telebrands
purchased, at their expense, long lead-time tooling and prototype parts for
production. Telebrands plans to complete infomercials and spot advertisements,
during the first quarter of 1999.
ROAD WHIZ(TM) PLUS
ROAD WHIZ(TM) PLUS was introduced in 1991, and has been enhanced each
year. It provides complete routing information for over 90 cities giving driving
distances, driving time and detailed directions to major cities. ROAD WHIZ(TM)
ULTRA contains over 60,000 services and has double the memory capacity of first
generation travel computers. This unit is marketed in mass merchandise
retailers, which included a fourth quarter promotion in 3,000 Kmart stores, and
will be marketed through Kmart in 1999.
ULTRAFINDER
ULTRAFINDER(TM) was introduced in 1995. It is a powerful hand-held
travel unit marketed by the Company. It contains over 60,000 services and
specific routes to over 500 cities, giving distance and driving time.
ULTRAFINDER(TM) features a two-line display and an updatable plug-in memory
module. It was initially priced to sell at $99.95 at retail, although the
company has offered promotions of this product at $49.95. During fiscal 1997,
the Company sold a private label version of this product, realizing revenue in
excess of $6.9 million. Reductions in both purchased and manufacturing costs
have made ULTRAFINDER(TM) a marketable item in 1998 at a $49.95 retail
price point.
SUPER ROAD WHIZ(TM)
The SUPER ROAD WHIZ(TM) was introduced during 1997. It lists interstate
highway services including gas stations, restaurants, motels, campgrounds,
malls, tourist sites and hospitals in over 160 major cities. During 1998, SUPER
ROAD WHIZ(TM) was featured on the QVC television network selling over 90,000
units in a single day, and through credit card insert mailings.
TOWN & COUNTRY
The TOWN & COUNTRY, introduced in 1996, provides a list of 60,000
services along the nation's highways, parkways and toll roads and directions to
over 7,000 towns on Interstates and U.S. Highways. The Company sells this
product through upscale retail locations, such as Brookstone and Rand McNally.
The ROAD WHIZ(TM) RV SPECIAL
The ROAD WHIZ(TM) RV SPECIAL was introduced in 1997. It provides
interstate services, U.S. highway data, including distance and driving time
between towns with populations of over 1,000, and city-to-city directions for
over 250 cities, including shortest complete route, total distance, and driving
time.
KIDS ROAD WHIZ(TM)
The KIDS ROAD WHIZ(TM), introduced in December 1996, is a travel
computer providing directions to amusement parks, water parks and other
entertainment sites for children traveling with parents. It also includes word
games. Sales of this item, to date, have been minimal and are not expected to
make a significant contribution to consumer product sales in the future.
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GOLF FINDER & GOLF GUIDE
GOLF FINDER(TM) and GOLF GUIDE represent the Company's two entries into
the sports leisure and travel market. Introduced in 1994, GOLF FINDER(TM) is a
hand-held data retrieval device which contains information on over 13,000 U.S.
golf courses, including greens fees, restaurant facilities, phone numbers, types
of terrain, travel directions to the course, availability of carts, caddies,
clubs, and other course features. GOLF GUIDE(TM) also contains a four-player
scorekeeper with player name entry and records individual players' scores, in
addition to the golf course information in GOLF FINDER(TM). The Company acquired
the golf course database for these products from a third party. The Company is
required to pay this third party a royalty of 10% based on net sales and 20% for
upgrades to the software developer.
HOME & GARDEN/GARDEN GURU
The HOME & GARDEN and GARDEN GURU products were introduced in late 1996
and 1997, respectively, to provide a convenient home reference on first aid and
helpful household hints on a variety of subjects, including spot removers and
home decor. For the garden enthusiast, information is provided on planting and
plant care, with over 4,000 pages of related information. The Company developed
this database with the help of the Missouri Botanical Garden, a non-profit
foundation dedicated to the development and preservation of plant species.
TRAVEL*STAR(TM) GPS
TRAVEL*STAR GPS introduced in January 1998 combines the database
information of ROAD WHIZ ULTRA(TM) with global positioning satellite technology,
to determine a vehicle's exact longitude and latitude. The Company offers
optional road service and detail direction subscription in conjunction with
another service provider, Protection One, Inc., through a cellular phone. With
additional plug-in memory modules, the unit is able to provide detailed
directions for most major cities. The unit, which is portable, retails for $299
to $399. Factory installed systems range from approximately $1,000 to over
$3,000. TRAVEL*STAR is marketed through SkyMall in-flight magazine and by
Radio Shack, in its catalog and Radio Shack Unlimited, in store catalog
programs.
In January 1999, the Company demonstrated a prototype of an advanced,
fully portable, in-car GPS navigation system, called TRAVEL*STAR 24. This
unit includes directions and information for more than 200,000 highway and city
services, turn by turn directions to hundreds of major intersections, sites of
interest in each of more than 250 metropolitan areas and directions to over
12,000 smaller cities and towns. The unit continually displays heading and
distance to the desired destination. Voice output identifies turns and alerts
the driver to deviations from the calculated route. This item is expected to be
available in August, 1999.
LASER SYSTEM CONTRACTS
The business of the Company when it was initially founded was primarily
focused on the fulfillment of research and development contracts leading to the
manufacture of laser communications systems. The Company submits bids for laser
system research and development contracts and production contracts to government
and government-related agencies, typically under cost plus or fixed-fee
contracts. Most of the Company's research and development laser systems
contracts are beyond one year in scope. Upon the award of a research and
development contract, the Company realizes revenues from progress payments
received during the course of completion of such contracts. Required capital
equipment is, usually, supplied to the Company by the customer. The technology
developed during the Company's performance of a research and development
contract becomes the exclusive property of the contracting party.
In 1995, the Company received a $1.7 million government production
contract from the Yuma Proving Ground to manufacture their Laser Pointing and
Tracking System PATS design. For the two years ended December 31, 1998 and 1997,
the Company realized revenues of $250,451 and $563,251, respectively, from this
contract. The Company has completed nearly all of the outstanding work orders
related to this program and does not anticipate this segment to use significant
resources in future years. The Company is focused on its consumer products
business and has neither invested in this market, nor will there be any
significant costs associated with cessation of this function, upon completion of
existing contracts.
MANUFACTURING
The Company does not manufacture any of its consumer products and is
entirely dependent upon third parties to manufacture and assemble the components
comprising its products. The Company generally receives annual pricing from each
of its manufacturers based upon estimated annual quantities. Thereafter, the
Company releases individual purchase orders for production. The Company's
arrangements with each manufacturer are terminable at will by either party. If
either or both arrangements were to be terminated, the Company believes that
alternate sources would become readily available. The sudden loss of one of the
manufacturers or unanticipated interruptions or delays from present
manufacturers would likely result in a temporary interruption to the Company's
planned operations. The Company intends to maintain its practice of engaging
subcontractors to meet its future manufacturing
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requirements.
Raw materials used by the Company include hardware, keypads, computer
memory chips, microprocessors, and other discrete electronic parts used in
building circuit boards. Most of these are standard stock items that are
generally available from multiple vendors. To date, the Company has been able to
obtain adequate and timely supplies of raw materials. The Company presently has
one sole source component, the antenna for the GPS product, which is supplied by
Talon Research & Development Ppty., Ltd., ("Talon"), in which the Company owns
18.9% of Talon, as of December 31, 1998. The inability to obtain timely or
sufficient deliveries of this sole-source component and certain custom parts
would materially disrupt production until an alternative vendor could be located
and qualified, and production could resume.
BACKLOG
As of December 31, 1998, the Company's total backlog was approximately
$15,300, versus a backlog of approximately $280,000 on December 31, 1997.
Backlog is generally very low at December 31, due to minimal post holiday demand
and normally short retailer lead times for standard products, which can be
shipped from inventory. The Company has occasionally experienced cancellations
or postponements in its delivery of orders.
SALES AND MARKETING
The Company's sales and marketing strategy is to remain the leading
supplier of low-cost, portable travel computers. To support this strategy, the
Company believes it must offer a growing line standard and custom travel
computers and GPS based travel computers. Such new devices are principally aimed
at providing portability, increased consumer safety and security, more features
and functionality, at affordable prices when compared to travel information
devices available from others sources.
The Company identifies its prospective customers and markets through a
combination of direct mail, telemarketing, media advertising, tradeshow
participation, and periodic appearances on home shopping television channels.
The Company advertises extensively in magazines, travel oriented journals and
periodically distributes promotional materials to increase market awareness of
its products. Since going public in 1995, the Company has focused its primary
marketing efforts on establishing customer relationships with local and regional
retailers and upscale retail outlets. During 1998 and 1997, the Company has
pursued programs to develop new markets by developing custom versions of travel
computers, and expand distribution to nationally recognized electronics and mass
merchandise retailers (e.g. Radio Shack and Kmart).
In December 1998, the Company entered into an agreement with a major
consumer products promotion company called Telebrands, Inc., to test direct
marketing of a custom Road Whiz product, to be called Auto Pilot(R). If
telemarketing tests, which commenced in December 1998, prove successful, this
item will be manufactured and marketed by Telebrands. The market test includes
analysis of the results of two different television commercials, in selected
markets, and will include an info-mercial, which will be aired in April 1999.
The Company's products are also marketed through independent sales
representatives, mail order
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catalogs and office supply stores. In fiscal 1998, the Company incurred
$2,442,366 in advertising, promotion, and marketing program expenses, as
compared to $2,066,472 in 1997. The Company incurred $224,104 in 1998 compared
to $221,705 during 1997 to advertise in the SkyMall(TM) magazine, the popular,
airline, buying guide. A direct mail program similar to one completed in 1997
was undertaken again in 1998 with Roy Thomas, a direct mail merchandiser. It
included approximately 31 million advertising inserts distributed beginning with
October 1998 oil and bank credit card statements. Additionally, the Company
incurred $145,900 advertising expenses for a Road Whiz promotion at over 3,000
Kmart stores.
The Company formed a joint product and marketing alliance with
SmartTime(TM) Network, in 1997, to develop and market e-mail and data retrieval
appliances on the Internet. Both parties agreed to share certain costs in the
project. During 1998, Intellidata Technologies Corp., the parent of SmartTime
Network, advised the Company that it was discontinuing the Smart Time operation.
Intellidata, agreed to transfer to the Company all software, documentation and
the hardware developed during the alliance, to the Company. In July, 1998,
Sci-Com, Inc., a privately held company based in Virginia, agreed to acquire the
existing business of SmartTime Network, and retain the SmartTime trade name for
its new operation. The Company entered into a new agreement with Sci-Com. Under
terms of the agreement, all software and documentation, including that acquired
from Intellidata was transferred to Sci-Com in exchange for a $400,000
promissory note due to the Company; to lease at nominal rental, network server
hardware acquired from Intellidata, and to fund expansions of the network. The
Company has fully reserved for the collectibility of the $400,000 note
receivable and accrued interest thereon. While the Company has no evidence that
Sci-Com is not financially viable, Sci-Com has not provided financial statements
as of December 31, 1998. The lack of financial statements does not permit the
Company adequate assurance of borrower's ability to repay the note. During 1998,
the Company loaned an additional $250,000 to Sci-Com. The loans are backed by
specific collateral, to facilitate network expansion of the Smart Time Network,
which will be undertaken during 1999.
DEPENDENCE ON CUSTOMERS
Roy Thomas, Inc., a direct mail customer, accounted for 21.6% or
$1,508,634 of 1998 consumer sales, compared to 14.5% or $1,918,987 of total
consumer sales, during 1997. The Company initiated sales to Kmart Corporation (a
large mass merchandise retailer), in a fourth quarter promotion, which totaled
$626,082 or 9.1% of total 1998 consumer sales.
During 1997, a major catalog promotion resulted in sales of
approximately $6.9 million or 52.1% of total sales to a single customer. The
promotion was completed in the fourth quarter of 1997 and there were no sales
related to this program in 1998.
For the two years ended December 31, 1998 and 1997, the QVC Network
sales totaled $1,379,148 and $349,223, respectively, representing approximately
19.7% and 2.6% of consumer sales for those years.
COMPETITION
Competition in the consumer electronics industry is intense. The
Company believes that the primary competitive factors necessary to maintain its
market leadership in the hand-held travel market include product features such
as performance, product reliability, functionality, ease of use, product
reputation, price, timeliness of product upgrades, and quality of customer
support and service. The Company believes that price is a significant factor in
determining future sales and the Company carefully monitors this. The Company
regards $19.95 as an important retail consumer price for the Company's products
to be successful in the mass market. The Company introduced ROAD WHIZ(TM), and
through market driven price reductions in components and increased use of low
cost contract manufacturing, is now priced to sell at retail for $19.95, as a
mass market item. The Company was able to introduce the product, on a
promotional basis in a major mass merchandise retailer, during 1998. The Company
intends to explore other long-term relationships with mass merchandise
retailers.
The segment of the electronics industry in which the Company is engaged
is populated by competitors with substantially greater financial resources than
the Company, and characterized by rapid and significant technological advances,
which often result in rapid partial or total obsolescence of products. The
Company is not aware of any competitor selling affordable hand-held travel
computers. There are other GPS products at substantially higher prices,
including factory installed in-car units. Although the Company attempts to
protect its technology and patents wherever possible, it is unable to provide
any assurances that its patents and trade secrets will not be circumvented in
the future. The Company faces competition from developers of travel software
products with visual mapping displays. To protect the Company's dominant market
position in affordable travel computers, the Company invested $672,090 or
approximately 9.3% of its 1998 revenues, in research and product development,
compared to $1,022,095 or 7.7% in 1997. There can be no assurance, however, that
the Company will be able to develop or acquire new products or increase market
channels at a rate sufficient to keep the Company competitive. The Company also
cannot guarantee that new or updated product updates will ultimately achieve
market acceptance.
RELATED PARTIES
POIS, INC.
The Company ended operations of its Detroit based Personal Onboard
Information Systems, Inc. subsidiary, effective December 31, 1997. There were no
material effects on 1998 results from termination of POIS, Inc. operations.
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TALON RESEARCH & DEVELOPMENT PPTY., LTD.
In March 1998, the Company acquired an 18.9% ownership interest in
Talon Research & Development Ppty., Ltd. (Talon) of Auckland, New Zealand for
$282,150 in cash. Talon develops, manufactures and markets electronic components
and marine instruments including Global Positioning Satellite (GPS) receiver
units, including the antennas used in the Company's Travel*Star GPS product
line. Financial results of Talon, for the period April through December, 1998,
are included in the Company financial statements on the equity method. On August
12, 1998, the Company paid $314,162 for an option to acquire an aggregate
interest of up to 50.1% of the outstanding common stock of Talon for
approximately $820,000. The option is exercisable through April 2, 1999.
As a result of the Company's reduced cash positions caused by the
unanticipated poor fourth quarter results, the Board of Directors approved an
alternative plan to conserve cash and less aggressively increase its investment
in Talon. The revised plan further addresses long standing obligations to help
Talon meet its financial obligations. Under the original plan, the Company spent
$314,162 to purchase an option to acquire additional shares in Talon to raise
its stake to 50.1%. The Company was obligated to make an additional payment of
approximately $820,000 upon exercise of this option. Under the revised plan the
$314,162 would be applied to purchase an additional 6.0% interest in Talon,
which would increase the Company's ownership in Talon to approximately 25%. The
terms of this agreement are currently under review by Talon, which the Company
believes conforms to earlier negotiations. Upon acceptance by Talon and the
timely completion of the pending bank credit facility, the Company would provide
a twelve month, standby letter of credit to Talon's bank in amount of $400,000,
to secure a new financing arrangement for Talon.
For the year ended December 31, 1998 Talon earned approximately
$687,000, compared to a nine month period ended December 31, 1997 which resulted
in a loss of approximately $370,000. Talon changed its reporting period during
1998. The Company realized other income of $118,733, representing its 18.9%
stake in Talon during the year. Talon management indicates that its forward
orders (backlog) as of December 31, 1998 totaled approximately $3.7 million.
SCIENTIFIC COMMUNICATION & CONTROLS CORP.
The Company formed a joint development and marketing agreement, in July
1998, with Scientific Communication & Controls Corp. (Sci-Com) of McLean,
Virginia. Sci-Com acquired the operating rights to the SmartTime Network from
Intellidata Technologies, Corp. Sci-Com will complete the implementation of
network software, to support the Company's E@syMail and internet personal data
assistant products. To facilitate this development and testing of the Company's
products, which commenced in the fourth quarter of 1997, the Company
transferred all software and documentation of the service software acquired
from Intellidata, in exchange for a promissory note of $400,000, bearing
interest at prime rate of 7.75% as of December 31, 1998. In addition, the
Company leased computer equipment acquired from Intellidata to Sci-Com at rates
below market value. The Company advanced Sci-Com $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 Sci-Com up to an additional $400,000 in additional funds
to complete network development, of which $200,000 was advanced as of December
31, 1998. 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 Sci-Com). The agreement also provides for the
optional conversion of the loan into a 10% equity interest in Sci-Com, at the
Company's sole discretion.
RESEARCH AND DEVELOPMENT
The Company performs ongoing research and development, seeking to
improve existing products and to develop new products. These activities are
primarily done at the Company's corporate headquarters. The Company periodically
engages outside computer system design consultants to expedite the completion of
the development and test stages.
In 1998, the Company incurred $672,090 in research and development
costs compared to $1,022,095 in 1997. Research activities for 1998 were
primarily focused on continued development of Travel*Star GPS, Travel*Star 24,
introduced at the January 1999 consumer electronics show, E@syMail personal data
assistant product and the development of a new database to incorporate American
Automobile Association (AAA) facility and rating data to support the TRIP
WIZARD(TM) product introduced at he Consumer Electronics Show in January 1999.
These three major projects accounted for 83.0% of all research and development
expenses in 1998.
The Company incurred $158,558 during 1998, compared to $321,007 in
1997, for research and development of it portable Global Positioning Satellite
(GPS) based travel computer, called Travel*Star. This product has a GPS
satellite receiver with the ROAD WHIZ(TM) data base and is believed to be the
first affordable and portable GPS Driver Information System on the market. In
addition, $166,657 was incurred on research and development of Travel*Star
24 was exhibited at the Consumer Electronics Show in Las Vegas. Travel*Star
24 incorporates the best features of Travel*Star, in a unit with an
integral GPS antenna, expanded information display capabilities and increased
functionality, including turn by turn directions in most major cities.
Travel*Star and Travel*Star 24 will continue to be marketed through
Radio Shack in its catalog program and Radio Shack Unlimited (RSU) program,
through Sky-Mall in-flight catalogs, and other specialty retail outlets.
E@syMail and personal data assistant units with Internet connect capabilities
incurred spending on research and development totaling $232,825 during 1998.
DATABASE RESEARCH
The Company believes that a broad and accurate proprietary database is
one of the most important
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factors for the competitive success of the consumer product line. The potential
for additional net sales, as well as the need to preserve the Company's
reputation for accuracy and reliability, requires that the Company continuously
validate and update its database. The Company uses various means to update its
ROAD WHIZ(TM) database, including publicly available geographic and demographic
data. A significant part of the ROAD WHIZ(TM) database is compiled by "Road
Helpers." Road Helpers are generally retirees and others that travel
extensively. Generally, the Road Helpers are nominally compensated by the
Company.
The Company maintains an on-site time staff of researchers who review
and augment the data gathered by the Road Helpers. In addition to the Road
Helpers, the research staff contacts travel services and Chambers of Commerce
across the country to gather other information.
During the fourth quarter of 1998, the Company reached an agreement
with AAA to develop a product which combined the Company's expertise in hand
held travel computers with the extensive database of travel, food and lodging
information compiled by AAA for the benefit of their members. The Company has
combined its travel database with that of AAA to provide a new information base
for the AAA ROAD WIZARD(TM). This new product will initially be marketed by the
91 auto clubs affiliated with AAA to the 41,000,000 AAA members in North
America, and through AAA's 1100 local offices throughout the United States and
Canada.
The Company's Research and Development Group includes two full-time
software engineers and two hardware design engineers. During 1998, the Company
employed various subcontractors in order to augment its internal research and
development resources.
PATENTS AND TRADEMARKS
The Company files patent applications, when applicable, to protect its
technology, inventions and improvements. The Company owns four patents. The
patents cover its method of compressing data relating to travel information.
This compression technology permits the Company's travel products to store more
data on smaller and less expensive memory devices.
The Company has a second patent dealing with the methodology, which
enables its travel devices, to account for changes which occur when the traveler
crosses a state border. The Company believes that in order to manufacture a
similar product, a competitor would have to develop a substantially different
methodology, at considerable time and expense.
The Company has received a third patent, which relates to use of
electronic coupons for services, such as food or lodging, from handheld units,
and could apply to navigation information products such as Travel*Star 24.
In addition to its patents, the Company attempts to further restrict
access to its proprietary technologies, trade secrets and processes. Key
employees of the Company are covered by employment contracts containing
restrictive covenants. These covenants require key employees, as a condition of
their employment, to hold all proprietary information confidential. The Company
also restricts customers and visitors site access to confidential information.
There can be no assurance that the Company can be successful in its efforts to
protect either its patents or its proprietary technologies and processes.
EMPLOYEES
The Company currently has 26 full-time employees, including six
officers, all of whom are located at the Company's headquarters in St. Louis,
Mo. The Company employs six people in sales, customer service and shipping,
eight people in product and database research, five people in executive
management and administration, two people devoted to government contract work,
three people in product development, one person in inventory management, and a
president and chief executive officer. None of the Company's employees belong to
a collective bargaining union. The Company has never experienced a work stoppage
and believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company's headquarters and 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 maintains no manufacturing
operations on site and employs outside contractors to perform all of its
manufacturing requirements.
Aggregate rental expense totaled $119,236 for 1998, compared to
$120,088 in 1997. The Company believes that its facilities are adequate for the
Company's present and foreseeable requirements.
8
<PAGE> 9
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
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, 1997 and ending December 31, 1998.
<TABLE>
<CAPTION>
Bid Asked
--- -----
Quarter Ending High Low High Low
<S> <C> <C> <C> <C>
March 31, 1997 $ 7.88 $ 5.88 $ 8.80 $ 6.25
June 30, 1997 $ 6.94 $ 5.63 $ 7.38 $ 6.00
September 30, 1997 $ 8.25 $ 5.00 $ 8.50 $ 5.25
December 31, 1997 $ 7.88 $ 5.63 $ 8.25 $ 5.55
March 31, 1998 $ 6.50 $ 3.75 $ 6.75 $ 3.88
June 30, 1998 $ 4.50 $ 3.25 $ 4.88 $ 3.50
September 30, 1998 $ 4.63 $ 2.25 $ 4.75 $ 2.38
December 31, 1998 $ 3.13 $ 2.00 $ 3.50 $ 2.13
</TABLE>
(b) Shareholders
At March 3, 1999, there were 152 stockholders of record of the
Company's Common Stock. Based upon information from nominee holders, the Company
believes the number of beneficial owners of its Common Stock exceeds 1,100.
(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
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
The Company's net sales are derived from two business segments: (1)
consumer products, marketed through retailers, catalog companies, and direct
mail or other marketing agencies or groups as employed by the Company, and (2)
laser systems contract revenues, derived from research and development and
production contracts awarded by government agencies.
The following table summarizes the contributions of consumer products
and development contracts, respectively, to total net sales of the Company for
each of the last two years ended December 31, 1998. The table should be read in
conjunction with the audited financial statements for the periods indicated and
the related notes incorporated herein.
<TABLE>
<CAPTION>
Net Sales
For the Two Years Ended December 31,
(in Thousands)
1998 % 1997 %
<S> <C> <C> <C> <C>
Consumer Products $6,984 96.5 $13,254 95.9
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Laser System Contracts 250 3.5 563 4.1
--------------------------------------------------
$7,234 100.0 $13,817 100.0
==================================================
</TABLE>
Year Ended December 31, 1998 vs. Year Ended December 31, 1997
Consumer product sales for 1998 decreased by $6,270,176 (47.3%) to
$6,983,804. The decrease was entirely due to a $6.9 million order for private
label Ultrafinders designed and sold to a single customer in 1997, with no
corresponding program in 1998.
The Company was successful in making an initial penetration into mass
merchandise retailing with Kmart Corporation orders for over 40,000 units
totaling approximately $626,082 in sales, during the fourth quarter of 1998.
Kmart has indicated that it will continue to offer the Road Whiz product in
1999, and orders for second quarter 1999 delivery were received during March of
1999. Unit volume for standard hand-held travel computers, excluding the large
private label promotion in 1997, increased slightly (1.1%). The sales in 1998
compared to 1997 reflect reduction in the mass market retail price to $19.95.
The Travel*Star product was introduced through Sky-Mall in-flight catalog and by
Radio Shack, a large national electronics retailer in its consumer catalog and
Radio Shack Unlimited, an in-store catalog. Although unit volume was
disappointing to the Company, Radio Shack is committed to continuing the catalog
programs and evaluating further in-store sales opportunities.
Market channels which have traditionally been a part of the Company's
strategic plan, such as television shopping networks, continued in 1998 to
provide strong customer response, including a fourth quarter promotion totaling
over 90,000 Road Whiz units on the QVC home shopping channel. Credit card
mailing programs also continued to be an important component of 1998 sales.
Fourth quarter results, despite lower mass market price point, achieved much
higher sales than the fourth quarter of 1997, but the overall volume remains
substantially below expectations. These programs are being thoroughly revised to
improve the overall contribution on sales and to shift the financial risks
related to high advertising costs to the company bringing the program to the
customer.
The Company recognizes that retail electronics consumer products have a
relatively short life cycle due to the rapid advances of technology and intense
competition for premium retail shelf space. The Company has employed a
long-standing business strategy to expand its market channels in hand-held
information devices by leveraging its hardware and software platforms. The
Company has entered into an agreement with Telebrands, a privately held mass
marketer, which uses direct television advertising, and has access to a broad
range of retail outlets to expand mass market potential for the Company's hand
held travel products. Final test marketing of Auto Pilot is being conducted by
Telebrands and is expected to be completed by April 1999. Travel*Star 24 was
well received during the Consumer Electronics Show (CES) in Las Vegas, during
January 1999. Management and sales personnel are actively pursuing additional
marketing channels for this item, and expect to launch this unit in the second
half of 1999. Formal marketing arrangements and alliances like Telebrands, AAA,
and the acquisition of other marketing partners are critical for the future
growth and success of the Company.
Contract sales from laser systems totaled $250,271 for 1998, compared
to $563,251 for 1997. Contract sales were derived from progress billings against
government contracts to upgrade systems which provide high resolution trajectory
information on airborne objects. The original contract was received in 1995 and
was originally valued at $1.7 million. The contract contained an override
clause, which resulted in additional orders of $450,363 during the year 1997.
There were no additional orders in 1998. At December 31, 1998, there was
approximately $9,300 in contract revenue remaining. Costs for contract sales, in
1998, exceeded revenues by $20,021 or 8.0% of sales compared to a $271,034, or
48.1% gross margin on sales for 1997. The 1998 loss is due primarily to travel
for additional on-site work to complete and test installations and costs
incurred for contract programming services to replace the services of a key
person who had been involved during the entire project who left the Company
prior to completion of the project. Costs for final adjustments and fixes to
software components for deliverable systems, exceeded estimates for 1998, but
will be completed in 1999 and are not expected to have a material impact on
future financial results. Further government contract activity is not part of
the Company's plans for the future, and resources are planned to be re-deployed
to consumer product activities.
Gross profit for the consumer product group totaled $3,081,895, or
44.1% of sales, for the year ended December 31, 1998, compared to $7,888,673, or
59.5% of sales, for 1997. Gross profit was adversely impacted by the absence of
relatively high margins on the $6.9 million private label promotional order in
1997 and by continued pricing pressure in retail, home shopping networks and
credit card insert channels to meet a $19.95 selling price for a basic hand held
travel computer. In addition, the Company recorded a provision totaling $469,210
for obsolescence of inventories. The obsolescence provision encompasses excess
or out of date products and components, net of planned usage in 1999. The
Company has identified specific market outlets for overstocks, and the
development of marketing and production partnerships, similar to Telebrands,
will minimize obsolescence risks for the Company in the future.
Although, promotional volumes, such as the 90,000 unit QVC order, over
40,000 units for the Kmart promotional order and over 100,000 units for the
fourth quarter credit card insert program,
10
<PAGE> 11
allowed for a reduction in unit costs, it contributed to a decrease in average
gross margins of approximately 15%. The Company is actively pursuing lower cost
sources of components and assemblies to help offset the reduced $19.95 average
retail price for mass market business.
Selling expenses for 1998 decreased to $2,931,151 from $4,540,359 in
1997. The decrease of $1,609,208 or 35.4%, primarily resulted from a decrease in
sales commissions of $2,057,415, due to lower sales in 1998. Advertising expense
increased by $350,414 (17.0%) from $2,066,472 in 1997. The increase in
advertising reflects an increase from approximately 23 million mailing inserts
in 1997 to approximately 31 million inserts in 1998. Poor response experienced
with the credit card insert programs in 1998, have caused management to change
its strategy for the risks associated with these programs in 1999. By the second
half of 1999, the credit card program companies to be employed by the Company,
will assume the advertising costs and the Company will provide product to the
marketer on a standard wholesale basis. Due to commitments made for 1999 spring
programs made in 1998, the effects of this change will take effect in the second
half of 1999.
General and administrative expenses increased by $435,639 (18.7%) in
1998 to $2,763,137 from $2,327,498 in 1997. The increase relates primarily to
the establishment of a reserve of $400,000 against a note receivable due from an
affiliate Sci-Com, Inc., which is considered uncollectible. The Company has
also advanced $250,000 to Sci-Com to support completion of the network, on which
E@syMail, a portable e-mail unit will be used. These notes are secured by
specified assets and proceeds of Sci-Com. The notes may be repaid either
through a 50% share of network revenues generated by Sci-Com, not limited to
revenues generated by E@syMail users, or may at the Company's discretion be
converted into a 10% equity interest in Sci-Com. The Company has, in light of
the 1998 revenue reductions, taken other first quarter initiatives to reduce
expenses through staffing reductions, reducing senior management salaries by 10%
and by reductions in professional and outside marketing services, to bring
expenses down to improve profitability.
The Company reduced expenditures for research and development to
$672,090 from $1,022,095 during 1997. The reduction was primarily due to the
closure of POIS and a tight focus, in 1998, on significant projects including:
the completion of the development of Travel*Star; development of Travel*Star 24;
development and testing of E@sy Mail and related personal assistant products;
and development and verification of the database for the AAA Trip Wizard.
Travel*Star 24 is anticipated to begin shipments during the second half of 1999.
Other income totaled $272,423 for 1998, compared to other income of
$225,575 for 1997. The 18.9% investment in Talon Research & Development Ppty.,
Ltd. resulted in other income of $118,733. There was no corresponding amount
realized in 1997. Interest income, decreased from $225,566 in 1997 to $161,387
in 1998, due to lower invested cash and marketable security balances.
The Company's effective tax rate was 23.9% for 1998. This rate is based
on applying tax loss carry-backs of $231,227 limited to the previous two years,
for which filings are being made to recover overpayments. The balance of
$500,000 has been recorded as a deferred tax asset, reserved for tax loss carry
forward application, which management expects to be applied against tax
liabilities incurred in future years. Some of these carry forward benefits may
be subject to limitations imposed by the Internal Revenue Service Code,
resulting in the reserve. This compares to rates of 31.8% of profits for the
year ended December 31, 1997.
As a result of the foregoing, the Company recorded a net loss of
$(2,307,057) or $(0.70) per basic and diluted common share compared to net
income of $337,104, or $0.10 per basic and diluted common share for the year
ended December 31, 1997. Earnings per share is computed on a basic and diluted
method in accordance with FAS 128. There were 3,299,636 and 3,400,967 basic
common shares and 3,299,636 and 3,425,613 diluted shares, respectively, used
in calculating earnings per share for the years ended December 31, 1998 and
1997.
YEAR 2000 ISSUES
The Company has implemented plans to address Year 2000 issues. The
primary focus includes: Company information technology systems; other support
systems; the readiness of Company suppliers and customers. Although Company
products include computerized components, the data bases are not date sensitive,
and the Company believes that there are no additional contingencies or
warranties related to its product resulting from Year 2000 issues. Expenses
related to determinations of Year 2000 compliance have been expensed and
incurred and have not been material to the financial results of the Company.
With respect to the Company's information technology systems, the
Company's primary accounting, electronic commerce and related systems are Year
2000 compliant and the software is certified as such by the vendors. The Company
has acquired and installed software updates, as such updates are made available,
under on-going technical support contracts with the software suppliers. Primary
product support databases have been tested and will recognize years from 2000
and higher in the correct century. Non-information technology systems, including
telecommunications have been tested and appear to be Year 2000 compliant.
During 1998, the Company spent approximately $10,000 on upgrading software and
related consulting and expects to spend a like amount in 1999.
The Company has developed information by structured questionnaires sent
to key customers and vendors. The Company continues to receive responses
from vendors and customers. Second requests will be made to non-responding
customers or vendors in early 1999. To date, nothing has come to the Company's
attention that Year 2000 problems will interrupt the Company's operations.
However, the Company is assessing the implications of respondents' readiness, to
develop a plan to monitor progress for any respondents not as yet indicating
Year 2000 compliance, and to develop appropriate contingency plans for any
situations found which may have a adverse impact.
An interruption of the Company's ability to conduct its business due to
a Year 2000 problem could have a material adverse effect on the Company. The
Company is not presently aware of any such significant exposure. However, there
can be no guarantee that the systems of third parties, such as customers or
suppliers, on which the Company relies, will be converted in a timely manner, or
that failure to convert would not have a material adverse effect on the Company.
Year Ended December 31, 1997 vs. Year Ended December 31, 1996
During 1997, sales of consumer products increased by $4,971,544 to
$13,253,980 from $8,282,436 in 1996. The increase in sales was the result of
$6.9 million in revenue for a custom Ultrafinder designed and sold to one
customer. This unit was used as a gift selection item within a promotion catalog
for the benefit of an international cigarette company. Sales of standard
products decreased approximately $1,900,000 from the previous year. New product
sales were adversely impacted as a result of extended delays in product
development. The Company introduced its newest product, the Travel*Star, at the
Consumer Electronics Show (CES) in Las Vegas during January 1998. Travel*Star is
a Global Positioning System (GPS) based product that began shipping during March
1998. The Company believes that Travel*Star and other new products currently in
development are important extensions to the present line of travel computers,
many of which are in their third year of existence.
Contract sales from laser systems totaled $563,251 for 1997, as
compared to $810,484 for 1996. Contract sales were derived from progress
billings against government contracts to upgrade systems, which provide
high-resolution trajectory information on airborne objects. The original
contract was received in 1995 and was originally valued at $1.7 million. The
contract contained an override clause, which resulted in additional orders of
$450,363 during the year. At December 31, 1997, there was approximately $259,300
in contract revenue remaining and $119,400 in cost to be expended.
Gross profit for the consumer product group totaled $7,888,673, or
59.5% of sales for 1997, compared to $4,786,221, or 57.8% of sales, for 1996.
Gross profit was adversely impacted by $260,000 during fiscal 1997 resulting
from the write down of certain inventories that became either obsolete or slow
moving during the year. Similar charges during the year 1996 amounted to
$19,000. Exclusive of these charges for inventory, the Company would have
achieved a 3.3% improvement in gross profit percentage. This improvement is
primarily the result of private label sales at higher gross margins, and
continued cost savings in the form of lower cost units received from the foreign
manufacturer.
Gross profit for contract sales totaled $271,034, or 48.1% of sales,
versus a gross profit of $430,277, or 53.1% of sales, last year.
11
<PAGE> 12
Selling expenses for 1997 increased to $4,540,359 from $2,297,307 in
1996. The increase of 97.6% resulted from increased sales commissions,
particularly related to private label and promotion orders, to $2,211,858 from
$299,139 in 1996 and advertising outlays which increased 16.5% from $1,773,454
to $2,066,472. The increases reflect the Company's commitment to opening new
markets and channels of distribution of information products. General and
administrative expenses increased to $2,237,498 from $1,691,458 in 1996, an
increase of 32.3%. The increases relate primarily to salaries and royalty
expenses, which increased $149,000 and $126,000 respectively. The royalty
expense increase relates to increased sales of Road Whiz(TM) and Ultrafinder(TM)
products. In addition, the company experienced increases in professional fees,
public relations and legal expenses.
The Company made significant investments in research and development
totaling $1,022,095 during the year. Much of this investment was attributed to
Travel*Star(TM) ($321,007), E@sy Mail(TM) ($131,577), and Personal-On-Board
Information System Products ($393,636) in addition to capitalized software
development costs of $290,635. Travel*Star(TM) will began shipments during the
first quarter of 1998. E@sy Mail(TM), an Internet appliance used for e-mail,
stock quotes, lottery results, horoscopes and more in a hand-held format is
running behind schedule due to delays encountered with the strategic partner
providing access to the e-mail connection.
Other income totaled $225,575 for 1997, as compared to $113,320 for the
year ended December 31, 1996. The increase, primarily in interest income, is due
to high first quarter 1997 collections which were invested in short-term
municipal bonds at higher average yields than previously used money market
instruments.
The Company's effective tax rate of 31.9% for 1997 remained comparable
to the 31.8% rate for the year ended December 31, 1996.
As a result of the foregoing, the Company's net income increased to
$337,104, or $0.10 per share, computed on a basic and diluted method as compared
to net income of $208,137, or $0.08, computed on both basic and diluted for the
prior year. There were 3,400,967 and 2,717,837 basic common shares and 3,425,613
and 2,774,633 diluted shares, respectively, used in calculating earnings per
share for the years ended December 31, 1997 and 1996. The computation of basic
and diluted earnings per share has been restated in accordance with SFAS 128.
The Company recognized certain charges in the fourth quarter of 1997
totaling $496,000, which were comprised of aggregate inventory write-offs
totaling approximately $260,000, and a provision for returns, net of inventory
recovery, of $236,000 in 1997 compared to $27,000 in 1996. Included in the
inventory write-off was shrinkage of approximately $90,000 and excess or
obsolete inventory of approximately $170,000. Almost one half of the provision
related to the private label promotional order and fourth quarter deliveries
against that order.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and cash equivalents decreased by $3,821,877 from $5,075,968
at December 31, 1997 to $1,254,091 at December 31, 1998. This decrease is
primarily due to a net loss of ($2,307,057) during 1998, investments in Talon of
$701,622, repurchase of common stock for $770,219, and advances of $250,000 to
Sci-Com.
At the end of 1998, there were no material capital spending commitments
outstanding. The Company relies on outside vendors for all of its manufacturing.
Consequently, the Company's operations do not require substantial capital
expenditures other than for the periodic purchase of tooling, test equipment,
and fixtures. During 1998, the Company spent $296,836 for capital expenditures,
which included $84,000 for the purchase of computer equipment from Intellidata
relating to the network services for E@syMail. Total capital expenditures are
not expected to be significant based on the current business outlook.
As of December 31, 1998, the Company was in default, on its existing
credit facility, with regard to one covenant of its insecured lending agreement
relating to a key financial ratio, interest coverage. The default has not been
cured as of the filing of this report. The Company has negotiated a lending
agreement with another lending institution, which will provide a credit a
facility of $1 million, secured by the Company's accounts receivable and
inventories. This facility will, meet projected needs for a letter of credit not
to exceed $500,000 related to the increase in the ownership of Talon from 18.9%
to approximately 25%, and will be part of the security for a $2 million lending
facility negotiated by Talon, which is projected to meet Talon's working capital
requirements in 1999. The new credit facility is expected to meet the Company's
needs through 1999, if it meets its revenue targets.
At December 31, 1998, the Company had a working capital surplus of
$6,038,519 as compared to a working capital surplus of $10,607,580 at December
31, 1997. Included in working capital at December 31, 1998 was $1,254,091 in
cash and cash equivalents. Inventories decreased $383,883, inclusive of a
reserve adjustment for excess and obsolete of $469,210. Accounts receivable
increased by 85.6%, or $1,431,923 to $3,103,965. The increase in accounts
receivable resulted from one customer receivable totaling $1,175,214, extended
dating for another customer, and two past due government receivables totaling
$205,308. Of these amounts that represented a total of $2,126,161, as of
December 31, 1998, the Company has collected approximately $1,945,000 of this
amount through the first quarter of fiscal 1999.
12
<PAGE> 13
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" (FAS133). 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 is effective for the Company on January 1, 2000, and
the Company has not yet determined the effects this statement will have on its
consolidated financial position or results of operations.
Effective January 1, 1998, the Company adopted American Institute of
Certified Public Accountants' Statement of position 98-1, "Accounting for the
Costs of Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1
provides guidance when to capitalize costs for internal-use computer software.
The Company's previous accounting policies were essentially in compliance with
the provisions of this statement, therefore, adoption of SOP 98-1 did not have a
material effect on the Company's results of operations.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of Ultradata Systems,
Incorporated, together with notes and the Reports of Independent Certified
Public Accountants, are set forth immediately following Item 13 of this
Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
13
<PAGE> 14
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth certain information regarding the
officers and directors of the Company as of March 1, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Monte Ross 67 President & Chief Executive Officer, Director
Mark L. Peterson 42 Vice President-Engineering, Secretary, Director
Ernest Clarke 59 Vice President-Government Projects, Director
Leonard Missler 51 Vice President-Software Development
Duane Crofts 61 Vice President-Advanced Products
David Biernbaum 44 Vice President & Chief Operating Officer
Daniel Muehlemann 34 Vice President-Sales
Steven H. Akre Esq. 46 Director
Bruce L. Miller 56 Director
John J. Clancy 62 Director
</TABLE>
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 President
and Chief Executive Officer and Chairman since inception. 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.
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.
Ernest Clarke has been employed as the Company's Vice President
Government Programs, and as a director since 1990. His primary responsibility
has been the development of custom test systems for organizations involved in
government laser systems 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 responsibility to supervise over 40 engineers. Mr.
Clarke was awarded a Master of Science degree in Electrical Engineering by
Stanford University in 1966.
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.
David Biernbaum joined the Company in 1997 as Vice President and Chief
Operating Officer. Prior to joining the Company, Mr. Biernbaum had twenty years
experience in consumer products marketing, product development, sales management
and finance. This experience was in positions such as Senior Vice President,
Marketing for Vi-Jon Laboratories, Inc. a manufacturer of private label health
and beauty care products and as Regional Marketing for The Gillette Company,
responsible for market launches of
14
<PAGE> 15
new personal care products. Mr. Biernbaum holds a Master's degree in Marketing
from Southern Illinois University.
Daniel B. Muehlemann joined the Company in October 1996 as Vice
President of Sales. Prior to joining the Company, Mr. Muehlemann served for five
years as Senior Accounts Manager for Maxim Technologies, Inc. In that position
he developed and implemented key sales and marketing strategies to increase
Maxim Technology's national client base. Mr. Muehlemann holds a Bachelor's
degree in Communications from Southwest Missouri State University.
Steven Akre has served as a member of the Board of Directors and as the
corporate counsel for the Company since it was founded. Mr. Akre is an
attorney-at-law, whose specialization is in taxation and corporate mergers and
acquisitions.
Bruce L. Miller has been a Director of the Company since 1989. Since
1992 he has been employed as Chairman of the Board of CoreSource, Inc., located
in Chicago, Illinois, which is engaged in the business of organizing and
managing health care programs for employees and providers. From 1989 until 1992,
Mr. Miller was the President of Crabtree Capital Corp., a firm engaged in
financial services. Mr. Miller is presently a Director of Harris Bank Glencoe,
which is a subsidiary of Harris Bank Corp. of Chicago.
John J. Clancy joined the Company in 1995 to serve as a member of the
Board of Directors. Mr. Clancy has served on the Board of Directors at Cimplex
Corporation, Inc. in San Jose, and Engineering Software Research & Development,
Inc. in St. Louis. Mr. Clancy was employed by McDonnell Douglas in a variety of
positions progressing from Programmer, to Salesman, to Divisional President. Mr.
Clancy was awarded a Bachelor of Science; Chemical Engineering: University of
Illinois; Master of Science: The Johns Hopkins University; Master of Business
Administration: Washington University - St. Louis; Master of Liberal Arts:
Washington University - St. Louis; Doctor of Philosophy in History and Business:
Washington University - St. Louis.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
None of the directors, officers or beneficial owners of more than 10%
of the Company's common stock failed to file on a timely basis reports required
during 1998 by Section 16(a) of the Exchange Act, except as follows: each of the
Company's five officers was late in filing a report on Form 4, each report
containing one transaction.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by,
or paid by the Company to the following persons for services rendered in all
capacities to the Company during each of the fiscal years ended December 31,
1998, 1997, and 1996: (1) the Registrant's Chief Executive Officer, and (2) each
of the other executive officers whose total salary and bonus for the fiscal year
ended December 31, 1998 exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------ ------------
Name & Position Year Salary Bonus Other (1) Options
- --------------- ---- ------ ----- --------- -------
<S> <C> <C> <C> <C> <C>
Monte Ross, 1998 $ 154,999 $ - $ 6,000 (2)
President 1997 $ 130,000 $ - $ 5,000 (3)
1996 $ 114,404 $ 14,000 $ 3,000 (4)
David Biernbaum, 1998 $ 122,803 $ - $ - (5)
Vice President & COO 1997 $ 23,077 $ - $ - (6)
1996 $ - $ - $ -
</TABLE>
(1) Includes premium payments for a life insurance policy on Mr. Ross, with his
estate as beneficiary.
(2) 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.
(3) During 1997 the Board's Stock Option Committee awarded Mr. Ross options to
purchase an additional 12,500 shares of Common Stock at an exercise price
of $5.75.
(4) During 1996 the Board's Stock Option Committee awarded Mr. Ross options to
purchase an additional 15,000 shares of Common Stock at an exercise price
of $7.39.
(5) During 1998 the Board's Stock Option Committee awarded Mr. Biernbaum
options to purchase an additional 5,000 shares of Common Stock at an
exercise price of $3.00.
(6) During 1997, the Board's Stock Option Committee granted Mr. Biernbaum
options to purchase 17,500 shares of Common Stock at an exercise price of
$7.00 upon joining the Company in October 1997, and options to purchase an
additional 10,000 shares at an exercise price of $5.75.
Employment Agreements; Royalty Agreement
Messrs. Ross, Peterson, and Clarke have individual employment
agreements with the Company beginning September 1, 1994. Except as noted herein,
the terms of the employment agreements are
15
<PAGE> 16
substantially identical. The agreements, were extended in 1997 by action of the
Board of Directors to October 31, 1999. 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. Clark and Peterson and 5% for Mr. Ross. The employment
agreements restrict each officer from competing with the Company 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,
which is considered confidential by the Company. Mr. Biernbaum also has a
separate employment agreement dated October 17, 1997, which provides for salary
and conditions similar to the above officers.
Leonard Missler, Vice President - Software Development, has a Royalty
Agreement with the Company dated September 14, 1989. The Agreement terminates on
September 13, 2009. Mr. Missler specifies in the Agreement that he will keep
confidential all of the Company's information regarding its technology and
products. In exchange, the Agreement provides that the Company will pay Mr.
Missler a royalty equal to 1% of net sales of the Company's ROAD WHIZ(TM)
products and 1/2% of net sales of other products incorporating the ROAD WHIZ(TM)
database. During the two years ended December 31, 1998 and 1997, royalty expense
totaling $53,752 and $116,480, respectively, were recognized.
STOCK OPTION AWARDS
The following tables set forth certain information regarding the stock options
acquired by the Company's Chief Executive Officer and Chief Operating Officer
during the year ended December 31, 1998 and those options held by them on
December 31, 1998:
<TABLE>
<CAPTION>
OPTION GRANTS IN CURRENT FISCAL YEAR
Percent
of total
options Potential realizable
Number of granted value at assumed
securities to annual rates of
underlying employees Exercise appreciation
option in fiscal price Expiration for option term
Name granted year ($/share) Date 5% 10%
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Monte Ross 6,000 2% $3.00 11/30/05 $ 4,973 $ 10,989
Monte Ross 57,500 21% $4.00 3/31/05 $ 63,545 $ 140,417
David Biernbaum 5,000 2% $3.00 11/30/05 $4,144 $ 9,158
David Biernbaum 27,500 10% $4.00 3/31/05 $ 30,391 $ 67,156
AGGREGATED FISCAL YEAR OPTION VALUES
<CAPTION>
Number of securities underlying
unexercised options at fiscal Value of unexercised in-the-money
Name year-end (#) options at fiscal year-end
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Monte Ross 63,500 $ -
David Biernbaum 32,500 $ -
</TABLE>
Stock Option Plans
THE 1994 STOCK OPTION PLAN
On September 28, 1994, the Board of Directors of the Company adopted
and the shareholders approved the Ultradata Systems, Inc. 1994 Stock Option Plan
(the "Option Plan"). The Option Plan is designed to permit the Company to grant
either incentive stock options under Section 422A of the Internal Revenue Code
(the "Code") or non-qualified stock options. Under the Option Plan, a Stock
Option Committee (the "Option Committee") of the Board is authorized to grant
options to purchase up to 175,000 shares of stock to key employees, officers,
directors, and consultants of the Company. The Option Committee administers the
Option Plan and designates the optionees, the type of options to be granted
(i.e., non-qualified or incentive stock options), the number of shares subject
to the options,
16
<PAGE> 17
and the terms and conditions of each option. The terms and conditions include
the exercise price, date of grant, and date of exercise of each option. An
employee may, at the discretion of the Option Committee, be permitted to
exercise an option and make payment by giving a personal note.
Incentive stock options may only be granted to employees of the Company
and not to directors or consultants who are not so employed. The exercise price
for incentive stock options must be at least one hundred percent (100%) of the
fair market value of the Common Stock as determined by the Option Committee on
the date of grant. All incentive stock options under the Option Plan must be
granted within ten years from the date of adoption of the Option Plan and each
option must be exercised, if at all, within five years of the date of grant. In
no event may any employee be given incentive stock options whereby more than
$100,000 of options can be exercised for the first time in a single calendar
year. All incentive stock options must be exercised, by an optionee, within 30
days after termination of optionee's employment, unless such termination is as a
result of death, disability, or retirement. In the event an optionee's
employment is terminated as a result of death or disability, such optionee or
his designated beneficiary shall be entitled to exercise any and all options for
a period of six months after such termination. If an optionee's employment is
terminated as a result of retirement, the optionee shall be entitled to exercise
his options for a period of three months following such termination.
Non-qualified stock options under the Option Plan are generally subject
to the same rules as discussed above. Non-qualified stock options may, however,
also be granted to directors and consultants, whether or not such individuals
are employees of the Company. The exercise price for non-qualified stock options
may not be granted at less than eighty-five percent (85%) of the fair market
value of the shares on the date of grant.
THE 1996 STOCK OPTION PLAN
The 1996 Plan is designed to permit the Company to grant either
incentive stock options under Section 422A of the Internal Revenue Code (the
"Code") or non-qualified stock options. Under the 1996 Plan, a Stock Option
Committee (the "Option Committee") of the Board is authorized to grant options
to purchase up to 175,000 shares of stock to key employees, officers, directors
and consultants of the Company. The Option Committee administers the 1996 Plan
and designates the optionees, the type of options to be granted (i.e.,
non-qualified or incentive stock options), the number of shares subject to the
options, and the terms and conditions of each option. The terms and conditions
include the exercise price, date of grant, and date of exercise of each option.
An employee may, at the discretion of the Option Committee, be permitted to
exercise an option and make payment by giving a personal note.
Incentive stock options may only be granted to employees of the Company
and not to directors or consultants who are not so employed. The exercise price
for incentive stock options must be at least one hundred percent (100%) of the
fair market value of the Common Stock as determined by the Option Committee on
the date of grant. All incentive stock options under the 1996 Plan must be
granted within ten years from the date of adoption of the Option Plan and each
option must be exercised, if at all, within five years of the date of grant. In
no event may any employee be given incentive stock options whereby more than
$100,000 of options become exercisable for the first time in a single calendar
year. All incentive stock options must be exercised by an optionee within 30
days after termination of optionee's employment, unless such termination is as a
result of death or disability, such optionee or his designated beneficiary shall
be entitled to exercise any and all options for a period of six months after
such termination. If an optionee's employment is terminated as a result of
retirement, the optionee shall be entitled to exercise his options for a period
of three months following such termination.
Non-qualified stock options under the 1996 Plan are generally subject
to the same rules as discussed above. Non-qualified stock options may, however,
also be granted to directors and consultants, whether or not such individuals
are employees of the Company. The exercise price for non-qualified stock options
may not be granted at less than eighty-five percent (85%) of the fair market
value of the shares on the date of grant.
In December 1998, the Board of Directors approved a resolution to
increase the number of shares authorized under the 1996 option plan by 100,000
shares to provide continued incentive for key personnel. As of March 1999, none
of these shares have been granted. This matter will be subject to approval by
stockholders at the 1999 annual meeting.
During 1998, the Company canceled incentive stock options to purchase
235,892 shares of Common Stock at exercise prices ranging from $5.00 to $7.00.
The same number of new options was issued at a price of $4.00.
During 1998 the Company issued additional incentive stock options to
purchase 40,900 shares of Common Stock at an exercise price of $3.00. The
following officers were recipients of options, (including a total of 183,500
options cancelled and reissued during the year):
<TABLE>
<CAPTION>
NAME Number of Average
---- Shares Exercise Price
------ --------------
<S> <C> <C>
Monte Ross 63,500 $ 3.91
Mark L. Peterson 38,000 $ 3.89
Ernest Clarke 28,500 $ 3.86
Leonard Missler 20,500 $ 3.80
Duane Crofts 22,000 $ 3.82
</TABLE>
17
<PAGE> 18
David Biernbaum 32,500 $ 3.85
Daniel Muehlemann 9,500 $ 3.58
REMUNERATION OF DIRECTORS
Prior to April 21, 1994, the Directors of the Company who were not
officers received 208 shares of Common Stock per meeting as compensation for
their services. That policy was terminated on April 21, 1994. Outside Directors
now 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 the beneficial ownership of outstanding
shares of Common Stock of the Company as of March 3, 1999 by any person who, to
the knowledge of the Company, owns beneficially more than 5% of the outstanding
Common Stock, by all directors of the Company, and by the directors and officers
of the Company as a group. None of the persons identified below owns any
securities of the Company other than the Common Stock listed below:
<TABLE>
<CAPTION>
Amount and
Nature of Percentage
Name and Address of Beneficial of Outstanding
Beneficial Owner (1) Owner Shares (6)
---------------------------- ---------------- ------------------
<S> <C> <C>
NAME
Monte Ross (2) 606,500 19.22%
shares of
record
Mark L. Peterson (3) 180,705 5.73%
shares of
record
Ernest Clarke (4) 159,552 5.06%
shares of
record
Steven H. Akre Esq.(5) 3,496 0.11%
shares of
record
Bruce L. Miller 2,872 0.09%
shares of
record
John J. Clancy 3,692 0.12%
shares of
record
--------------- ------------
All officers and directors
as a group (6 persons) 956,817 30.33%
================ ============
</TABLE>
(1) The address of each of these shareholders is c/o Ultradata Systems,
Incorporated, 9375 Dielman Industrial Drive, St. Louis, Missouri 63132
(2) Includes 536,000 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.
(3) Includes 134,387 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
18
<PAGE> 19
either of them.
(4) Includes 130,852 shares owned jointly by Mr. Clarke with his wife. Also
includes 2,080 shares owned by children residing with Mr. Clarke.
(5) Includes 3,120 shares owned by the G. Akre Irrevocable Trust, over which
Mr. Akre's wife has investment control.
(6) 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
On September 17, 1994, the Board of Directors of the Company approved
the sale of 150,000 shares of Common Stock to the Company's three
officers/directors as follows:
<TABLE>
<CAPTION>
Shares Notes
------ -----
<S> <C> <C>
Monte Ross 100,000 $ 187,500
Mark L. Peterson 25,000 $ 46,875
Ernest Clarke 25,000 $ 46,875
------ ------
TOTAL 150,000 $ 281,250
</TABLE>
The purchase price for the shares was $1.875 per share, which was paid
by each officer/director in the form of a promissory note bearing interest at 6%
per annum. The principal amount of each note, plus accrued interest, is payable
on July 1, 2001.
In August and September of 1994 nine employees of the Company,
including all five of its officers, exercised incentive stock options and paid
the purchase price of $1.20 per share by delivering to the Company promissory
notes. The promissory notes bear interest at 6% per year and are payable upon
the earlier of the date on which the employee's employment by the Company is
terminated or the date on which the employee sells the shares. The number of
shares so purchased and the principal amount of the notes given were as follows:
<TABLE>
<CAPTION>
Employee Shares Notes
---------- ------ ------
<S> <C> <C>
Monte Ross 55,734 $ 67,000
Mark Peterson 13,725 $ 16,500
Ernest Clarke 13,725 $ 16,500
Leonard Missler 17,676 $ 21,250
Duane Crofts 2,080 $ 2,500
Other Employees 416 $ 500
------------ ---------
TOTAL 103,340 $ 124,250
</TABLE>
The Company has an agreement with Leonard Missler, its Vice President
Software Development, under which, through September 13, 2009, it pays Mr.
Missler a 1% royalty on all net sales of ROAD WHIZ(TM) products and 1/2% on net
sales of other products incorporating the ROAD WHIZ(TM) database. During the
years ended December 31, 1998 and 1997, the Company paid royalties to Mr.
Missler of $53,752 and $116,480, respectively.
Steven H. Akre, Esquire, a member of the Company's Board of Directors,
has performed legal services as general counsel for the Company since its
inception. During 1998 and 1997, Mr. Akre's firm was paid $103,984 and $44,557,
respectively, for legal services.
Item 13. EXHIBITS, LIST, AND REPORTS
(A) CONSOLIDATED FINANCIAL STATEMENTS
List of Consolidated Financial Statements Under Item 7 of this
Report:
Reports of Independent Certified Public Accountants.
Consolidated Balance Sheet as of December 31, 1998.
Consolidated Statements of Operations for each of the years in the
two-year period ended December 31, 1998.
Consolidated Statements of Stockholders' Equity for each of the years
in the two-year period ended December 31, 1998.
Consolidated Statements of Cash Flows for each of the years in the
two-year period ended December 31, 1998.
Notes to Consolidated Financial Statements for the years ended December
31, 1998 and 1997.
(B) EXHIBITS INDEX AND REPORTS ON FORM 8-K
Regulation S-B
19
<PAGE> 20
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-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. Employment Agreement with Monte Ross.(1)
10-d. Employment Agreement with Mark L. Peterson.(1)
10-e. Employment Agreement with Ernest Clarke.(1)
10-f. Royalty Agreement dated September 14, 1989, between the Company and
Leonard Missler.(1)
10-f. Modification Agreement dated November 4, 1995, to Royalty Agreement
dated September 14, 1989, between the Company and Leonard Missler. (1)
10-o Extended employment agreement as of September 30, 1997 between the
Company and Monte Ross (3)
10-p Extended employment agreement as of September 30, 1997 between the
Company and Mark L. Peterson (3)
10-q Extended employment agreement as of September 30, 1997 between the
Company and Ernest Clarke (3)
10-r Employment Agreement as of October 13, 1997 between the Company and
David Biernbaum (3)
21. Subsidiaries - None.
27. Article 27 Financial Data Schedule (2)
(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) Filed herewith.
(3) Previously filed on Form 10-KSB for the period ended December 31, 1997.
(C) REPORTS ON FORM 8-K
None during the fourth quarter
20
<PAGE> 21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
Ultradata Systems, Incorporated:
We have audited the accompanying consolidated balance sheet of Ultradata
Systems, Incorporated, as of December 31, 1998 and the related consolidated
statement 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.
We conducted our audit in accordance with generally accepted auditing
standards. 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 represent fairly, in
all material respects, the consolidated financial position of Ultradata
Systems, Incorporated at December 31, 1998, and the consolidated results of
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
March 4, 1999 (signed) BDO Seidman LLP
(Except for Note 17, which
is dated March 26, 1999)
St. Louis, Missouri
21
<PAGE> 22
Independent Auditors' Report
The Board of Directors and Stockholders
Ultradata Systems, Incorporated:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Ultradata Systems, Incorporated and
subsidiary as of December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the changes in stockholders' equity of
Ultradata Systems, Incorporated and subsidiary as of December 31, 1997 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
(signed) KPMG LLP
March 16, 1998
St. Louis, Missouri
22
<PAGE> 23
<TABLE>
<CAPTION>
ULTRADATA SYSTEMS, INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheet
December 31, 1998
- ------------------------------------------------------------------------------------------------------------
ASSETS 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Current assets:
Cash and cash equivalents $ 1,254,091
Trade accounts receivable, net of allowance for doubtful accounts of
$9,520 at December 31, 1998 3,103,965
Costs and estimated earnings on long-term contracts 95,534
Inventories 3,121,003
Tax benefit receivable 231,227
Prepaid expenses and other current assets 794,252
- ------------------------------------------------------------------------------------------------------------
Total current assets 8,600,072
- ------------------------------------------------------------------------------------------------------------
Property and equipment, net 835,307
Deferred tax asset 500,000
Deferred compensation trust 150,702
Investment in affiliated company 820,355
Advances to affiliates 250,000
Other assets 64,212
- ------------------------------------------------------------------------------------------------------------
Total assets $ 11,220,648
- ------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable 940,222
Accrued expenses and other liabilities 1,621,331
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 2,561,553
Deferred rent 21,148
Deferred compensation liability 150,702
- ------------------------------------------------------------------------------------------------------------
Total liabilities 2,733,403
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $.01 par value; 10,000,000 shares authorized;
3,410,000 shares issued and outstanding at December 31, 1998 34,100
Additional paid-in capital 9,799,936
Retained earnings 59,039
Treasury stock (255,200 shares at cost as of December 31, 1998) (900,281)
Notes receivable issued for purchase of common stock (505,549)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,487,245
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 11,220,648
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
23
<PAGE> 24
ULTRADATA SYSTEMS, INCORPORATED AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales:
Consumer products $ 6,983,804 13,253,980
Contract 250,271 563,251
- ----------------------------------------------------------------------------------------------------------
Total net sales 7,234,075 13,817,231
- ----------------------------------------------------------------------------------------------------------
Cost of sales:
Consumer products 3,901,909 5,365,307
Contract 270,292 292,218
- ----------------------------------------------------------------------------------------------------------
Total cost of sales 4,172,201 5,657,525
- ----------------------------------------------------------------------------------------------------------
Gross profit 3,061,874 8,159,706
Selling expense 2,931,151 4,540,359
General and administrative expenses 2,763,137 2,327,498
Research and development expense 672,090 1,022,095
- ----------------------------------------------------------------------------------------------------------
Operating (loss) profit (3,304,504) 269,754
- ----------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (3,790) (1,155)
Interest income 161,387 225,566
Equity in affiliated company 118,733 -
Other, net (3,907) 1,164
- ----------------------------------------------------------------------------------------------------------
Total other income, net 272,423 225,575
- ----------------------------------------------------------------------------------------------------------
(Loss) income before income tax expense (3,032,081) 495,329
Income tax benefit (expense) 725,024 (158,225)
- ----------------------------------------------------------------------------------------------------------
Net (loss) income $ (2,307,057) 337,104
- ----------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ (0.70) 0.10
- ----------------------------------------------------------------------------------------------------------
Diluted $ (0.70) 0.10
- ----------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding:
Basic 3,299,636 3,400,967
- ----------------------------------------------------------------------------------------------------------
Diluted 3,299,636 3,425,613
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
24
<PAGE> 25
ULTRADATA SYSTEMS, INCORPORATED AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Notes
receivable
Additional for purchase Total
Common paid-in Retained Treasury of common stockholders'
stock capital earnings stock stock equity
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 34,035 9,763,001 2,028,992 (410,500) 11,415,527
Exercise of stock options
for 6,500 shares 65 36,935 37,000
Purchase of 23,000 shares of
treasury stock at cost (130,062) (130,062)
Net income 337,104 337,104
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 34,100 9,799,936 2,366,096 (130,062) (410,500) 11,659,569
Purchase of 232,200 shares of
treasury stock at cost (770,219) (770,219)
Reclassification of accrued
interest on notes receivable
issued for purchase of
common stock (81,591) (81,591)
Repayment of notes receivable
issued for purchase of
common stock 5,000 5,000
Accrued interest on notes
receivable issued for
purchase of common stock (18,458) (18,458)
Net (loss) income (2,307,057) (2,307,057)
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 34,100 9,799,936 59,039 (900,281) (505,549) 8,487,245
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
25
<PAGE> 26
ULTRADATA SYSTEMS, INCORPORATED AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (2,307,057) 337,104
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation and amortization 246,435 209,301
Deferred income tax provision (493,797) 33,067
Inventory reserve 469,210
Equity in earnings of unconsolidated affiliate (118,733)
Note receivable reserve 416,428
Increase (decrease) in cash due to changes in operating assets and
liabilities:
Trade accounts receivable, net (1,431,923) 2,936,244
Tax benefit receivable (231,227)
Costs and estimated earnings on long-term contracts 433,086 (89,950)
Inventories (85,378) (215,382)
Prepaid expenses and other current assets (193,399) (59,526)
Accounts payable 430,885 (865,008)
Accrued expenses and other liabilities 1,192,068 (436,000)
Deferred rent 4,976 7,464
Other assets (30,409)
- ------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (1,698,835) 1,857,314
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in affiliated company (387,475) --
Option to acquire additional interest in affiliated company (314,147)
Investment in software development (109,365) (296,899)
Capital expenditures (296,836) (351,962)
Advances to affiliates (250,000) --
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,357,823) (648,861)
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock 37,000
Repurchase of common stock at cost (770,219) (130,062)
Proceeds from repayment of notes receivable to
purchase common stock 5,000
- -------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (765,219) (93,062)
- -------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (3,821,877) 1,115,391
Cash and cash equivalents at beginning of year 5,075,968 3,960,577
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,254,091 5,075,968
- -------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 3,790 1,184
Cash paid during the year for taxes -- 275,569
- -------------------------------------------------------------------------------------------------------------
Noncash Investing activities:
Sale of capitalized software development costs in exchange for note
receivable $ 400,000
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
26
<PAGE> 27
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and for 1997, its 100% owned subsidiary, POIS, Inc. (POIS). Investments
in affiliates consist principally of 18.9% of Talon Research & Development,
Ppty., Ltd.(Talon) of Auckland, New Zealand. The investment in Talon is
accounted for using the equity method, due to the ability of the Company to
exercise significant influence on Talon and its operations.
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.
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.
REVENUE RECOGNITION
Net sales are generally 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.
Costs and estimated earnings on long-term contracts represent unbilled
revenues, including accrued profits on long-term contracts accounted for under
the percentage-of-completion method.
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.
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. 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.
LONG-LIVED ASSETS
In accordance with SFAS 121, long-lived 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 adoption of SFAS 121 had no impact on the Company's
financial position or on its results of operations.
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 consolidated balance sheet.
27
<PAGE> 28
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.
At December 31, 1998 and 1997, $554,784 and $191,814 of advertising
costs were reported as an asset. Included in the 1998 assets is $516,706, which
represents capitalized costs of direct-response advertising. Direct-response
advertising consists primarily of credit-card inserts that include order coupons
for the Company's products. The capitalized costs of the advertising are
amortized on a declining basis over the four-month period following the
mailings. Advertising expense totaled $2,416,886 and $2,066,472, for fiscal
years 1998 and 1997, respectively.
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 and accured
liabilities are reflected in the consolidated financial statements at fair
value because of the short-term maturity of the instruments. The Company uses
quoted market prices or discounted cash flows to calculate these fair values.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs consist of expenditures, incurred during
the course of planned search and investigation aimed at discovery of new
knowledge, which will be useful in developing new products or processes, or
significantly enhancing existing products or production processes, and the
implementation of such through design and testing of product alternatives or
construction of prototypes. The Company expenses all research and development
costs as they are incurred.
DEFERRED COMPENSATION TRUST
Deferred compensation trust represents contributions made by the
Company to a Rabbi trust plus the related dividend and interest income earned on
investments. The amounts are restricted from use for operation purposes and
investment decisions are made by the trust beneficiary. The deferred
compensation trust is recorded at its fair value.
ROYALTY EXPENSE
Royalty expense is recognized on a pro rata basis as units are sold.
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.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income 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.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to
employees with any 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.
28
<PAGE> 29
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 the new method, are
discussed with Note 10.
RECLASSIFICATIONS
Certain 1997 balances have been reclassified to conform with the 1998
presentation.
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" (FAS133). FAS 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 is effective for the Company on
January 1, 2000, and the Company has not yet determined the effects this
statement will have on its consolidated financial position or results of
operations.
Effective January 1, 1998, the Company adopted American Institute of
Certified Public Accountants' Statement of Position 98-1, "Accounting for the
Costs of Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1
provides guidance when to capitalize costs for internal-use computer software.
The Company's previous accounting policies were essentially in compliance with
the provisions of this statement, therefore, adoption of SOP 98-1 did not have a
material effect on the Company's results of operations.
SIGNIFICANT CUSTOMERS
For the year ended December 31, 1998, the company relied on two
customers for approximately 21.6% and 19.7%, respectively, of consumer product
sales. Accounts receivable from those customers totaled $1,175,214 and $310,798,
respectively, at December 31, 1998.
For the year ended December 31, 1997, the company relied on one
customer for approximately 52.1% of consumer product sales. Accounts receivable
from that customer totaled $335,198 at December 31, 1997.
NOTE 1. 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. In addition, the Company performs
laser system development and manufacturing under certain contracts with the
United States government.
NOTE 2. INVENTORIES
Inventories at December 31, 1998 consist of the following:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Raw Materials $ 1,179,328
Work in Process 507,979
Finished Goods 1,902,906
-----------------
3,590,243
Reserve for Obsolescence (469,210)
-----------------
$ 3,121,003
=================
</TABLE>
NOTE 3. PREPAID EXPENSES
Prepaid expenses at December 31, 1998 consist of the following:
1998
29
<PAGE> 30
<TABLE>
<S> <C>
Prepaid advertising $ 554,784
Other prepaid expenses 239,468
-----------------
$ 794,252
=================
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property, plant and equipment, as of December 31, 1998 consisted of:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Research & development equipment $ 160,890
Production equipment 65,747
Tooling and test equipment 790,811
Office furniture and equipment 405,351
Sales displays 69,011
Leasehold improvements 141,425
-----------------
1,633,235
Less: accumulated depreciation
and amortization 797,927
-----------------
$ 835,307
=================
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1998
and 1997 totaled $246,435 and $209,301, respectively.
NOTE 5. LEASES
The Company revised 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 $119,236 and $120,100 for the years
ended December 31, 1998 and 1997, respectively.
Future minimum lease payments and the related totals expensed for financial
reporting under the operating lease consist of the following:
<TABLE>
<CAPTION>
Rent
Cash Expense to be
payment recognized
--------------- ------------------
<S> <C> <C>
Year ending December 31,
1999 $ 127,753 $ 118,621
2000 126,868 118,621
2001 105,723 98,850
--------------- ------------------
$ 360,344 $ 336,092
=============== ==================
</TABLE>
30
<PAGE> 31
NOTE 6. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities at December 31, 1998 consist of the
following:
- ----------
<TABLE>
<CAPTION>
1998
----
<S> <C>
Accrued sales commissions
and royalties $ 80,143
Accrued advertising 1,361,085
Other 180,103
-----------
$ 1,621,331
===========
</TABLE>
NOTE 7. 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 President 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 President.
NOTE 8. LINE OF CREDIT
On March 4, 1994, the Company entered into a revolving line of credit
with a commercial bank which requires monthly interest payments at the
prime rate (7.75 % and 8.5% at December 31, 1998 and 1997, respectively)
on outstanding borrowings. The available line of credit totaled $2,500,000
at December 31, 1998 and 1997. As of December 31, 1998, the Company was in
default, on its existing credit facility, with regard to one covenant of
its unsecured lending agreement, relating to a key financial ratio,
interest coverage. The default has not been cured as of the filing of this
report. There were no outstanding borrowings at December 31, 1998 or 1997.
The Company had an outstanding standby letter of credit for $429,000, for
advertising programs, which expired on February 28, 1999.
On May 1, 1998, the Company signed as guarantor on a line of credit
issued to Talon GPS, LLC, by a commercial bank. The available line of
credit totaled $100,000 and at December 31, 1998, there were no borrowings.
NOTE 9. 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.
NOTE 10. EARNINGS PER SHARE
A reconciliation of the numerator and denominator of the earnings per share
calculation is provided for all periods presented. The numerator for basic and
diluted earnings per share is net income for all periods presented. The
denominators for basic and diluted earnings per share is net income (loss) for
1998 and 1997, as follows:
<TABLE>
<CAPTION>
For the twelve months ended December 31,
1998 (a) 1997 (b)
<S> <C> <C>
Numerator:
$(2,307,057) $ 337,104
Net Income (Loss)
Numerator for basic and diluted earnings (loss)
per share - income available
to common shareholders $(2,307,057) $ 337,104
=================== =================
Denominator:
Denominator for basic earnings (loss)
per share - weighted
average shares 3,299,636 3,400,967
Basic Earnings (Loss) Per Share $ (0.70) $ 0.10
Effect of dilutive securities: Employee stock options - 24,646
Denominator for diluted earnings (loss) per share -
adjusted weighted average shares and assumed conversions 3,299,636 3,425,613
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C> <C>
Diluted Earnings (Loss) per Share $ (0.70) $ 0.10
</TABLE>
(a) Options to purchase 326,792 shares of common stock at prices between
$3.00 and $7.39 per share were outstanding at December 31, 1998, but
were not included in the computation of diluted earnings (loss)
per share because the options' exercise price was greater than the
average market price of common shares.
(b) Options to purchase 102,000 shares of common stock at prices between
$6.75 and $7.39 per share were outstanding at December 31, 1997, but
were not included in the computation of diluted earnings (loss) per
share because the options' exercise price was greater than the
average market price of common shares.
NOTE 11. INCOME TAXES
Income tax (benefit) expense for the years ended December 31, 1998 and 1997
consist of:
<TABLE>
<CAPTION>
1998
------------------------------------------------
Current Deferred Total
<S> <C> <C> <C>
- --------------------------------------------------------------------
Federal $ (231,227) $ (466,367) $ (697,594)
State -- (27,430) (27,430)
- --------------------------------------------------------------------
$ (231,227) $ (493,797) $ (725,024)
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------------
Current Deferred Total
<S> <C> <C> <C>
- --------------------------------------------------------------------
Federal $ 100,446 $ 29,922 $ 130,368
State 24,712 3,145 27,857
- --------------------------------------------------------------------
$ 125,158 $ 33,067 $ 158,225
</TABLE>
Income tax expense for the years ended December 31, 1998 and 1997
differed from amounts computed by applying the statutory U.S. federal corporate
income tax rate of 34% to income before income tax (benefit) expense as a
result of the following:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------
<S> <C> <C>
Expected income tax (benefit) expense $(1,042,139) $ 168,412
Increase (decrease) in income taxes resulting from:
Valuation allowance 648,422 -
State income taxes net of federal benefit (80,919) 18,386
Nondeductible expenses for federal income tax purposes 5,993 13,995
Research and experimental credits (72,353) (25,589)
Foreign Operations (45,118) -
Other, net (138,910) (16,979)
--------------------------------
Income tax (benefit) expense $ (725,024) $ 158,225
================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1998 and 1997 include
the following:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 796,870 $ 6,664
Research and experimental credit carryforward 72,353 -
Note receivable reserved for financial
reporting purposes 158,243 -
Accounts receivable reserves, principally due to
accruals for financial reporting purposes 109,642 12,992
Inventory reserves, principally due to accruals
for financial reporting purposes
and basis differences 211,248 32,936
Other 29,285 11,223
-------------- --------------
Total deferred tax assets $ 1,377,641 $ 63,815
Deferred tax liabilities
Prepaid advertising $ (210,818) $ (39,211)
Property, plant and equipment, principally
due to differences in depreciation basis (18,401) (18,401)
-------------- --------------
Total deferred tax liabilities (229,219) (57,612)
-------------- --------------
Gross deferred tax asset $ 1,148,422 $ 6,203
Valuation allowance (648,422) -
-------------- --------------
Net deferred tax asset $ 500,000 $ 6,203
============== ==============
</TABLE>
A valuation allowance has been provided for those net operating loss
carryforwards and temporary differences, which are estimated to expire before
they are utilized. The net operating loss carryforward of approximately $2.1
million will expire in 2013.
NOTE 12. EMPLOYEE BENEFIT PLANS
(a) Simplified Employee Pension Plan
The Company employed a simplified employee pension plan covering all
full-time employees through December 31,1997. Subject to approval by the Board
of Directors, the Company matches employee contributions up to 3% of the
compensation paid to participating employees, as defined by the plan. Employees
may contribute up to 12% of their compensation. Expense attributable to Company
contributions totaled $33,030 during the year ended December 31, 1997. This plan
was terminated as of December 31, 1997.
(b) 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 $54,138 during the
32
<PAGE> 33
year ended December 31, 1998.
(c) Incentive Stock Option Plans
At December 31, 1998, 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 income (loss) and earnings (loss) per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C> <C>
Net income (loss) As reported $(2,307,057) $337,104
Pro forma $(2,665,679) $115,127
Basic As reported $ (0.70) $ 0.10
earnings (loss) per Pro forma $ (0.81) $ 0.03
share
Diluted As reported $ (0.70) $ 0.10
earnings (loss) Pro forma $ (0.81) $ 0.03
per share
</TABLE>
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 1998, the Company cancelled incentive stock options to purchase
235,892 shares of common stock at exercise prices ranging from $5.00 to $7.00
per share. The same number of new options were issued at a price of $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 1998, and 1997 respectively: dividend yield of
zero for all years; expected volatility of 54.4% and 52.3%; risk-free interest
rates of 5.42% and 5.70%; 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, 1998 and 1997, and the changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Fixed Options Shares price Shares price
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 300,792 $ 5.85 215,692 $ 6.26
Granted (including repriced options) 276,792 $ 3.41 210,100 $ 5.82
Exercised - - (6,500) $ 5.69
Forfeit (14,900) $ 5.66 (118,500) $ 6.55
Cancelled (235,892) $ 5.66 - -
--------- ---------
Outstanding at end of year 326,792 $ 3.54 300,792 $ 5.85
========= =========
Options exercisable at year end 326,792 300,792
Weighted average fair value of
options granted to employees
during the year $ 2.39 $ 3.02
</TABLE>
<TABLE>
<CAPTION>
Options outstanding and exercisable
Number of shares Weighted average
Range of outstanding at remaining Weighted average
exercise prices December 31, 1998 contractual life Exercise price
- --------------- -------------------- ---------------- --------------
<S> <C> <C> <C>
$3.00 - $3.99 40,900 4.9 years $3.00
$4.00 - $4.99 235,892 4.2 years $4.00
$5.00 - $5.99 5,000 1.6 years $5.75
$6.00 - $6.99 35,000 1.5 years $6.39
$7.00 - $7.39 10,000 2.7 years $7.39
-------
326,792
</TABLE>
33
<PAGE> 34
NOTE 13. COMMITMENTS AND CONTINGENCIES
On September 14, 1989, the Company entered a royalty agreement relating
to its ROAD WHIZ(TM) product. After 20,000 ROAD WHIZ(TM) units are sold, the
agreement provides for a 1% royalty payment on net sales of the ROAD WHIZ(TM)
product and 1/2% on the Company's other products, which incorporate the ROAD
WHIZ(TM) database. Royalty payments are made quarterly until September 13, 2009.
During the years ended December 31, 1998 and 1997, royalty expense totaled
$50,938 and $116,480, respectively.
On October 17, 1994, the Company entered into a royalty agreement for
the use of a database for its GREENSFINDER(TM) product. The agreement provides
for an initial payment of $24,000, representing the royalty payment for the
first 6,000 GREENSFINDER(TM) units sold. After 6,000 units are sold, the royalty
fee will be 10% of the net sales price as defined in the agreement. In addition,
the Company will pay a royalty fee of 20% of the net sales price as defined in
the agreement for GREENSFINDER(TM) upgrades. The agreement is valid for five
years. The Company is amortizing the initial payment on a pro rata basis over
6,000 units sold, not to exceed five years. During the years ended December 31,
1998 and 1997, royalty expense totaling $10,192 and $9,665 respectively, was
recognized.
NOTE 14. RELATED-PARTY TRANSACTIONS
As of December 31, 1997 the Company terminated all operations at the
former Detroit, Michigan office, and consolidated operations at the Company's
St. Louis facility. The POIS, Inc. subsidiary had been consistently unable to
gain entry to the automotive OEM or after-market segments, for its products, and
was unprofitable.
On March 23, 1998, the Company acquired an 18.9% interest in Talon
Research & Development Ppty., Ltd. of Auckland, New Zealand, for $ 282,500. The
Company acquired an option to purchase, in September 1998, for additional shares
in Talon for approximately a total of $1.4 million, which was exercisable within
30 days of receipt of audited financial statements for 1998 from Talon. The cost
of the option was $314,147. In addition, the Company has incurred $105,022 in
legal and consulting costs related to the acquisition of shares, and are
capitalized as a part of the cost of the shares. As the result of actions by the
Board of Directors on March 23, 1999, the above amount will be used to purchase
additional shares of Talon stock, which will bring the Company's interest to
approximately 25%. Other terms of the previous option are nullified and any
subsequent purchase of Talon stock by the Company will be subject to further
negotiation with Talon management. The Company's share in the earnings of Talon
from the date of acquisition to December 31, 1998, is $118,733.
In addition to the above transactions, the Company has purchased
certain electronic components, including parts for the Travel Star, which have
been sold to Talon at cost. These sales totaled $477,570 for 1998. The Company
purchased from Talon electronic components, which are integral to the Travel
Star product, which totaled $638,627. A net balance of $62,411 was receivable by
the Company as of December 31, 1998.
NOTE 15. ADVANCES TO AFFILIATES
On July 1, 1998, the Company entered into a joint development and
marketing agreement with Scientific Communications & Controls, Inc. (Sci-Com), a
privately held company based in McLean, Virginia. The Company has sold software
and documentation received from Intellidata Technologies, in exchange for a
$400,000 promissory note with interest at the prime rate (7.75% as of December
31, 1998); leased to Sci-Com, at a below market rate, $84,000 in computer
equipment required to support internet communication to support E@syMail; loaned
$50,000 to Sci-Com for expansion of the network equipment, with interest at
6.36%; and advanced $200,000 to Sci-Com to support testing for the product.
These notes bears interest at the prime rate. The Note for $50,000 and the
$200,000 advance are secured by specified assets and proceeds of Sci-Com may be
repaid either through a 50% share of network revenues generated by Sci-Com, not
limited to revenues generated by E@syMail users, or may at the Company's
discretion be converted into a 10% equity interest in Sci-Com. During 1998, the
Company also paid Sci-Com consulting fees totaling $67,560 for contract
development and programming services related to the development and testing of
E@syMail a portable e-mail unit. The Company has fully reserved for
collectibility of the $400,000 note receivable and accrued interest of $16,428
thereon.
NOTE 16. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 1998, the Company recorded adjustments that
increased its net loss by approximately $765,000. These adjustments included a
$416,000 reserve for collectibility of the note from Sci-Com with accrued
interest, $228,000 increase in reserve for inventory obsolescence, a $68,000
decrease in inventories for book to physical count adjustments and $53,000 of
other various non-recurring adjustments.
NOTE 17. SUBSEQUENT EVENTS
On March 26, 1999, the Company received a letter of intent from a bank
to establish a $1,000,000 operating line of credit. Completion of the agreement
is dependent upon preparation by the bank and acceptance by the Company of
complete loan documentation, including loan covenants.
On March 23, 1999, the Board of Director's met and approved, an
alternative plan, by which, the option acquired in August would be exercised for
the amount paid ($314,162), and would increase the Company's ownership of Talon
to approximately 25%. Under the terms of this agreement, any future acquisition
of shares in Talon would be subject to terms and valuations to be renegotiated,
and all other terms of the previous option would be nullified.
34
<PAGE> 35
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, President, Chief
Executive Officer and Chairman
of the Board
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.
April 14, 1999
/s/ Monte Ross ________________________________________
Monte Ross
President, Chief Executive Officer
and Chairman of the Board
April 14, 1999
/s/ Mark L. Peterson ________________________________________
Mark L. Peterson,
Vice President of Engineering,
Secretary and Director
April 14, 1999
/s/ Ernest Clarke ________________________________________
Ernest Clarke,
Vice President of Government Programs,
Director
April 14, 1999
/s/ Steven H. Akre ________________________________________
Steven H. Akre,
Director
April 14, 1998
/s/ Bruce L. Miller ________________________________________
Bruce L. Miller,
Director
April 14, 1998
/s/ John J. Clancy ________________________________________
John J. Clancy,
Director
PAGE 16
35
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,254,091
<SECURITIES> 0
<RECEIVABLES> 3,113,485
<ALLOWANCES> (9,520)
<INVENTORY> 3,121,003
<CURRENT-ASSETS> 8,600,072
<PP&E> 1,336,398
<DEPRECIATION> (551,492)
<TOTAL-ASSETS> 11,220,648
<CURRENT-LIABILITIES> 2,561,554
<BONDS> 0
0
0
<COMMON> 34,100
<OTHER-SE> 8,453,145
<TOTAL-LIABILITY-AND-EQUITY> 11,220,648
<SALES> 7,234,075
<TOTAL-REVENUES> 7,530,623
<CGS> 4,172,201
<TOTAL-COSTS> 6,366,378
<OTHER-EXPENSES> (3,907)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,790
<INCOME-PRETAX> (3,032,081)
<INCOME-TAX> (725,024)
<INCOME-CONTINUING> (2,307,057)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,307,057)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> (0.70)
</TABLE>
