SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
(Amendment No. ___)
Ultradata Systems, Incorporated
_____________________________________________________________________
(Name of Small Business Issuer in its Charter)
Delaware 3679 43-1401158
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(State or other Jurisdiction of (Primary Standard (I.R.S.
Incorporation or Organization) Industrial Employer
Classification Code Identification
Number) No.)
MONTE ROSS, PRESIDENT
Ultradata Systems, Incorporated
9375 Dielman Industrial Drive
St. Louis, MO 63132
(314) 997-2250
(Address and telephone number of Registrant's principal executive offices,
principal place of business, and agent for service of process.)
_________________________________
Copy to
ROBERT BRANTL, ESQ.
322 Fourth Street
Brooklyn, NY 11215
(718) 768-6045
Attorney for Issuer
_________________________________
Approximate Date of Commencement of Public Sale: As soon as practicable
after the Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [__]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [__]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [__]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [__]
CALCULATION OF REGISTRATION FEE
Title of Each Proposed Proposed
Class of Proposed Maximum Maximum Amount of
Securities To Amount to be Offering Price Aggregate Registration
Be Registered Registered (1) Per Share (2) Offering Price (2) Fee
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Common Stock,
$.01 par
value 2,835,890 $ 3.0315 $ 8,597,001 $ 2,269.61
(1) The amount to be registered is the sum of (a) 300,000 shares issuable upon
exercise of the options held by Influence Incubator L.L.C., and (b) 200%
of (i) 720,654 which would be issued if all 1,776 outstanding shares of
Series A Convertible Preferred Stock were converted on June 14, 2000 and
(ii) 478,506 shares issuable upon exercise of Common Stock Purchase
Warrants held by BH Capital Investments, L.P. and Excalibur Limited
Partnership, and (c) 128,000 shares issuable on exercise of the option
granted to Thornhill Group, Inc., and (d) 9,570 shares issued to
Victoria Davis-Lee.
(2) The proposed offering price is estimated solely for the purpose of
calculating the registration fee. Pursuant to Rule 457(c), the
registration fee is based on $3.0315, the average of the high and
low prices of the Common Stock reported on NASDAQ on June 13, 2000.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
ULTRADATA SYSTEMS, INCORPORATED
Common Stock
1,636,730 Shares
Six shareholders of Ultradata Systems, Incorporated are offering
shares of Ultradata common stock to the public by means of this prospectus.
Ultradata's common stock is listed for trading on the NASDAQ SmallCap
Market under the trading symbol "ULTR."
The six shareholders intend to sell the shares into the public market
from time to time. The shareholders will negotiate with the market makers
for Ultradata common stock to determine the prices for each sale. They
expect each sale price to be near to the market price at the time of the sale.
Purchase of Ultradata common stock involves risk. Please see "Risk
Factors," which begins on page 5.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus. Any representation
to the contrary is a criminal offense.
The date of this prospectus is July , 2000
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . .-3-
Summary Financial Information . . . . . . . . . . . . . . .-3-
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . .-5-
YOU SHOULD NOT RELY ON
FORWARD LOOKING STATEMENTS. . . . . . . . . . . . . . . . .-8-
DIVIDEND POLICY. . . . . . . . . . . . . . . . . . . . . . . .-9-
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . .-9-
Market for the Common Stock . . . . . . . . . . . . . . . -12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . -12-
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
Handheld Travel Computers . . . . . . . . . . . . . . . . -20-
GPS Products. . . . . . . . . . . . . . . . . . . . . . . -24-
Internet-Based Navigation . . . . . . . . . . . . . . . . -26-
Employees . . . . . . . . . . . . . . . . . . . . . . . . -30-
Description of Our Property . . . . . . . . . . . . . . . -30-
Legal Proceedings . . . . . . . . . . . . . . . . . . . . -30-
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . -30-
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . -35-
DESCRIPTION OF OUR SECURITIES. . . . . . . . . . . . . . . . -37-
Common Stock. . . . . . . . . . . . . . . . . . . . . . . -37-
Series A Convertible Preferred Stock. . . . . . . . . . . -38-
SELLING SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . -39-
Plan of Distribution. . . . . . . . . . . . . . . . . . . -42-
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . -43-
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . -43-
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . -43-
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . -45-
PROSPECTUS SUMMARY
Ultradata Systems, Incorporated
Ultradata supplies directions to travelers through portable units. In
addition, we own a one-third interest in the DriveThere.com Website, which
provides our directions via the Internet. Our products and services are based
on our patented data compression technology. For several years, Ultradata has
manufactured and marketed hand-held computers which provide travel information
(directions, services, amenities, etc.), edited for particular markets. In
the next few months, we expect to enter the market for automotive GPS-based
(i.e. "global positioning satellite") directional systems with the Travel Star
24. Travel Star 24 is a low-cost, portable navigation unit for the
automotive after-market. The Travel Star 24 is capable of calculating
routes, following the route, providing audible turn-by-turn prompts, and
locating over 300,000 services and amenities across the U.S.A. At a suggested
retail price under $400, the Travel Star 24 should compete favorably with
existing products with similar capabilities, which generally sell for $600 and
up, as well as with the original equipment systems that are priced in the
thousands of dollars.
Ultradata has only one office, which is located at 9375 Dielman
Industrial Drive, St. Louis, Missouri 63132. Our telephone number is 314-997-
2250.
The Selling Shareholders
Six shareholders are using this prospectus to sell shares of Ultradata
common stock to the public. Five of them acquired the shares as a result of a
private financing of Ultradata in May, 2000. The sixth is partner with
Ultradata in the joint venture called "Influence Data L.L.C.," which operates
the DriveThere.com Website. We gave our partner an option to purchase
Ultradata shares to encourage its dedication to the joint venture.
Outstanding Shares
Ultradata has issued two classes of stock: common stock and Series A
Convertible Preferred Stock. On the date of this prospectus there were
3,187,915 shares of common stock outstanding. In addition, there are
warrants, options and contract rights outstanding that could lead to
additional shares of common stock being issued. We cannot determine at this
time the number of additional shares that could be issued, because some of the
contract rights are based on the future market price of our common stock.
Summary Financial Information
The information for 1999 and 1998 and the 1st quarters of 2000 (actual)
and 1999 is derived from the financial statements included at the end of this
prospectus. The information for 1997 is derived from the financial statements
included in our Annual Report on Form 10-KSB for the year ended December 31,
1997. The information for the 1st quarters of 2000 and 1999 has not been
audited, but, in our opinion, we have made all adjustments necessary for a
fair presentation of the financial results for those quarters. Results for
the 1st quarter of 2000 are not indicative of the results that can be
expected for the year.
1st Qtr. 1st Qtr.
Statement of Year Ended Year Ended Year Ended 2000 1999
Operations 12/31/99 12/31/98 12/31/97 (unaudited) (unaudited)
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Net Sales $ 5,566,626 $ 7,234,075 $13,817,231 $ 289,687 $1,083,791
Cost of Sales 3,151,046 4,172,201 5,657,525 175,116 536,754
--------- --------- ---------- -------- ---------
Gross Profit 2,415,580 3,061,874 8,159,706 114,571 547,037
Research &
Development 358,357 672,090 1,022,095 96,233 99,226
Selling, General
& Administrative 3,875,539 5,749,351 6,867,857 522,751 1,254,001
--------- --------- --------- -------- ---------
Operating
Profit/(Loss) (1,818,316) (3,359,567) 269,754 (504,413) (806,190)
Other Income, Net 191,302 303,750 225,575 77,626 107,368
Income Tax
Benefit/(Expense) (370,236) 725,024 (158,225) - -
--------- --------- -------- -------- --------
Net Income/(Loss) $(1,997,250) $(2,330,793) $ 337,104 $(426,787) $(698,822)
========= ========= ======== ======= =======
NetIncome/(Loss)
Per Share $ (0.64) $ (0.71) $ 0.10 $ (0.14) $ (0.22)
========= ========= ======== ======== =======
Weighted Average
Number of Shares
Outstanding 3,122,138 3,299,636 3,425,130 3,105,235 3,154,682
========= ========= ========= ========= =========
Balance Sheet 3/31/00
Data 12/31/99 12/31/98 12/31/97 (Unaudited)
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Working Capital $4,455,812 $ 6,038,519 $10,607,580 $4,342,552
Total Assets 7,308,792 11,220,648 12,798,694 7,093,398
Long-term Debt - - - -
Total Liabilities 549,084 2,733,403 1,139,125 446,522
Shareholders'
Equity 6,759,708 8,487,245 11,659,569 6,646,876
RISK FACTORS
You should carefully consider the risks described below before buying
our common stock. If any of the risks described below actually occurs, that
event could cause the trading price of our common stock to decline, and you
could lose all or part of your investment.
We may not become profitable.
During 1998 and 1999 combined, we lost over $4.3 million. Our working
capital was reduced from $10 million to $4 million. In the first quarter of
this year, we lost an additional $427,000. Unless our sales increase
significantly, we will continue to sustain losses.
If the products that we are introducing in 2000 are not successful, the
future viability of our business will be in doubt.
In the past two years, our sales have fallen sharply, we have used up a
large portion of our working capital, and the price of our Common Stock is
only about one-third of its price two years ago. Many people, both inside our
company and in the investment community, consider our entry into the GPS
market and the world of e-commerce as the test of our ability to develop and
grow as a company. If we fail to capitalize on those opportunities in 2000,
whether due to poor planning or factors beyond our control, we will end the
year with our working capital seriously depleted, and our failures will likely
prevent us from obtaining additional capital.
We have recently changed the way we sell our handheld computer products,
in an effort to reverse the decline in sales. We will not know until late
this year whether the new strategy is effective.
From 1995 until 1998, we sold our products to retailers and directly to
consumers. We solicited direct sales primarily through catalogs, magazine
ads, and by mail. This strategy led to steady sales growth, but only marginal
profits, as our direct sales efforts were generally unprofitable. In 1998,
therefore, we began to reduce our direct sales efforts, and to focus our
marketing on mass market retailers such as Kmart, Kohl's and Target Stores.
As a result, 1999 we recorded much less in sales, but also recorded much
smaller losses. We hope that the new strategy will lead to profitable
operations during 2000; but we will not be know if we have been successful in
reorienting our marketing efforts until later this year. If our efforts to
sell hand-held products continue to be unprofitable, the drain on resources
could significantly hinder our efforts to expand into the GPS and Internet
markets.
Our new strategy is to sell our products primarily to mass market
retailers. This will make us dependent on a small group of large customers
for most of our sales.
Our decision to focus our marketing efforts on mass market retailers is
likely to increase the percentage of our revenues attributable to large
customers. In 1999 four customers each accounted for over 10% of our
revenues. We expect the number of large customers to increase in 2000 and
thereafter. This situation creates a risk that a significant customer may use
its importance to force us to lower prices. In addition, our dependence on
major customers means that the loss of business from one or more major
customers could adversely affect our financial results.
Several industry analysts have predicted that there will be a shortage
of semiconductors this year. This could prevent us from producing all of the
products we will need to operate profitably.
Most of our products include semiconductors. We do not have any long-
term supply contracts with our semiconductor suppliers, and they are not
required to supply us with semiconductors for any specified periods, or in any
specified quantities. If we are unable to obtain adequate supplies of
semiconductors, we will have to delay production of products. Since we need
to be able to sell a certain volume of products in order to be profitable, a
delay in production could cause us to lose money. In addition, a shortage of
semiconductors could lead to an increase in the price of semiconductors, which
would reduce the profit margin on our products.
Several large marketing enterprises have become involved in the GPS
market. We will attempt to compete in this market with relatively meager
resources, and could be defeated by the efforts of one or more of our
competitors.
A product that performs substantially all of the functions of
Travel Star 24 could appear on the market tomorrow, at the price we intend to
charge for Travel Star 24. Indeed, the success of Travel Star 24, should it
occur, is likely to propel the introduction of competitive products into the
market. If the introduction of a comparable product were financed
aggressively, Ultradata could find itself unable to market Travel Star 24
profitably.
We may require additional funds to complete development of our
GPS/Internet products.
We are only now initiating development of our GPS/Internet products. As
with any engineering development project, we cannot predict with assurance the
cash that will be necessary to complete the development of these products. If
the funds necessary to complete the GPS/Internet project exceed our cash
resources, we will seek financing. If the funds are raised by issuing equity
securities, you may experience a dilution of the value of your shares. If the
funds are raised by issuing debt, we may be subject to a heightened risk of
insolvency. But the worst result would be if the necessary funds could not be
obtained. In that event, we could be forced to curtail or terminate our
development efforts.
We will require additional financing if Travel Star 24 is successful,
in order to fund new orders.
If the introduction of Travel Star 24 leads to a large demand for that
product, we may need additional funds to pay the costs of manufacturing
inventory. We will then have to either sell additional equity or finance the
orders by some other means. If we are unable to secure the necessary
financing, our efforts to establish Travel Star 24 in the GPS market could be
severely hampered.
We have limited experience in the automotive after-market or on the
Internet. Our lack of experience may cause us to underestimate the challenges
facing us in those markets.
Our plan is to improve our financial performance by expanding our
operations into new markets. This strategy carries the risk of the unknown.
Many of our present customers could become customers for Travel Star 24.
However, we expect to also distribute Travel Star 24 through marketing
channels, such as auto parts dealers, with which we have limited experience.
We may not anticipate circumstances involving competition, marketing strategy,
regulation, or technology that prove harmful to our program for growth.
Competition for qualified personnel in the GPS, wireless, and Internet
industries is intense. If we are not able to hire and retain skilled
personnel, our plans for growth could be stymied.
Competition for highly skilled engineering and marketing personnel is
intense because there are a limited number of persons available with the
necessary technical skills and understanding of our products and markets. In
particular, we are always actively seeking for engineers with experience in
GPS and wireless applications, and they are in short supply. Our plans for
development will not be realized unless we are able to hire and retain the
necessary personnel.
Our future could be adversely affected, if we lost the services of our
Chief Executive Officer.
Monte Ross has been the primary architect of our business strategy and
marketing program. If his services were not available to us, Ultradata would
likely be adversely affected until a replacement could be found. At present,
we maintain a $1 million key man life insurance policy on Mr. Ross. The
policy expires on November 24, 2000. In addition, we have an employment
agreement with Mr. Ross, the term of which expires on October 1, 2000. The
agreement provides that Mr. Ross may not compete with Ultradata for one year
after termination of his employment.
There is no market maker providing strong support for our common stock.
As a result, the common stock is low-priced, thinly traded, and subject to
relatively wide swings in price.
For most of the past two years, with the decline in the Ultradata's
business results, interest in our common stock within the investment community
has waned. During the first half of 2000, there have been large gyrations in
the stock price; but a strong sustainable market for the common stock has not
developed. Unless interest in the common stock is sustained and a thriving
market for the common stock reemerges, you may find it impossible to sell
Ultradata shares at a profit, and may find it difficult to sell them at all.
The Series A Preferred Stock will be converted into large numbers of
shares of common stock, which will dilute the value of your shares.
Ultradata has issued Series A Preferred Stock with a face value of
$1,616,000. If our shareholders approve the sale and we satisfy certain other
conditions, we will issue an additional $1,404,000 of Series A Preferred Stock
later this year. The Preferred Stock (plus an 11.25% annual accrual) will be
converted into common stock at a rate which is tied to the market price of the
common stock. If all $3,020,000 in Preferred Stock is issued, it will convert
into at least 880,171 shares of common stock, which would be 21.6% of the
shares outstanding today. Until May 16, 2001, the $3,020,000 in Preferred
Stock could convert into as many as 1,653,497 common shares (34.2%), if the
market price for the common stock is less than $2.50 for twenty trading days.
>From May 17 until November 16, 2001, the $3,020,000 in Preferred Stock could
convert into as many as 2,317,281 common shares (42.1%), if the market price
for the common stock is less than $2.00 for twenty trading days. And after
November 16, 2001, there is no lower limit on the conversion rate. So after
November 16, 2001 the $3,020,000 in Preferred Stock could theoretically
convert into 99% of the outstanding common shares, which would render your
shares virtually worthless.
YOU SHOULD NOT RELY ON
FORWARD LOOKING STATEMENTS
This prospectus contains a number of forward-looking statements
regarding our future prospects. Among the forward-looking statements are
descriptions of our plans to restructure the marketing program for the Road
Whiz line of products, to introduce GPS products to the market, and to
develop products based on a GPS/Internet technology. These forward-looking
statements are a true statement of our present intentions, but are neither
predictions of the future nor assurances that any of our intentions will be
fulfilled. Many factors beyond our control could act to thwart Ultradata in
its efforts to develop and market its products, including factors discussed in
"Risk Factors" as well as factors we have not foreseen. In addition,
changing circumstances may cause us to determine that a change in plans will
be in the best interests of Ultradata.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
expect to retain future earnings, if any, for use in the operation and
expansion of our business, and do not anticipate paying any cash dividends in
the foreseeable future.
CAPITALIZATION
Outstanding Derivative Securities
On the date of this prospectus, there were 3,187,915 shares of common
stock outstanding. However, there were also options, warrants and convertible
preferred shares outstanding that could lead to the issuance of additional
common stock. The following table identifies these outstanding derivative
securities. The number of shares into which the Series A Preferred Stock is
convertible depends on the market price of the common stock at the time of
conversion. In this table, we are presenting the number of common shares that
would be issued if the Preferred Stock were converted at the "Floor" price of
$2.50, which is the conversion price applicable on the date of this
prospectus. We have not, in this table, limited the number of shares into
which the Series A Preferred Stock is convertible by the limit of 635,668
shares that will apply unless our shareholders approve a proposal to lift the
limit at our annual meeting on July 27, 2000.
Number of Common
Derivative Security Shares Issuable
Incentive Stock Options, exercisable at
$2.00 to $7.39 322,065
Other Options, exercisable at $2.50 to $5.00 906,506
Series A Preferred Stock 652,460
Option to purchase 160 shares of Series
A Preferred Stock, exercisable at
$1,000 per preferred share 64,000
---------
Total 1,945,031 ( 38%)
Common Shares Currently Outstanding 3,187,915 ( 62%)
---------
5,132,946 (100%)
=========
Securities Purchase Agreement
On May 10, we signed a Securities Purchase Agreement with two Toronto-
based investment funds: BH Capital Investments, L.P. and Excalibur Limited
Partnership. The agreement provides that we will sell to the funds Series A
Convertible Preferred Stock and Common Stock Purchase Warrants to purchase
common stock for $5.00 per share.
The Securities Purchase Agreement provides for two closings, at each of
which Ultradata will sell Preferred Shares and Warrants to the funds, each of
which will purchase 50% of the securities. The first closing occurred on May
16, 2000, at which time the funds paid a total of $1,600,000 for 1,600 shares
of Series A Preferred Stock and warrants to purchase 478,506 shares of common
stock. NASDAQ regulations require that we obtain shareholder approval before
issuing securities convertible into more than 20% of our common shares.
Therefore, the Certificate of Designations, which sets forth the terms of the
Preferred Stock, contains provisions that will prevent the funds from
acquiring more than 635,668 shares of common stock in total on conversion of
the Preferred Shares unless our shareholders approve the issuance of shares in
excess of that number. A proposal to approve the issuance to the funds of
more than 20% of the common stock will be presented for a vote of our
shareholders on July 27, 2000.
A second closing, at which the funds will purchase Preferred Shares and
Warrants for a total of $1,400,000, may occur. If the second closing occurs,
the funds will purchase 1,400 shares of Series A Preferred Stock and warrants.
The terms of the warrants issued at the second closing would be identical to
those issued at the first closing, except that the warrants then issued will
allow the funds together to purchase a number of shares equal to $1,400,000
divided by the 5-day average closing price of the common stock preceding the
second closing.
The second closing will occur only if the following conditions are
satisfied or are waived by the funds:
* Our shareholders must approve the conversion of the Preferred Shares
into more than 20% of the common stock outstanding on May 10, 2000
(i.e. 635,668 shares).
* The registration statement containing this prospectus must have been
declared effective by the SEC, and have been effective for a period
of 40 trading days.
* The average daily trading volume of the common stock for the 30
trading days preceding the second closing must have been no less than
75,000 shares.
* The average of the closing bid prices for the common stock for the 30
trading days preceding the closing must be no less than $4.50.
We made a number of covenants to the funds in the Securities Purchase
Agreement, which included the following:
* Until November 16, 2000, we will not issue any securities for the
purpose of financing without the approval of the funds.
* The funds will have a right of first refusal on any sale of
securities by us during the next twelve months.
A number of penalties have been built into the Securities Purchase
Agreement to compensate the funds if we fail to satisfy our covenants. The
most significant of the penalties are:
* If the meeting of the Shareholders to approve this Proposal does not
occur prior to August 15, 2000, we must pay the funds $13,333 for
each day the meeting is delayed.
* If the SEC has not declared effective the registration statement
containing this prospectus before August 15, 2000, we must pay the
funds an amount for each day of delay equal to .0005 times the
closing ask price times the number of shares which the funds could
acquire on conversion and exercise of the securities they purchased
at the first closing.
* If the funds are unable to convert any of the Preferred Stock into
freely-tradeable common stock, either because our shareholders fail
to approve the transaction or because this prospectus is not
available or for any other reason, the funds can force us to redeem
the Preferred Stock that could not be converted. The redemption
price would be the greater of (a) 130% of the purchase price plus
11.25% of the face value from the date of issuance or (b) the number
of shares of common stock that the funds would have received on
conversion multiplied by the five day average closing ask price.
Market for the Common Stock
Our common stock is listed for quotation on the NASDAQ SmallCap Market
under the trading symbol "ULTR." The following table sets forth the bid prices
for our common stock as quoted on NASDAQ for the eight quarters starting
January 1, 1998 and ending December 31, 1999 and the first quarter of this
year.
Bid
Quarter Ending High Low
--------------------------------------
March 31, 1998 $ 6.50 $ 3.75
June 30, 1998 $ 4.50 $ 3.25
September 30, 1998 $ 4.63 $ 2.25
December 31, 1998 $ 3.13 $ 2.00
March 31, 1999 $ 2.75 $ 1.44
June 30, 1999 $ 2.00 $ .94
September 30, 1999 $ 2.00 $ 1.38
December 31, 1999 $ 2.06 $ 1.13
March 31, 2000 $16.126 $ 1.00
Our shareholders list contains the names of 139 registered shareholders
of record. Based upon information from nominee holders, we believe the number
of owners of our common stock exceeds 1,200.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
Financial Statements and the notes to the Financial Statements, which appear
at the end of this prospectus. A summary of the Financial Statements appears
in the Prospectus Summary at the beginning of this prospectus.
Overview
One factor has been dominant in causing our poor financial results over
the past two years: our inability to sustain the high level of sales of the
hand-held products at upscale retail prices that we realized in 1996 and 1997.
Beginning in 1998, we have been transforming our marketing efforts away from a
primary focus on the "upscale" market. Initially we devoted a large portion
of our effort to direct marketing through magazines, mailers and bill inserts,
as well as by televised appearances on the QVC Shopping Network. This
strategy generally proved to be a mistake, as the cost of the marketing effort
often exceeded the revenue we obtained from it. The one exception was our on-
going relationship with QVC, which has been the source of over 19% of our
revenue in each of the past two years. We expect QVC to again be a
significant source of revenue in 2000.
In 1999, therefore, we again shifted our focus, this time to mass market
retailing, of the sort you associate with Kmart, Kohl's, and Target Stores, to
name three of our new mass market customers. The reduction of our prices to
mass market levels required major adjustments to our cost structure - in other
words, if you are selling the same product this year for $19.95 that you sold
for $49.95 last year, you had better be cutting your costs and eliminating any
part of your business that isn't immediately profitable. During the second
half of 1999 we made the cuts and performed the streamlining. That made 1999
a transition year, with reduced sales and not-yet-efficient operations leading
again to losses, albeit losses substantially reduced from 1998.
In the second half of 1999, we did make a major overhaul of our cost
structure in an effort to position our handheld business for future profits.
The change in marketing strategy toward mass market retailers and private
brands made possible efficiencies that were unavailable when we were focused
on an upscale market involving direct sales and specialty retailers. The
three primary changes facilitated by this conversion were:
- a significant reduction in overhead expenses as a result of the
relative efficiency of marketing through mass market retailers. The
reduction included a 20% reduction in our labor force, reductions
in executive compensation, and a more efficient use of our facility
that, combined, brought our overall personnel cost down by 27%
- significant reductions in advertising and marketing expense; and
- development of new supplier relationships facilitated by the higher
unit volumes involved in mass market retailing. These new
relationships have resulted in dramatic decreases in product cost
through the application of "chip-on-board" manufacturing processes,
and have reduced assembly labor costs. At year-end 1999 raw product
costs had been reduced by as much as 40% for some products.
The positive benefits of these adjustments to our cost structure began
to be realized in the 4th quarter of 1999, when we achieved income from
operations on a quarterly basis for the first time in two years. This
occurred even though the full benefit of our recent reduction in product costs
was not realized in that quarter, since we determine the cost of our products
on a FIFO ("first-in, first-out") basis. We will not know with assurance
until after 2000 whether the reorientation of our marketing focus and the
ancillary restructuring of our cost structure will stabilize our handheld
travel computers as a profitable line of business. We need to re-establish
the handheld units as a stable foundation for our business, so that we can
devote our financial resources to our development projects without fear of
being left without adequate resources to sustain operations.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 Compared to Three Months
Ended March 31, 1999
Sales. During the first three months of this year, our sales virtually
disappeared. Net sales were $289,687, compared to $1,083,791 for the first
quarter of 1999. There were several reasons for the dramatic fall-off in
sales, some of which were actually positive for us:
- We have been eliminating sales efforts that have been unprofitable.
For example, in the first quarter of 1999 we had revenues of
$452,759 (41.8% of total revenue for the quarter) from a direct-mail
insert program. That kind of marketing proved to be very
unprofitable for us, however. For example, the expense of the direct
mail program that produced those 1999 revenues was almost $500,000.
That meant we had lost money on the sales, even before we paid any of
our other expenses or costs. For this reason, we have eliminated
almost all of our direct marketing efforts. As a result, our selling
expense during the first quarter of 2000 was $78,959, compared to
$718,510 in the first quarter of 1999.
- During 1999 all of our relationships with mass market retailers were
on a special order basis. In other words, the retailers placed
orders with us for a quantity of our products, put them on their
store shelves, and measured how quickly they sold. Since gift-buying
is a major impetus behind the sales of our handheld computers, these
buying programs were scheduled for the holiday season, without
follow-on to this year. However, we do not expect this riches-or-
rags scenario to continue. Our two largest mass market customers,
Kmart and Target Stores, have introduced our products into plan-o-
gram, which means they will keep their shelves stocked with our
products. We are working intensively to establish our products in
the plan-o-gram programs of other mass market retailers.
Gross Profit. Our gross profit margin for the first quarter of 2000 was
only 39.5%, compared to 50.5% in the first quarter of 1999. For the past two
years our gross profit margin has averaged 44%; so both quarters were
relatively aberrant. The explanation for the aberration is that orders for
delivery in the first quarter tend to be specialty items that do not reflect
the general trends of our sales. Over the next year, we expect our gross
profit margin to gradually increase from the 44% benchmark established in 1999
and 1998.
G&A Expense. General and administrative expenses, for the first quarter
of 2000 totaled $443,792, compared to $535,491 for the first quarter of
1999. This decrease of $91,699, or 17.1% reflects executive salary reductions
and other cost-cutting measures made in the second half of 1999.
R&D Expense. Research and development expense decreased $2,993 or 3.0%,
to $96,233 during the first quarter of, 2000 compared to the first quarter in
1999. We kept our research and development expense at this relatively low
rate because we were concerned that our cash resources would not be sufficient
to both sustain operations and fund an aggressive research and development
program. In May, 2000, however, we received net proceeds of $1,375,000 from
the sale of Series A Preferred Stock and Common Stock Purchase Warrants to two
investment funds. We expect to devote virtually all of those funds to
completing the development of our Travel Star 24 and initiating development
of our GPS/Internet technology. Our contract with the investment funds
provides that we will sell them a second tranche of securities in the Fall of
this year if our shareholders approve the dilution that the sale will bring
about and if certain other conditions are met. If that sale occurs, we will
devote those proceeds to research and development as well, which will allow us
to pursue our engineering goals in an aggressive manner.
Other Income. Our non-operating income fell to $77,626 in the first
quarter of 2000, compared to $107,368 for the first quarter of 1999. The
principal cause of the difference was a loss of $27,000 that we recorded as a
result of our one-third interest in the operations of Influence Data, L.L.C.
We did not own that interest in the first quarter of 1999. We hope that as
the Website, DriveThere.com, acquires a larger coterie of regular users,
Influence Data will become a source of profits, but we cannot predict when
that will occur. We also look forward to growth in our other equity
investment, Talon Research & Development, Ltd., which would increase our "other
income."
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Sales. The full impact of our revised marketing strategy for the
handheld products was felt in 1999 sales. After the first quarter, we
eliminated almost all direct market selling activity, since we had proven
unable to sell our products profitably through direct channels. Instead, we
set out to develop a group of large retailers as the core customers for our
handheld products: some specialty retailers such as The Sharper Image, with
whom we had established relationships, but more towards mass market retailers
such as Kmart and Kohl's. As a result of the changes we were undergoing
during 1999, product sales for 1999 decreased by $1,417,178 (20.3%) to
$5,566,626, compared to 1998. In addition, during 1998 we had recognized
$250,271 in revenue from our government contract business that was suspended
at the end of 1998.
Gross Profit. Our gross profit margin was not significantly changed
from 1998 to 1999, averaging 44% in both years. The efficiencies that we put
in place in 1999 would have increased our gross profit margin, but for three
factors that counterbalanced the efficiencies:
- Our movement to lower-priced retail sales involves the elimination of
some of the gross profit in each sale, although we hope to compensate
by increasing the volume of sales.
- Since we account for inventory on a FIFO basis, the cost advantages
of our new manufacturing arrangements were not reflected in sales
until near the end of 1999.
- Gross profit was reduced in 1999 by residual expenses attributable to
our government contracts business that was suspended in 1998.
Inventory. One problem that has plagued us for several years has been
the obsolescence of inventory that occurs as our markets change. Particularly
at the end of 1998, this has resulted in sizeable write-offs which result in
an unfortunate wasting of our net worth. Inventory write-offs are a
particular problem as they tend to skew the year-to-year comparisons of our
financial results - i.e. a problem which is essentially accretive over time
becomes an expense only in the period when we reach the conclusion that
inventory has become unmarketable, causing us to take the write-off.
Late in 1999, we implemented a program that should greatly reduce the
problem of inventory write-offs. We contracted to barter our slow-moving
inventory. Under this new arrangement, we transfer the inventory at fair
value in exchange for print advertising credits. The arrangement requires us
to purchase $2.50 in advertising for every $1.00 of credit, which means we
make a commitment of $1.50 in cash. So, while this arrangement has committed
us to purchase $620,640 in print advertising over the next two years, our cash
commitment is only $372,384.
S,G&A Expense. As discussed in the "Overview" above, our reorientation
to lower-priced mass market sales enabled us to initiate cost-cutting measures
during 1999. For the most part, these measures became effective only in the
second half of the year, and our financial results suffered from the
inefficiencies that are customary in a transition period. Important among our
efforts to restructure expenses were:
- We reduced our workforce, so that by year-end our personnel expense
had been reduced by 27%;
- We reduced our facilities expenses, since mass market retailing does
not require the personnel or the space that is necessarily devoted to
customer service in a direct marketing business;
- We reduced our manufacturing costs by almost 40% by working with a
new offshore manufacturer with chip-on-board capability;
- We reduced our selling expense from $2,931,150 to $1,812,524,
primarily by reducing advertising and marketing by $970,661.
R&D Expense. In 1999, we reduced research and development costs by
$313,733, or 46.7%, to $358,357 compared to $672,090 in 1998. In addition,
we capitalized $110,214 of costs for the internally developed software tools
necessary for Travel Star 24 , which will be amortized over five years
beginning when the Travel Star 24 first goes on sale. The reduction in R&D
expense was part of our efforts to control our costs as we reorganized our
marketing effort. With the proceeds of the recent private placement, we
expect to increase our research and development activities aggressively.
Other Income. Our non-operating income was reduced to $191,302 in 1999
from $303,750 in 1998. The significant parts of this "other income" were:
- Our interest income, net of expenses, fell by $63,974, primarily as
a result of the significant operating losses realized in 1998 and
1999, which reduced our cash balances.
- During 1999, we increased our interest in Talon Research and
Development Company, Ltd. by 6.0% to 24.9%. Talon has been growing
rapidly, and its management expects a continuation of this trend.
Our share of Talon's net earnings during 1999 was $61,496. However,
we are required to amortize over nine years the difference between
the price we paid for our stake in Talon and 24.9% of Talon's net
assets. That amortization cost of $71,081 led us to report a loss
from our investment in Talon of $9,585.
- During 1999 we established a strategic presence in e-commerce by
participating in a joint venture called Influence Data, L.L.C. The
joint venture launched its road travel portal Website, www.
DriveThere.com, on October 29, 1999. The portal offers a complete
bundle of road travel products, including services, insurance, and
license and vehicle information. Our share of the start-up losses
of the joint venture during 1999 was $60,386. In addition, we are
required to amortize the difference between our initial contribution
to the capital of the joint venture and our share of its net assets.
That amortization cost of $11,147 led us to report a loss from our
investment in Influence Data, L.L.C. of $71,533.
- We realized royalty income of $127,473 during 1999 from IdeaVillage.
This income is the result of an arrangement in which IdeaVillage
licenses from us a unique version of the Road Whiz , funds the
manufacturing process directly, distributes the product through the
Radio Shack stores, and pays us a royalty on the sale.
Net Loss. We had a loss before taxes of $1,627,014 for 1999, compared
to $3,055,817 in 1998. However, because of our continuing losses, we decided
that it would be appropriate to take a reserve against the value of our
deferred tax asset. This tax asset had been built up in previous years,
representing the value that our tax loss carryforwards will have in future
years. The reserve we took in 1999, which increased our loss by $370,236,
reflected the fact that the carryforwards will never be of value unless we
become profitable. Although we believe that we will become profitable, we
considered the reserve appropriate in light of our historical losses . As a
result, our net loss in 1999 was $1,997,250, compared to a net loss of
$2,330,793 in 1998, which had been alleviated by an "income tax benefit" of
$725,024.
Liquidity and Capital Resources
Although our working capital has atrophied substantially over the past
two years due primarily to our operating losses, at March 31, 2000 we still
had over $4.3 million in working capital, which we believe to be substantially
greater than most companies of our size. On May 16, 2000 we added $1.273
million by selling securities to two investment funds. So we do have
sufficient working capital to sustain our operations and introduce our new
products, provided that we can stop the atrophy in our handheld business
through our new strategy of developing mass market customers and opening new
distribution channels.
Although working capital was reduced by $1.5 million during 1999, our
cash position remained stable. This compared favorably with 1998, when our
operations consumed $1,674,874 in cash, due to our unprofitable sales
strategy. Stabilization in 1999 occurred because we achieved positive cash
flow from operations of $518,664, as a result of the conversion of accounts
receivable and inventory to cash. The cash flow from operations in 1999 was
counterbalanced by $550,496 in cash flow used in investing activities,
primarily $400,000 that we restricted to guarantee a letter of credit for
Talon and $110,214 that we spent to develop software tools for compressing
roadmap topology into a format suitable for Travel Star 24 . This latter
amount was capitalized, and will be amortized over the five years after we
first sell Travel Star 24 . During 1998, by comparison, our investing
activities used $1,381,784 in cash, the greater portion of which was used to
invest in Talon. In addition, during 1998 we used $770,219 to repurchase our
common stock, a practice that used only $2,125 in 1999.
At March 31, 2000, we had $1,903,003 in cash and cash equivalents,
compared to $1,220,134 at December 31, 1999. Our operating activities during
the first quarter of this year provided cash totaling $427,547, primarily due
to the collection of $1,051,991 in accounts receivable. Those collections
were partially offset by a net loss of $426,787 for the quarter, an increase
in inventory of $106,736, and a reduction of accrued expenses and other
liabilities of $153,494. By comparison, our operations consumed $227,160 in
cash during the first quarter of 1999, as the cash from receivables collected
during that quarter was exceeded by the increases in our accrued payables and
expenses. During neither the first quarter of 2000 nor the first quarter of
1999 were material amounts of cash provided by or used in investing and
financing activities, with the exception that during the first quarter of 2000
we added to cash $314,625 when employees exercised stock options.
During 1999, we negotiated a lending agreement with Southwest Bank of
Missouri that provides a credit facility of $1 million, which includes a
$400,000 letter of credit facility for Talon. The credit is secured by our
accounts receivable, inventories and equipment, with an interest rate of 1%
over Prime Rate. The credit facility expires on July 1, 2000. We have
applied for a renewal of the credit facility, but the bank has not indicated
whether the facility will be renewed. In the event that the facility is not
renewed, we will seek alternate sources of credit, based on our liquid assets.
We expect that if sales orders for 4th quarter delivery reach our
expectations, we will find credit available to permit us to fill the orders.
Our liabilities were greatly reduced during 1999, and were equivalent to
less than twelve percent of our current assets at year-end and less than ten
percent of our current assets at March 31, 2000. Since we rely on outside
vendors for all of our manufacturing, our operations do not require
substantial capital expenditures other than for the periodic purchase of
tooling, test equipment, and fixtures. During 1999, our capital expenditures
were limited to the $115,468 we invested in development of software tools for
Travel Star 24 and our contributions to Talon and Influence Data.. At March
31, 2000 we had no material capital spending commitments outstanding..
Subsequently, however, we committed to contribute $190,000 to Influence Data,
L.L.C. during June, 2000.
Because we have gotten the cash requirements of our handheld business
stabilized, our working capital and cash reserves appear to be sufficient to
sustain over the coming year the level of business that we experienced during
1999, even it we are unable to renew our credit facility with Southwest Bank.
That leaves us with two liquidity issues: the cash we will need for
development of new products and the cash we will need if sales increase
significantly at year end. The cash for new product development we hope to
obtain by a second closing with the investment funds that are purchasing our
Series A Preferred Stock. If that closing occurs, the funds will purchase
$1.4 million in additional securities, which should be sufficient for our
development requirements. If the closing, which is subject to a number of
conditions, does not occur, we will have to seek equity financing elsewhere or
delay our development activities.
Our second liquidity issue arises from the fact that we expect sizable
additional sales at year end. For example, we recently received a $2 million
order (with an indication for an additional $1 million order) from Media
Syndication Global. Shipments under the order have already commenced and will
continue on a monthly basis, but the size of shipments under this order will
increase significantly in the fourth quarter of 2000. If overall sales for
the fourth quarter reach our anticipation, our cash reserves may not be
sufficient to fund our fourth quarter production requirements. Therefore, we
have already initiated negotiation of a short-term credit facility for the
third quarter, although we will not be certain that we will need it until
sales for 2000 become clearer.
Impact of Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 requires derivatives to be
recognized as assets or liabilities on the balance sheet and measured at fair
value. Changes in the fair value of derivatives should be recognized in either
net income or other comprehensive income, depending on the designated purpose
of the derivative. We will be required to implement this policy on January 1,
2001. We have not yet determined what effect this policy will have on our
financial position or results of operations.
Accountants
BDO Seidman, LLP audited our financial statements for 1999 and 1998.
Previously, KPMG LLP audited our financial statements for 1997 and 1996.
On July 24, 1998, our Board of Directors dismissed KPMG LLP from its
engagement to audit our 1998 financial statements. The report of KPMG LLP
on our 1997 and 1996 financial statements did not contain an adverse opinion
or a disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope, or accounting principles. We did not have, in
connection with the audit of our 1997 or 1996 financial statements or any
subsequent period, any disagreement with KPMG LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement, if not resolved to KPMG LLP's satisfaction,
would have caused KPMG LLP to make reference in connection with its reports
to the subject matter of the disagreement.
BUSINESS
Overview
Since 1987 we have been engaged in the business of selling handheld
computers that provide travel information. The products are based upon a data
compression technology that we developed, portions of which we have patented.
Recent developments in communications technology have opened up new
opportunities for us to use our technology. Therefore, we still sell our
handheld computers, but over the past three years we have been expanding the
scope of our operations:
- In 1998 we acquired an 18.9% interest in Talon Research &
Development, Ltd., which manufactured GPS ("global positioning
satellite") antennas that can be combined with our database to create
a variety of travel products. We increased our interest in Talon to
24.9% in 1999.
- In 1999 we helped to form a joint venture called Influence Data,
L.L.C., which provides travel services, including directions, over
the Internet.
- In the Fall of 2000 we expect to begin selling our Travel Star 24 ,
which combines our travel information with a GPS antenna to enable a
driver to obtain his location and directions to his destination while
he drives.
- We have begun development of an enhanced version of our GPS product
that will include a cellular transceiver to permit the driver to use
the product to access the Internet while traveling.
Our research & development expenses were $358,357 and $672,090 for the
years ended December 31, 1999 and 1998, respectively.
Handheld Travel Computers
The Road Whiz Line of Products
Our core business is a line (currently 16 products) of hand-held
computers that utilize our proprietary data compression technology to provide
a library of information in a pocket-size box. Most of the products contain
travel information, customized to specific markets, and so the flagship
products have carried variations of the trademark "Road Whiz." Within the
chip that powers a Road Whiz can be found information compiled by our army of
"Road Helpers" regarding over 100,000 services and amenities along the U.S.
Interstate Highway System and directions on how to reach the service or
amenity of choice. Some versions of the Road Whiz also contain information
about services and attractions within the cities linked by the Interstate
Highway System. The service information provided by a Road Whiz product
includes directions and mileage to gas stations, hotels, motels, hospitals,
and 24-hour restaurants, as well as highway patrol emergency numbers. We sell
our handheld products through independent sales representatives, mass
merchandise retailers, catalog companies, department stores, office supply
stores, direct mail promotions, luggage stores and selected television
shopping channels.
Among the hand-held products we currently offer are the following:
Road Whiz Plus and Super Road Whiz provide complete routing
information for over 90 cities, giving driving distances, driving time and
detailed directions. Both products are designed to be marketed by mass
merchandise retailers, such as Kmart and Kohl's. Road Whiz Ultra has similar
capabilities, but is designed primarily for sale on the QVC television
network. In addition, we sell a unit containing the Road Whiz database but
named Car & Driver as a private label of the Target Stores chain.
Ultrafinder is a more powerful travel unit, which features a two-line
display and an updatable plug-in memory module, while providing specific city
information to supplement the Road Whiz database of highway information.
Ultrafinder is intended primarily for direct marketing, such as
advertisements in Sky Mall magazine.
Town & Country provides a list of 60,000 services along the nation's
highways and directions to over 7,000 towns connected by the Interstate
Highway System. We sell this product through upscale retail locations, such
as Brookstone and Rand McNally. The Road Whiz RV Special adds to the
standard Road Whiz features useful for an RV owner, such as the location of
dump stations and the availability of parking for recreational vehicles at
restaurants.
AAA TripWizard is the product of a joint effort between Ultradata and
the American Automobile Association. The product combines AAA's database and
ratings with Ultradata's Road Whiz database to provide turn-by-turn
directions to AAA-rated facilities across the country. AAA TripWizard is
sold through AAA travel stores as well as upscale retailers such as Brookstone
and Sharper Image.
The hand-held products generally retail between $19.95 and $49.95. We
recommend that consumers update their units every one or two years, and sells
the updates for $19.95 or $29.95 plus $4.95 shipping and handling.
Our New Marketing Strategy
After our initial public offering of securities in 1995, we were able to
commence widespread marketing of the handheld products. We priced them to the
upper range gift market ($49 to $129) and focused our marketing efforts on
direct sales through television and print ads, as well as through a sales
representative network. That strategy was successful in expanding our sales
for three years, while the products were new to the market. The expansion of
sales, however, did not bring with it a proportionate expansion of profits.
Too many of our marketing techniques were only marginally profitable, and as
our products lost some of their newness, marketing techniques such as direct
mailing produced diminishing returns. For that reason, beginning late in 1998
we revised our marketing strategy. The products (except for the high
performance units, such as Ultrafinder) now generally retail for $19.95, and
marketing is focused on mass market retailers and custom-branded private label
units. At this price point, we hope to achieve sufficient volume that
economies of scale, combined with new low cost manufacturing methods initiated
in the 4th quarter of 1999, will permit us to operate profitably, even at a
lower level of annual sales.
Retail distribution through mass merchandise channels accounted for over
50% of our revenue in 1999, as revenue from sales to Kmart, Target Stores.
United Marketing Group, and The QVC Television Network each accounted for over
10% of 1999 revenue. End of year results from this program look promising, as
Kmart completed a successful holiday season promotion, and has introduced the
Road Whiz product into plan-o-gram, which involves everyday sales and
reorders of the product. Target Stores, likewise, has introduced a product
into plan-o-gram, in Target's case a private-labeled version of the Road Whiz
line named "Car & Driver."
Four customers accounted for 10% or more of our sales in 1999, and, in
the aggregate, accounted for 55% of sales. The loss of our largest customer
would have resulted in a loss of sales of approximately 20%. The customers to
whom over 10% of sales were made in either of the past two years are
identified in the following table.
Customer 1999 % of Sales 1998 % of Sales
QVC $1,102,246 19.8% $1,379,148 19.7%
Kmart 813,792 14.6% - -
United Marketing
Group 582,260 10.5% - -
Kohl's 575,184 10.3% - -
Roy Thomas, Inc. - - 1,508,634 21.6%
--------- ---- --------- ----
Total $3,073,482 55.2% $2,887,782 41.3%
The percentage of revenue attributable to mass merchandise channels is
expected to grow in 2000, although the relative contribution of any individual
chain or channel should decrease over time as we expand our distribution
network to include other merchandising giants. Road Whiz products are
currently sold in stores representing less than 5% of the ACV (all commodities
volume) in U.S. retail. So we intend to aggressively seek expansion to other
store chains. For example, in December Radio Shack completed an intense
holiday promotion with sales of 90,000 units.
Central to the new marketing strategy is our effort to develop a variety
of distribution paths, so as to maximize our penetration of the potential
market for our products. To date, in addition to our sales to retailers, the
following types of distribution have been put in place:
- Private Branding. The leading example of the private label marketing
strategy was the introduction in 1999 of the AAA TripWizard as a
joint venture with the American Automobile Association. The database
for this product was customized to include both our core database of
over 100,000 services and amenities as well as turn-by-turn
directions to restaurants, lodging facilities, camping and service
facilities approved by AAA, along with their AAA diamond-rating or
AAA approved status. Initially, the product retailed at $49.95
through the upscale retailers The Sharper Image and Brookstone's.,
and results were disappointing. AAA has agreed to a substantial
reduction in the retail price of the AAA TripWizard , which will
facilitate marketing to AAA's network of affiliates, which consists of
93 clubs, 1,100 offices and over 41 million members in the United
States.
- Licensing. The Radio Shack promotion was organized by
Ideavillage.com, which provided display advertising and point-of-
purchase materials, as well as print and television advertising
support. We developed a version of the Road Whiz labelled Auto
Pilot for distribution by Ideavillage.com, which purchases the
product directly from the assembler, except for key chips which are
purchased from us. Ideavillage.com then pays us a royalty on product
sales.
- Direct Response Marketing. At the end of May we received orders for
over $2 million (with an additional $1 million of add-on orders
indicated) from Media Syndication Global. Media Syndication Global
specializes in multi-media direct response marketing. Although we
failed in our efforts at direct marketing of the handheld products,
Media Syndication Global has resources and expertise in this area
that we lacked, and its initial test marketing of our products was
sufficiently successful to lead it to order $2 million of handheld
products for delivery in 2000.
- Marketing Partnership. During 2000 the Road Whiz line will be
expanded by the introduction of a unit we developed in cooperation
with United Marketing Group, the organization responsible for the
ITC-50 hotel discount booklet. That 50%-off hotel discount guide,
which normally retails for $20, will be embedded in a new Road Whiz
unit that will have a suggested retail price of $39.95, but likely
sell for $29.95 in mass markets. The product will be test-marketed
through a retail store chain and via a direct mail program organized
by United Marketing Group.
If our new marketing strategy is successful, the result will be an
increase in sales revenue with a significant reduction in selling and
administrative expense, as the costs attendant to direct retail marketing are
reduced. Even though the exponential growth rate that we achieved in 1996 and
1997 is unlikely to be replicated, stabilization of our core business at even
a modest level of profitability would provide a foundation on which we could
pursue dynamic growth through our entry into the GPS and Internet markets.
Manufacturing
We do not manufacture any of our products. We retain assemblers to
manufacture the products. We procure the microprocessors and memory chips and
other unique items, and supply them to the assembler.
To date, there are two manufacturers to whom we have contracted most of
our assembly work. Once each year, these manufacturers quote prices to us
based upon estimated annual quantities. Then we place individual purchase
orders for production. Our arrangements with these manufacturers - up to the
point of a purchase order - are terminable at will by either party. If
either or both of the manufacturers became unavailable to us, alternate
sources would be readily available. Nevertheless, the sudden loss of one of
the manufacturers or unanticipated interruptions or delays from present
manufacturers would likely result in a temporary interruption to our planned
operations.
Backlog
As of March 31, 2000 our total backlog was $110,805, compared to backlog
of $141,300 on March 31, 1999.
Patents
We own two patents that are utilized in our Road Whiz products. They
provide us a technological advantage which, to date, has prevented any similar
product from appearing. One patent covers our method of compressing data
relating to travel information. This compression technology permits our
travel products to store more data on smaller and less expensive memory
devices. The second patent covers the methodology which enables our travel
devices to account for changes which occur when the traveler crosses a state
border.
Competition
To date, we have not faced significant competition in selling our
handheld computer products. The primary reasons for the lack of competition
are:
- Our patented data compression technology permits the storage of
unusually large volumes of information in low-cost devices.
- Our database is unique, and it would be time-consuming to replicate
it.
- We have thirteen years of experience in developing this line of
products, which gives us insight into the needs and desires of the
traveling consumer.
- We have a simple, low-cost design for our products, which employs a
minimum of parts.
- We have developed low-cost, but high quality manufacturing sources.
- The devices that perform functions to those performed by our handheld
products are considerably more expensive, and often lack the data
quality of our products.
These several factors have, thus far, served as a barrier to any
effective competition with our handheld products.
GPS Products
Talon Research & Development, Ltd.
We own 24.9% of Talon Research & Development, Ltd., a privately-held
enterprise located in Auckland, New Zealand. Talon manufactures and markets
electronic components and marine instruments that incorporate Global
Positioning Satellite ("GPS") receiver units. Among Talon's products are the
GPS receiver and antenna used in our Travel Star 24. Talon sells these
antennas to Ultradata at the lowest price it offers to any customer.
The prospects for significant growth at Talon appear promising. In
February of this year, Talon was chosen to replace Magellan as the GPS
hardware supplier for the Palm Pilot, which opens a major sales channel as
well as marking a significant shift in market power toward Talon. Talon also
this year received an order from Rand McNally for antennas for 30,000 GPS Palm
Pilots. Finally, Talon has been expanding the international distribution of
its marine electronics products beyond its European base to South America,
South Africa, and China, and is projecting significant growth in its marine
electronics business as well as its OEM GPS receiver business.
Travel Star 24 GPS Auto Navigational System
Taking advantage of our access to the Talon GPS receiver/antenna, we
have developed a low cost, portable navigation unit for the automotive after-
market, which we will market as the "Travel Star 24." The Travel Star 24
utilizes the Talon GPS receiver and antenna to pinpoint the longitude and
latitude of the moving vehicle. On-the-fly, the unit is capable of
calculating a route, displaying visual directions and distance as well as
audible turn-by-turn prompts and warnings when the driver strays from the
route. The Travel Star 24 also includes an expanded version of the
proprietary and unique Road Whiz database, providing the driver directions to
over 300,000 services across the U.S.A. As the driver travels, the GPS
signals are referenced to the service database, so that the driver can
instantly find businesses, hotels, service stations, rest stops, restaurants,
hospitals, tourist attractions, airports, etc. in more than 250 metropolitan
areas, as well as directions to over 12,000 smaller cities and towns.
While there are a wealth of potential users for a GPS-based navigation
system, we intend to target the Travel Star 24 to the automotive after-market,
which currently consists of over 150 million vehicles and grows by 15 million
vehicles annually. In addition, we are engaged in discussions with several
companies that sell GPS-based theft recovery systems. These companies are
considering Travel Star 24 (without the Talon GPS system) as a low-cost
addition to their theft recovery systems.
Currently, between 600,000 and 1,000,000 GPS-based navigation systems
are sold annually. These include installed original equipment such as
"Neverlost", which is generally priced in the $2,000 range; low-end hand-held
units of very limited capability (generally approximately $200); and middle
market units priced in the $500 to $600 range. Examples across this middle
range can be found in the lines of Magellan, Garmin and Lowrance.
Travel Star 24 will compete in this range, as we expect it to have an initial
retail price under $400. But the Travel Star 24 should have several
competitive advantages over the middle market competitors:
- Travel Star 24 provides audible prompts, whereas the competitors use
a "moving map" that requires the driver to take his eyes off the
road;
- No other product in the middle price range can compute routes - the
routes must be entered by the user;
- Travel Star 24 can plan a route to 12,000 towns and cities;
- Travel Star 24 can be equipped with a low cost ($49.95) regional
cartridge that will provide block-to-block navigation; and
- Travel Star 24 incorporates Ultradata's proprietary data compression
technology to provide directions to over 300,000 services, a
functionality for which the competition offers nothing comparable.
The Travel Star 24 can easily fit into a briefcase or purse; so it is
portable to any rental vehicle. We expect to begin selling it during the
Fall of 2000, as the remaining development consists of completion and beta-
testing of the software and finalization of the data set. Problems with
either project, however, could delay production.
Patents
We hold two additional patents which have potential utility in the GPS
market. Patent 5,943,653 was awarded in August, 1999 and covers the delivery
of electronic coupons in a handheld computer for discounts of services. The
technology can be combined with the GPS locational function to cause time and
site-specific coupons to be delivered to the driver offering, for example, a
discount at the upcoming hotel. We would, of course, receive a fee for each
customer that the hotel gained in this fashion. We are currently in
discussions with a participant in the cellular telephony industry aimed at a
cross-license of our patent for the telephony technology as a platform for
delivery of the electronic coupons.
The other related patent, which was awarded in May of 1999, covers a
method of integrating a GPS receiver into a radar detection device. By use of
this patented technology, it becomes practical to eliminate many false radar
detection alarms, as well as to provide audible warnings of speed zones. We
are in discussions with a major distributor of radar detection devices
regarding a license of this technology.
Internet-Based Navigation
www.DriveThere.com
In May of 1999 we formed a joint venture with Influence Incubator, LLC
to create a vertical interest portal on the Web for travelers. The joint
venture, of which we own 33%, launched its Website, www.DriveThere.com, in
October, 1999. By creating affiliations with a large number of major content
providers, the joint venture has been able to load the Website with a wealth
of travel-usable content, including driving directions, travel suggestions,
weather reports, information on products and services for travelers (e.g.
insurance, tires), a forum for auto sales, and contacts for emergency roadside
assistance. In addition, the shopping function on the Website is a virtual
department store for travelers, offering products ranging from educational
toys to amuse traveling children to the Road Whiz to enlighten traveling
parents.
The joint venture plans that, in mid-2000, the Website will sponsor a
Preferred Members Program, which will provide a panoply of services for
travelers (e.g. a facility to pay traffic tickets online) for a minimal annual
fee. Even if 1% of U.S. drivers join and pay a fee of $5 per month, revenue
from the Program will reach $24MM annually, not including the several
ancillary benefits of driving traffic to the Website, such as advertising
revenue and enhanced e-commerce opportunities.
In March, 2000 Lucent Technologies announced that it would be conducting
an initial customer trial with DriveThere.com for "PhoneBrowser," a Lucent
product that would allow consumers to access the Internet with an ordinary
telephone, using natural language speech commands and receiving content via
recorded audio or synthesized text-to-speech. In the customer trial, drivers
will be able to use their mobile phones to access the DriveThere.com Website
and obtain the directions and other information available there. The driver
will be asked a series of questions when she reaches the site, similar to the
organization of the Road Whiz . Her replies will determine the information
that is collected from the database, and the Lucent technology will enable
that information to be converted into speech and relayed over the phone. If
the trial and subsequent market tests are successful, a joint venture
arrangement between Lucent and DriveThere.com would be negotiated. At this
time, there is no commitment with Lucent other than to conduct the initial
trial together.
The Internet TripLink
We currently have under development a product that would permit users to
download a detailed travel itinerary through a modem-equipped PC into a
handheld unit. The user could in this manner be given real-time access to
volatile information such as traffic, discounts, and increased detail as to
routing and services. We expect to initiate marketing of the product late in
2000. We anticipate that we will market the Internet TripLink in joint
venture with one or more Internet service providers who have expressed
interest in using the Internet TripLink to sustain subscriber loyalty.
GPS/Internet Auto Navigation and Tracking System
The most exciting project on our development schedule is an effort to
exploit the synergy between the communications capabilities of the Internet
and the locational capabilities of a GPS antenna. The product line is
presently only in the planning stage. But later this year, if our resources
permit, we expect to commence development of a GPS/Internet auto navigation
and tracking system. The utility of the product will be to create a rich link
between the driver and a stationary source of communications, be it a family
member on a home PC or a hotel chain soliciting the driver's business.
Examples of the benefits of a GPS/Internet communications system are:
- The ability of an authorized person to track the location of the
vehicle from their home computer (Do you know where your teenager
is?).
- The ability of the driver to send and receive brief, formatted e-mail
messages to/from the "home base". ("Call me" or "I'll be home by
9:00").
- The ability of the driver to receive useful location-specific
information, such as available hotel discounts along the route, on a
dynamic hour-by-hour basis. ("It's early evening, and the Holiday Inn
at Nashville has many vacancies. They are now willing to discount 60%
off the nominal rate").
- The ability to forward highly-targeted traffic information to the
vehicle based on knowledge of its location and direction of travel.
- The ability to send an emergency message which includes your specific
location, anywhere in the country.
The system is conceptually simple. We plan to modify the Travel Star 24
to incorporate a cellular transceiver into the existing housing. Information
in the vehicle will originate in and be displayed on the Travel Star 24, which
has a four-line text display and a menu-driven "soft key" user interface. The
Travel Star 24 also has a built-in GPS receiver, and can generate the
necessary geo-coordinates to identify the vehicle's location. The vehicle's
identity, its geo-coordinates, and any outgoing messages will be passed to the
cellular transceiver for broadcast to the local phone cell, then transferred
via the Internet to the "Home Base" PC.
At the "Home Base", mapping software will be installed, which can
translate the geo-coordinates into a position display on a map. The person at
home can thus track the location and progress of the vehicle, using the
connectivity provided by the Internet. The same "Windows"-based software can
receive and display incoming messages, and generate pre-formatted outbound
messages and position queries. Similarly, pre-formatted messages can be sent
from the vehicle to the Internet site, where the messages are available to
friends and family.
There will be a number of elements comprising the system:
- Vehicle hardware, consisting of the Travel Star 24 with an integrated
cellular transceiver and a power cable;
- A cellular system with broad national coverage;
- Software for the "Home Base" (i.e. custom CD-ROM or download from the
Website);
- A "gateway" for handling message traffic between the Internet and the
cellular system (i.e. the Website); and
- A server at the Website for validating users, and handling time and
location-related responses to queries and/or "push" information.
We plan to work with a number of competent organizations to develop,
launch and operate the GPS/Internet System. Essentially, we will focus on
developing the Travel Star 24 hardware and supervising program integration.
We will contract out the responsibility for providing transceiver hardware,
and will work with other organizations that would provide the cellular network
interface and billing, gateway software and advertising relationships. To
date, the only relationship we have formed in this regard is a letter of
intent with a start-up communications company, which has offered to fund
integration of a cellular link into Travel Star 24 and then undertake
marketing the product to OEMs.
The GPS/Internet System is in the planning stage only. There are a
number of technical tasks required to make the system operational, including
the hardware and software modifications described in the following paragraphs:
- Modification of Travel Star 24. The existing Travel Star 24 design
must be modified to incorporate the cellular transceiver, and its
software needs to be expanded to enable the new functions made
possible by the cellular link.
- Develop a Website to serve as "Gateway." The site would be developed
to communicate with "Home Base" computers via the Internet. It would
be linked to the cellular hub via a dedicated line. Software must be
developed to enable appropriate interfaces with the system to provide
the additional features. The server which hosts this web site would
be connected to a source of real-time hotel discounts, and other
valuable "push" or query-based services. Based on the geo-coordinates
of the inquiring Travel Star 24, it must be able to correlate the
consumer's location with available discounts.
- Integration with Cellular Network. Connectivity to specific vehicles
would be through a 'National Call Center.' National coverage would be
provided by the cellular network. The messaging menu would contain
short messages options generated by the Travel Star 24 and the "Home
Base" software. Connect time will be short, since the messages are
pre-formatted.
- Modification of Mapping Software to present the user with a screen to
initiate communications with the target vehicle and to automatically
display the location of the vehicle (when its coordinates have been
received), at some intermediate scale, which can then be further
adjusted by the user to identify the specific street where the unit
is located.
The GPS/Internet product can be positioned as a service adjunct to the
Travel Star 24, whose added benefits would include safety and security,
ability to access vehicle location, location-specific hotel and restaurant
discounts, and other potential features made possible by the combination of
cellular communications and GPS technologies.
The appeal of the product will vary over demographic segments and
related advertising and distribution channels. For example, the more mature
audience which is typical of the TV shopping channels might be more interested
in the added safety and security inherent in knowing exactly where you are,
and being able to communicate that information to others, in order to receive
assistance. A "Road Warrior", by contrast, might be more interested in
finding heavily-discounted lodging along his route, as hotel vacancies persist
later into the day. Traveling families may be attracted to both the safety
and economy-travel features. Families with teen-age children may want to know
exactly where the car is late at night, and whether the children are where
they're supposed to be.
Employees
We have 19 full-time employees, including our six officers. All of our
employees are located at our headquarters in St. Louis, Missouri. We employ
six people in sales, customer service and shipping, three people in database
research, four people in executive management and administration, four people
in product development, one person in inventory management, and a president
and chief executive officer. In addition, a number of part-time consultants
are retained for database research and software development. None of our
employees belongs to a collective bargaining union. We have never experienced
a work stoppage, and we believe that our relations with our employees are
good.
Description of Our Property
Our 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. We pay a monthly rent plus 31% of all building expenses under an
operating lease which expires on October 31, 2001. In 1999 the rent and
expenses we paid totalled $114,247.
We maintain no manufacturing operations on this site, because we employ
outside contractors to manufacture our products. We believe that this
facility is adequate for our need for the foreseeable future.
Legal Proceedings
We are not involved in any significant legal proceedings at this time.
MANAGEMENT
This table identifies our directors and executive officers. Directors
serve until the next annual meeting of shareholders and until their successors
are elected and qualify. Officers serve at the pleasure of the Board of
Directors.
Director
Name Age Position Since
--------------------------------------------------------------------
Monte Ross 67 President and Chief
Executive Officer, Director 1986
Mark L. Peterson 43 Vice President - Engineering,
Secretary, Director 1986
Ernest Clarke 60 Vice President,
Chief Financial
Officer, Director 1990
Leonard Missler 54 Vice President - Software
Development --
Duane Crofts 63 Vice President -
Advanced Products --
David Biernbaum 45 Vice President --
Steven H. Akre, Esq.(1)47 Director 1986
John J. Clancy(1) 63 Director 1995
Donald Rattner(1) 67 Director 1999
(1)Member of the Audit Committee
Monte Ross founded Ultradata in 1986, and has served as our President
and Chief Executive Officer since the founding. In addition to his management
responsibilities, Mr. Ross is responsible for new product development and for
supervision of sales and marketing. 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.
Mr. Ross is the father-in-law of Mark L. Peterson, our Vice President -
Engineering.
Mark L. Peterson has served as our Vice President of Engineering since
1988. He is responsible for the design of our hand-held products. Mr.
Peterson was awarded a Master of Science degree in Electrical Engineering by
Washington University in 1980. Mr. Peterson is the son-in-law of Monte Ross,
our President.
Ernest Clarke was employed from 1990 until 1999 as our Vice President -
Government Programs. In 1999 Mr. Clarke became our Chief Financial Officer.
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. 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. Mr. Crofts has been integral to the development of Travel Star 24 and
our entire GPS 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. Prior to
joining the Company, Mr. Biernbaum was employed as Senior Vice President,
Marketing for Vi-Jon Laboratories, Inc. a manufacturer of private label health
and beauty care products. Mr. Biernbaum holds a Master's degree in Marketing
from Southern Illinois University.
Steven H. Akre, Esq. has served as our corporate counsel since Ultradata
was founded in 1986. Mr. Akre is an attorney at law, whose specialization is
in taxation and corporate mergers and acquisitions. He is currently a sole
practitioner. Prior to December, 1999, Mr. Akre was a member of Lewis Rice &
Fingersh, L.L.C.
John J. Clancy has been retired for the past five years. Mr Clancy
currently serves on the Board of Directors of Cimplex Corporation, Inc. in San
Jose, and Engineering Software Research & Development, Inc. in St. Louis.
Previously, Mr. Clancy was employed by McDonnell Douglas in a variety of
positions progressing from Programmer to Divisional President. Mr. Clancy was
awarded a Master of Science degree in Chemical Engineering by The Johns
Hopkins University and a Master of Business Administration degree by
Washington University, St. Louis.
Donald Rattner has for over 25 years been a member/partner in
BrookWeiner, LLC, a Chicago-based accounting firm, and its predecessors. He
is a member of the American Institute of Certified Public Accountants and the
Illinois CPA Society.
Compensation of Directors
Our Directors who are not also officers receive $500 per meeting and are
reimbursed for out-of-pocket expenses incurred on our behalf.
Employment Agreements
Messrs. Ross, Peterson, and Clarke have individual employment agreements
with us which are substantially identical, except as noted below. The
agreements terminate on October 31, 2000. Each agreement provides for a base
salary, which the Board of Directors must adjust annually. If the majority of
the Board cannot agree as to a level of salary adjustment, the salary
increases by 10% for Mr. Clarke and Mr. Peterson and by 5% for Mr. Ross. The
employment agreements restrict each officer from competing with us for one
year after the termination of his employment unless he establishes that his
employment by a competitor will not involve the use of any information which
we consider confidential.
Executive Compensation
Annual Compensation Long-Term Compensation
Year Salary Other(2) Options (#)
-------------------------------------------------------------------------
Monte Ross, President(1) 1999 $ 142,588 $ 6,000 10,000
1998 $ 154,999 $ 6,000 6,000
1997 $ 130,000 $ 5,000 12,500
(1) Mr. Ross is the only officer of Ultradata whose total salary and bonus
for 1999 exceeded $100,000.
(2) Represents the premium paid for an insurance policy on Mr. Ross's life,
the beneficiary of which is Mr. Ross's estate.
Option Grants in the Last Fiscal Year
Percent of Total
Number of Shares Options Granted
Underlying to Employees in Exercise Expiration
Name Options Granted Fiscal Year Price Date
------------------------------------------------------------------------
Monte Ross 10,000 9.7% $2.00 12/31/04
Aggregated Fiscal Year-End Option Values
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money Options
Name Options at December 31, 1999 at December 31, 1999
----------------------------------------------------------------------------
Monte Ross 73,500 exercisable Not Applicable
Stock Option Plans
We have two stock option plans: the 1994 Incentive Stock Option Plan and
the 1996 Incentive Stock Option Plan. The Plans are identical. Our
shareholders have approved the issuance of options for 350,000 shares under
the Plans. Our Board of Directors have approved the grant of options for an
additional 150,000 shares, and the Board will ask our shareholders to approve
that increase at the annual meeting of shareholders on July 27, 2000. So
far, options for 414,088 shares have been issued under the Plans, not
including options that were issued and then terminated when the employees left
Ultradata. Of the 414,088, options have been exercised to purchase 92,023
shares of common stock. Options to purchase 322,065 remain outstanding.
The Plans give the Board of Directors the authority to grant stock
options. All of our employees, as well as our Directors and consultants who
perform services for us are eligible to receive options. Some of these options
may qualify under Section 422 of the Internal Revenue Code, which gives tax
advantages to options that meet the qualifications. Stock options designed to
qualify under Section 422 are referred to as "incentive stock options." All
other stock options are referred to as "non-qualified stock options." The most
important provisions of the Plans are the following:
* The Board of Directors will determine the number of shares that an
employee may purchase and all other terms and conditions of each
option.
* No option will have a term of more than 10 years.
* Every incentive stock option granted to a shareholder who owns 10% or
more of the voting power in Ultradata, will expire not later than
five years after the grant.
* The employee who holds an option may not transfer it, except by will
or through the laws of inheritance.
* The Plan limits the Board's authority to grant incentive stock
options to a single individual by requiring that the aggregate
exercise price of all stock options, incentive and otherwise, vesting
in one employee in any single calendar year may not exceed $100,000.
* There is no limit on vesting of non-qualified stock options.
* The exercise price for non-qualified stock options may not be less
than eighty-five percent (85%) of the fair market value of the shares
on the date of grant.
* The exercise price of an incentive stock option must be at least 100%
of the market price of a common share on the date the stock option is
granted.
* The exercise price of an incentive stock option granted to an
employee who owns 10% or more of the voting power in Ultradata may
not be less than 110% of the market price of a common share on the
date the stock option is granted.
* The Board may permit an employee to exercise an option and make
payment by giving a personal note.
Transactions Between Ultradata and its Management
In 1994 five of our officers and four employees purchased shares of our
common stock and gave us promissory notes in payment. On June 11, 1999 three
of the officers surrendered a portion of the shares they had purchased, and we
forgave a portion of their notes in exchange for the shares. The Board of
Directors agreed with the officers that they would value the surrendered
shares at the weighted average market price for the 30 trading days preceding
June 11, 1999. The table below shows data concerning the 1994 purchase and
1999 surrender of shares.
Shares Purchased Shares Surrendered
Total Price Average Total Price Average
---------------------------------------------------------------------------
Monte Ross 155,734 $254,500 $1.63 100,000 $215,000 $2.15
Mark Peterson 38,725 $ 63,375 $1.64 37,423 $ 80,456 $2.15
Leonard Missler 17,676 $ 21,250 $1.20 12,548 $ 26,978 $2.15
We have a written agreement with Leonard Missler, our Vice President -
Software Development. The agreement provides that, until September 13, 2009,
we will pay Mr. Missler a 1% royalty on all net sales of ROAD WHIZ products
and 1/2% on net sales of other products incorporating the ROAD WHIZ database.
Because of this agreement, we paid $39,820 in royalties to Mr. Missler in 1999
and $53,752 in 1998.
Steven H. Akre, Esquire, who is a member of our Board of Directors, has
performed legal services as general counsel for us since Ultradata was
founded. During 1999 and 1998, we paid the law firm with which Mr. Akre was
then associated $108,411 and $103,984, respectively, for legal services.
Limitation of Liability and Indemnification
Our certificate of incorporation provides that our directors will not be
personally liable to us for monetary damages for breaches of their fiduciary
duty as directors, unless they violated their duty of loyalty to us or our
stockholders, acted in bad faith, knowingly or intentionally violated the law,
authorized illegal dividends or redemptions or derived an improper personal
benefit from their action as directors.
In addition, our certificate of incorporation provides that our
directors shall be indemnified by us to the extent authorized by Delaware law.
This indemnification would cover all expenses and liabilities reasonably
incurred in connection with their services as directors.
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to our directors, officers or controlling persons pursuant to
the foregoing provision or otherwise, we have been advised that in the opinion
of the SEC such indemnification is against public policy as expressed in that
Act and is, therefore, unenforceable.
PRINCIPAL SHAREHOLDERS
The following table sets forth information known to us with respect to
the beneficial ownership of our common stock as of July __, 2000 by the
following:
* each shareholder known by us to own beneficially more than 5% of our
common stock;
* Monte Ross;
* each of our directors; and
* all directors and executive officers as a group.
There are 3,187,915 shares of our common stock outstanding on the date
of this prospectus. Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed below have sole voting power and
investment power with respect to their shares, subject to community property
laws where applicable. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission. In computing the number
of shares beneficially owned by a person and the percent ownership of that
person, we include:
* shares of common stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable
within 60 days, and
* shares of common stock that would be issued today if the Series A
Preferred Stock held by that person were exercised today.
We do not, however, include these "issuable" shares in the outstanding shares
when we compute the percent ownership of any other person.
Name and Amount and
Address of Nature of Percentage
Beneficial Beneficial of Outstanding
Owner (1) Ownership Shares
--------------------------------------------------------
Monte Ross 452,500(2) 13.84%
Mark L. Peterson 162,382(3) 4.97%
Ernest Clarke 165,352(4) 5.12%
Steven H. Akre, Esq. 4,496(5) 0.11%
Donald Rattner 14,000 0.44%
John J. Clancy 3,692(6) 0.12%
All officers and 896,565(7) 25.99%
directors as a
group (9 persons)
BH Capital Investments, L.P. 319,534(8) 9.90%
175 Bloor St. East, 7th Floor
Toronto, Ontario
Canada M4W3R8
Excalibur Limited Partnership 319,534(8) 9.90%
33 Prince Arthur Avenue
Toronto, Ontario
Canada M5R1B2
(1) Except as otherwise noted, the address of each of these shareholders is c/o
Ultradata Systems, Incorporated, 9375 Dielman Industrial Drive, St. Louis,
Missouri 63132.
(2) Includes 236,000 shares owned by the Monte Ross and Harriet J. Ross Living
Trust. Mr. Ross and his wife share investment control over the trust; they
may revoke it or amend it at will; and they receive all income from the
trust during the life of either of them. Also includes options to purchase
73,500 shares.
(3) Includes 91,964 shares owned by the Mark L. Peterson and Ryia Peterson
Living Trust and 8,318 owned by Ryia Peterson. Mr. Peterson and his wife
share investment control over the trust; they may revoke it or amend it at
will; and they receive all income from the trust during the life of either
of them. Also includes options to purchase 58,000 shares.
(4) Includes options to purchase 34,500 shares.
(5) Includes 3,120 shares owned by the G. Akre Irrevocable Trust, over which
Mr. Akre's wife has investment control. Also included options to purchase
1,000 shares.
(6) Includes options to purchase 3,692 shares.
(7) Includes options to purchase 261,692 shares.
(8) Represents for each shareholder: (a) the number of shares of Common Stock
into which the Series A Convertible Preferred Shares could have been
converted on the date of this propsectus plus (b) warrants to purchase
239,253 shares of Common Stock, but subject to a limit that on conversion
and exercise each shareholder may not acquire more than 9.9% of the
outstanding common stock. The limit may be waived by the shareholder on 75
days notice to Ultradata, in which event the Preferred Shares and warrants
owned by each shareholder could have been converted into 562,253 shares of
Common Stock, or 14.99% of the shares outstanding today.
DESCRIPTION OF OUR SECURITIES
Our authorized capital stock consists of 10,000,000 shares of common
stock and 5,000,000 shares of preferred stock. There are 3,187,915 shares of
our common stock outstanding and 1,600 shares of Series A Preferred Stock
outstanding.
Common Stock
As a holder of our common stock, you will be entitled to one vote for
each share in the election of directors and in all other matters to be voted
on by the shareholders. There is no cumulative voting in the election of
directors. Our by-laws require that only a majority of the issued and
outstanding shares of common stock must be represented to constitute a quorum
and to transact business at a shareholders meeting.
You will be entitled to receive dividends if the Board of Directors
declares dividends. In the event that Ultradata is liquidated or dissolved,
you will receive a distribution, on a per share basis, of any assets remaining
after payment of all liabilities and any preferential payments that must be
made to preferred shareholders. You will have no preemptive or conversion
rights and you will not be subject to any calls or assessments. There are no
redemption or sinking fund provisions applicable to the common stock. The
common stock was validly issued, fully paid and nonassessable.
Preferred Stock
Our Board of Directors is authorized to issue preferred stock, without
action by the shareholders of the Company. The preferred stock may be issued
from time to time in one or more series. The Board will determined the
consideration that must be given for the preferred stock, as well as the
rights, privileges and preferences that holders of the preferred stock may
exercise. Among the provisions that the Board may determine when it creates a
series of preferred stock are:
- the dividend rate,
- voting rights,
- redemption rate,
- sinking fund,
- liquidation preferences, and
- conversion rights.
The only preferred shares presently outstanding are the Series A
Convertible Preferred Stock. We have no plans at this time to issue any other
shares of preferred stock.
Series A Convertible Preferred Stock
We have issued 1,600 shares of Series A Preferred Stock to two
investment funds, BH Capital Investments, L.P. and Excalibur Limited
Partnership and 16 shares to one individual. We have also given Thornhill
Group, Inc. an option to purchase 160 shares of Series A Preferred Stock. If
our shareholders approve the possibility of dilution from the Series A
Preferred Stock and certain other conditions are met, we will sell an
additional 1,400 shares to the two funds, issue 4 more shares to the
individual, and increase Thornhill's option to 300 shares. Each share of
Series A Preferred Stock has a face value of $1,000.
The Series A Convertible Preferred Stock has no voting rights, except as
to matters which directly affect the rights of the holders of the Preferred
Shares. The holders of Preferred Shares are not entitled to any dividends.
Among the rights that are attendant to the Preferred Shares are:
* The Preferred Shares have a liquidation preference equal to their
face value plus an accrual amount equal to 11.25% from the date of
issuance (22.5% if the common stock is delisted by NASDAQ). The
holders will be entitled to payment of the liquidation preference
upon the liquidation of Ultradata or its bankruptcy or certain other
events.
* The Preferred Shares may be converted into common stock at any time
at the option of the holders. If not previously converted, the
Preferred Shares will automatically convert into common stock on May
16, 2003. The amount to be converted will equal the face value of
the Preferred Shares plus the accrual amount of 11.25% from the date
of issuance. The conversion rate will be the lower of $3.50 or 75%
of the 5-day average closing bid price, subject to certain anti-
dilution rights and to the Floor. The "Floor", below which conversion
cannot occur, will be $2.50, but only during the first 18 months
after the issuance of the Preferred Shares. After 18 months there is
no limit to how far the conversion price could fall. Moreover, if
the conversion price for any 20 trading days during the first 18
months would have been less than $2.50 but for the Floor, then the
Floor will be reduced to $2.00; and if the conversion price for any
20 trading days during months 13 through 18 after issuance would have
been less than $2.00 but for the Floor, the Floor will reduce to
$1.50.
The two funds have agreed that they will not engage in short-selling of
the common stock except during the ten days preceding conversion, and each of
them will limit its short sales during those periods to ten percent of the
daily trading volume.
Registrar and Transfer Agent
The Registrar and Transfer Agent for the common stock is:
American Stock Transfer & Trust Company
40 Wall Street - 46th Floor
New York, NY 10005
212-936-5100
SELLING SHAREHOLDERS
The table below lists the selling shareholders and other information
regarding the beneficial ownership of our common stock by each of the selling
shareholders. None of the selling shareholders owns any of our shares other
than the shares they are offering by means of this prospectus. The column
labeled "Common Shares Offered" includes the number of shares of common stock
that would have been issued on June 14, 2000 if the selling shareholder had
converted all of his or its Series A Preferred Stock and had exercised all
options and warrants he or it owned. The column does not give effect to any
restrictions, whether in a contract or in the Series A certificate of
designations, on the number of shares a selling shareholder may own at one
time.
Our calculation of the number of shares into which the Series A
Preferred Stock could have been converted assumes a conversion price of $2.50,
which is the "Floor" price that would have been applicable on June 14, 2000.
The numbers listed in that column, to the extent they reflect the conversion
of Series A Preferred Stock, may fluctuate from time to time based on changes
in the closing bid price of our common stock. We have registered 2,398,320
shares of common stock for resale by the selling shareholders on conversion of
our Series A Preferred Stock and exercise of the warrants held by BH Capital
Investments, L.P. and Excalibur Limited Partnership. The 2,398,320 shares
represent 200% of the shares that would have been issued to the selling
shareholders on June 14, 2000 on conversion of all the outstanding Series A
Preferred Stock and exercise of the warrants. As each selling shareholder
resells shares of common stock, we will file prospectus supplements as
necessary to update the number of shares of common stock that each selling
shareholder intends to sell, reflecting prior resales and changes in the
conversion price.
Common Nature of
Name Shares Offered Ownership
BH Capital Investments, L.P. 564,350 Note 1
Excalibur Limited Partnership 564,350 Note 1
Thornhill Group, Inc. 192,000 Note 2
Victoria Davis-Lee 9,570 Direct
Jose Luis Castro 6,460 Note 3
Influence Incubator, L.L.C. 300,000 Note 4
Total 1,636,730
Note 1: BH Capital Investments, L.P. and Excalibur Limited Partnership
each own warrants to purchase 239,253 shares at $5.00 per share.
In addition, each of them owns 800 shares of Series A Preferred
Stock. Based on the closing bid price for our common stock for
the five days preceding June 14, 2000, 800 shares of Series A
Preferred Stock is convertible into 325,097 shares of common
stock.
Note 2: Thornhill Group, Inc. owns an option to purchase 128,000 shares of
common stock at $2.50 per share. In addition, Thornhill owns an
option to purchase 160 shares of Series A Preferred Stock at
$1,000 per share. Based on the closing bid price for our common
stock for the five days preceding June 14, 2000, 160 shares of
Series A Preferred Stock is convertible into 64,000 shares of
common stock.
Note 3: Jose Luis Castro owns 16 shares of Series A Preferred Stock.
Based on the closing bid price for our common stock for the five
days preceding June 14, 2000, 16 shares of Series A Preferred
Stock is convertible into 6,460 shares of common stock.
Note 4: Influence Incubator, L.L.C. owns an option to purchase 150,000
shares of common stock at $4.00 per share and 150,000 shares of
common stock at $5.00 per share.
We are registering the shares for resale by the selling shareholders in
accordance with registration rights granted to the selling shareholders in our
several contracts with them. We will pay the registration and filing fees,
printing expenses, listing fees, blue sky fees, if any, and fees and
disbursements of our counsel in connection with this offering. The selling
shareholders will pay the fees and disbursements of their own counsel, as well
as any underwriting discounts, selling commissions, and similar expenses
relating to the sale of the shares. We have agreed to indemnify some of the
selling shareholders (BH Capital Investments, L.P., Excalibur Limited
Partnership, and Influence Incubator, L.L.C.), underwriters whom they may
select, and some of their affiliates against certain liabilities, including
liabilities under the Securities Act, in connection with this offering. Those
three selling shareholders have agreed to indemnify us and our directors and
officers, as well as any person who controls us, against certain liabilities,
including liabilities under the Securities Act. Insofar as indemnification
for liabilities under the Securities Act may be permitted to our directors and
officers, or persons that control us, we have been informed that in the
opinion of the SEC such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
Relationships with Ultradata
BH Capital Investments, L.P. and Excalibur Limited Partnership entered
into a Securities Purchase Agreement with us on May 10, 2000. The terms of
that agreement are described in "Capitalization: Securities Purchase Agreement"
elsewhere in this prospectus. As part of that transaction, we agreed to
include in this prospectus the common shares which these two funds can
acquire.
Thornhill Group, Inc. is a member of the NASD. Thornhill served as the
placement agent for our private offering, which resulted in the sale of Series
A Preferred Stock and Common Stock Purchase Warrants to BH Capital
Investments, L.P and Excalibur Limited Partnership. As compensation for those
services, we gave to Thornhill $192,000 plus an option to purchase 128,000
shares of common stock at $2.50 per share and an option to purchase 160 shares
of Series A Preferred Stock at $1,000 per share. We also gave Thornhill the
right to designate a nominee to the Board of Directors. Upon Thornhill's
designation, the Board of Directors will nominate Mr. Howard Krollfeifer, Jr.
at the annual meeting of shareholders on July 27, 2000.
Victoria Davis-Lee was party to a Financial Consulting Agreement with
us, which we made in 1999. That agreement required that we compensate Ms.
Davis-Lee for introducing us to Thornhill Group, Inc. Ms. Davis-Lee shared
the compensation with Jose Luis Castro, with whom we have had no previous
relationship. As compensation, we paid to Ms. Davis-Lee $17,000 in cash and
issued 9,570 shares of common stock. We issued 16 shares of Series A
Preferred Stock to Mr. Castro.
Influence Incubator, L.L.C. is the Manager and owner of Influence
Data, L.L.C. We own the other third of Influence Data, L.L.C., having
organized it with Influence Incubator, L.L.C in May of 1999, When we formed
the joint venture, we gave Influence Incubator an option to purchase 160,000
shares of our common stock at a blended price of $3.00 per share. In March of
this year, we had a dispute with Influence Incubator regarding the meaning of
that option. Late in May, we settled the dispute by paying Influence
Incubator $10,000, contributing $190,000 to Influence Data, cancelling the
existing option, issuing a replacement option to purchase 300,000 shares at a
blended price of $4.50, and agreeing to include those shares in this
prospectus.
Plan of Distribution
The selling shareholders may sell shares from time to time in public
transactions, on or off the NASDAQ SmallCap Market, or in private
transactions, at prevailing market prices or at privately negotiated prices,
including, but not limited to, one or more of the following types of
transactions:
- ordinary brokers' transactions;
- transactions involving cross or block trades or otherwise on the
- NASDAQ SmallCap Market;
- purchases by brokers, dealers or underwriters as principal and resale
by such purchasers for their own accounts pursuant to this
prospectus;
- "at the market" to or through market makers or into an existing market
for our common stock;
- in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected
through agents;
- through transactions in options, swaps or other derivatives (whether
exchange-listed or otherwise);
- in privately negotiated transactions; or
- to cover short sales.
In effecting sales, brokers or dealers engaged by the selling
shareholders may arrange for other brokers or dealers to participate in the
resales. The selling shareholders may enter into hedging transactions with
broker-dealers, and in connection with those transactions, broker-dealers may
engage in short sales of the shares. The selling shareholders may also sell
shares short and deliver the shares to close out the short position. The
selling shareholders may also enter into option or other transactions with
broker-dealers that require the delivery to the broker-dealers of the shares,
which the broker-dealer may resell using this prospectus. The selling
shareholders may also pledge the shares to a broker-dealer and, upon a
default, the broker or dealer may effect sales of the pledged shares using
this prospectus.
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts, or concessions from selling shareholders in amounts to
be negotiated in connection with the sale. The selling shareholders and any
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales, and any such
commission, discount or concession may be deemed to be underwriting
compensation.
Information as to whether underwriters whom the selling shareholders may
select, or any broker-dealer, is acting as principal or agent for the selling
shareholders, the compensation to be received by underwriters that the selling
shareholders may select or by any broker or dealer acting as principal or
agent for the selling shareholders, and the compensation to be paid to other
broker-dealers, in the event the compensation of such other broker-dealers is
in excess of usual and customary commissions, will, to the extent required, be
set forth in a supplement to this prospectus. Any dealer or broker
participating in any distribution of the shares may be required to deliver a
copy of this prospectus, including a prospectus supplement, if any, to any
person who purchases any of the shares from or through such broker or dealer.
We have advised the selling shareholders that, during any time when they
are engaged in a distribution of the shares, they are required to comply with
Regulation M promulgated under the Securities Exchange Act. With certain
exceptions, Regulation M precludes any selling shareholder, any affiliated
purchasers and any broker-dealer or other person who participates in a
distribution from bidding for or purchasing or attempting to induce any person
to bid for or purchase any security that is the subject of the distribution
until the entire distribution is complete. Regulation M also prohibits any
bids or purchases made in order to stabilize the price of a security in
connection with the distribution of that security. All of the foregoing may
affect the marketability of our common stock.
We will not receive any of the proceeds from the selling shareholders'
sale of their common stock.
LEGAL MATTERS
The validity of the common stock which the six shareholders are selling
by means of this prospectus has been passed upon by our counsel, Robert
Brantl, Esq., 322 Fourth Street, Brooklyn, New York 11215.
EXPERTS
The financial statements included in this prospectus and in the registration
statement have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere in this prospectus and in the registration statement, and
are included in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2, including exhibits and schedules, under the Securities
Act with respect to the shares to be sold in the offering. This prospectus
does not contain all the information set forth in the registration statement.
In particular, the statements in this prospectus regarding the contents of
contracts, agreements or other documents are not necessarily complete. You
can find further information about us in the registration statement and the
exhibits and schedules attached to the registration statement.. In addition,
we file annual, quarterly and current reports, proxy statements and other
information with the Commission, which may assist you in understanding our
company.
You may read and copy the registration statement or any reports,
statements or other information that we file at the Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by
writing to the Commission. Please call the Commission at 1-800-SEC-0330 for
further information on the operation of the Public Reference Room. Our
Commission
filings, including the registration statement, are also available to you on
the Commission's Web site at http://WWW.SEC.GOV.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
I. Audited Financial Statements for the Years
Ended December 31, 1999 and 1998
Pages
Report of Independent Certified Public Accountants F-1
Balance Sheet F-2
Statements of Operations F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-7
II. Unaudited Financial Statements for the Three Months Ended
March 31, 2000 and 1999
Balance Sheet F-17
Statements of Operations F-18
Statements of Stockholders' Equity F-19
Statements of Cash Flows F-20
Notes to Financial Statements F-21
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
Ultradata Systems, Incorporated:
We have audited the accompanying balance sheet of Ultradata Systems,
Incorporated, as of December 31, 1999 and the related statements of operations,
stockholders' equity and cash flows for the years ending December 31, 1999 and
1998. 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 audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ultradata Systems,
Incorporated at December 31, 1999, and the results of operations and its cash
flows for the years ended December 31, 1999 and 1998 in conformity with
generally accepted accounting principles.
March 2, 2000
St. Louis, Missouri
(signed) BDO Seidman, LLP
ULTRADATA SYSTEMS, INCORPORATED
Balance Sheet
December 31, 1999
Assets
Current assets:
Cash and cash equivalents $ 1,220,134
Restricted cash 410,888
Trade accounts receivable, net of
allowance for doubtful accounts of
$16,475 1,482,267
Inventories 1,655,422
Prepaid expenses and other current
assets 105,778
---------
Total current assets 4,874,490
---------
Property and equipment, net 683,936
---------
Total property and equipment 683,936
---------
Investments, available for sale 105,834
Investment in Talon Research and
Development, Ltd. 827,903
Investment in Influence Data, LLC 255,667
Advances to affiliates 272,683
Advertising credits 249,685
Other assets 38,594
---------
Total assets $7,308,792
=========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 156,214
Accrued expenses and other liabilities 262,464
---------
Total current liabilities 418,678
Deferred rent 13,684
Deferred compensation liability 116,722
---------
Total liabilities 549,084
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value;
10,000,000 shares authorized;
3,410,000 shares issued and
outstanding at December 31, 1999 34,100
Additional paid-in capital 9,851,894
Accumulated Deficit (2,024,687)
Treasury stock (326,171 shares at
cost as of December 31, 1999) (942,311)
Notes receivable issued for purchase
of common stock (197,117)
Accumulated other comprehensive
income, net 37,829
----------
Total stockholders' equity 6,759,708
----------
Total liabilities and stockholders'
equity $7,308,792
=========
See accompanying summary of accounting policies and notes to financial
statements.
ULTRADATA SYSTEMS, INCORPORATED
Statements of Operations
Years ended December 31, 1999 and 1998
1999 1998
Net sales:
Consumer products $ 5,566,626 $ 6,983,804
Contract - 250,271
--------- ---------
Total net sales 5,566,626 7,234,075
Cost of sales:
Consumer products 3,120,941 3,901,909
Contract 30,105 270,292
--------- ---------
Total cost of sales 3,151,046 4,172,201
Gross profit 2,415,580 3,061,874
Selling expense 1,812,524 2,931,150
General and administrative expenses 2,063,015 2,818,201
Research and development expense 358,357 672,090
--------- ---------
Operating loss (1,818,316) (3,359,567)
--------- ---------
Other income (expense):
Interest expense - (3,790)
Interest income 93,848 161,612
Equity (loss) in earnings affiliated
companies (81,118) 118,733
Royalty income 127,473 -
Other, net 51,099 27,195
--------- --------
Total other income (expense) 191,302 303,750
Loss before income tax expense (1,627,014) (3,055,817)
Income tax expense (benefit) 370,236 (725,024)
--------- ---------
Net loss $(1,997,250) $(2,330,793)
========= =========
Loss per share:
Basic and diluted $ (0.64) $ (0.71)
======= =======
Weighted Average Shares Outstanding:
Basic and diluted 3,122,138 3,299,636
========= =========
See accompanying summary of accounting policies and notes to financial
statements.
ULTRADATA SYSTEMS, INCORPORATED
Statements of Stockholders' Equity
<TABLE>
Years ended December 31, 1998 and 1999 Notes
receivable
for
Additional Retained purchase Accumulated
paid earnings of comprehensive Total
Common in (deficit) Treasury Stock income stockholders'
Stock capital Stock net equity
=====================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1998 $34,100 $ 9,799,936 $ 2,303,356 $(130,062) $(410,500) $ 62,740 $ 11,659,570
Purchase of
232,200 shares
of treasury stock
at cost (770,219) (770,219)
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 (100,049) (100,049)
Comprehensive income:
Net loss (2,330,793) (2,330,793)
Other comprehensive loss,
net of tax:
Net unrealized gain on
deferred compensation
trust available for sale
Securities 23,736 23,736
Total comprehensive loss (2,307,057)
=====================================================================================================
Balance at December
31, 1998 $34,100 $9,799,936 $ (27,437) $(900,281) $(505,549) $86,476 $ 8,487,245
Purchase of 1,000
shares of Treasury
stock at cost (2,125) (2,125)
Issuance of 80,000
shares of
treasury stock for
investment
in Influence Data,LLC 45,418 281,782 327,200
Redemption of 149,971
shares of
common stock to
reduce notes
receivable (321,687) 321,687 -
Accrued interest on
notes
receivable issued
for purchase of
common stock (13,257) (13,257)
Issuance of stock options
to non-employee for
services performed 6,540 6,540
Comprehensive income
Net loss (1,997,250) (1,997,250)
Other comprehensive loss:
Net unrealized loss on
deferred compensation
trust available for sale
Securities (48,647) (48,647)
Total comprehensive loss
(2,045,897)
----------------------------------------------------------------------------------------------------
Balance at December
31, 1999 $34,100 $9,851,894 $(2,024,687) $(942,311) $(197,117) $37,829 $ 6,759,708
==================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
ULTRADATA SYSTEMS, INCORPORATED
Statements of Cash Flows
Years ended December 31, 1999 and 1998
1999 1998
Cash flows from operating activities:
Net loss $(1,997,250) $(2,330,793)
Adjustments to reconcile net loss to net
cash provided by (used in)
Operating activities:
Depreciation and amortization 259,870 246,435
Loss on disposal of property and equipment 6,969 -
Deferred income tax provision 476,149 (493,797)
Non-cash compensation expense 6,540 -
Inventory reserve 67,137 469,210
Equity in losses (earnings) of
unconsolidated affiliates 81,118 (118,733)
Realized (gain) loss on investments (22,602) 23,736
Increase in allowance for uncollectible
notes receivable 31,000 416,428
Increase (decrease) in cash due to changes
in operating assets and liabilities:
Trade accounts receivable, net 1,621,698 (1,431,923)
Costs and estimated earnings on
long-term contracts 95,534 433,086
Inventories 1,148,759 (85,378)
Prepaid expenses and other current
assets 675,216 (193,399)
Accounts payable (784,008) 430,885
Accrued expenses and other liabilities (1,358,867) 1,192,068
Tax benefit receivable 231,227 (231,227)
Deferred rent (7,464) 4,976
Deferred compensation trust liability (33,980) 23,961
Other assets 21,615 (30,409)
--------- ----------
Net cash (used in) provided by operating
activities 518,664 (1,674,874)
--------- ----------
Cash flows from investing activities:
Investment and earnings of affiliated company (17,133) (387,475)
Option to acquire additional interest in
affiliated company - (314,147)
Deferred compensation trust investments 30,158 (23,736)
Investment in software development - (109,365)
Advances to affiliated company (49,680) (250,000)
Restricted cash increases (398,373) (225)
Capital expenditures (115,468) (296,836)
-------- ----------
Net cash used in investing activities (550,496) (1,381,784)
Cash flows from financing activities:
Repurchase of common stock at cost (2,125) (770,219)
Proceeds from repayment of notes receivable to
purchase common stock - 5,000
-------- ---------
Net cash provided by (used in) financing
activities (2,125) (765,219)
-------- ---------
Net increase (decrease) in cash and cash
equivalents (33,957) (3,821,877)
Cash and cash equivalents at beginning of
year 1,254,091 5,075,968
--------- ---------
Cash and cash equivalents at end of year $ 1,220,134 $ 1,254,091
========= =========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
Summary of Significant Accounting Policies
Basis of Presentation
The financial statements include the equity in earnings of unconsolidated
affiliates Talon Research & Development Co., Ltd. (Talon) of Auckland New
Zealand, and Influence Data, LLC. The investments in Talon and Influence Data,
LLC are accounted for using the equity method. The Company has a 24.9%
interest in Talon and a 33.3% interest in Influence Data, LLC.
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.
Restricted Cash
Restricted cash includes a deposit maintained in conjunction with the Company's
agreement to guarantee Talon credit with the Bank of New Zealand and money-
market funds related to the deferred compensation trust. The cash amounts are
restricted from use in operational activities of the Company.
Revenue Recognition
Net sales are recognized when products are shipped. The Company has established
programs, which, under specified conditions, enable customers to return
product. The Company establishes liabilities for estimated returns at time of
shipment. In addition accruals for customer discounts and rebates are recorded
when revenues are recognized.
Revenue under the Company's long-term contract is recognized on the percentage
of completion method based upon incurred costs compared to total estimated
costs under the contract. Revisions to assumptions and estimates, primarily
in contract value and estimated costs, used for recording sales and earnings
are reflected in the accounting period in which the facts become known.
Royalties are earned based on sale of products.
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. The Company capitalizes certain software development
costs in accordance with the American Institute of Certified Public
Accountants Statement of Position No. 98-1, "Accounting for the Costs of
Software Developed or Obtained for Internal Use." Costs incurred for the
Company's own personnel who are directly associated with software development
are capitalized. Capitalized software costs will be amortized over an estimated
useful life of five years. Depreciation is provided on the straight-line basis
over the estimated useful lives of the assets, generally five years. Leasehold
improvements are amortized over the shorter of the term of the related lease
or its useful life. The Company continually reviews property and equipment to
determine that the carrying values are not impaired.
Long-Lived Assets
In accordance with SFAS 121, long-lived assets and certain identifiable
intangible assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. For purposes of evaluating the
recoverability of long-lived assets, the recoverability test is performed using
undiscounted net cash flows related to the long-lived assets. The Company
reviews long-lived assets to determine that carrying values are not impaired.
No assets are impaired at December 31, 1999.
Operating Lease
Lease expense on the corporate facilities is recognized on a straight-line
basis over the primary term of the lease. The lease provides for accelerating
rent over the lease term. Accordingly, deferred rent has been recorded in the
Company's balance sheet.
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, and
advertising credits acquired by barter, which are amortized as the advertising
credits are utilized.
At December 31, 1999, $249,685 of advertising credits are reported as an
asset. These credits were exchanged for discontinued or slow-moving inventory
in a barter transaction, and will be utilized at seasonal sales periods
throughout 2000. The credits will convert to advertising expense at the time
the credits are used. Advertising expense totaled $1,446,225 and $2,416,886
for fiscal years ended December 31, 1999 and 1998.
Goodwill
The excess of the purchase price of net assets acquired in equity investments
over their fair value is being amortized on a straight-line basis not to exceed
10 years.
Fair Value of Financial Instruments
FAS 107 "Disclosure About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. Cash and
cash equivalents, accounts receivable, accounts payable, and accrued
liabilities are reflected in the financial statements at fair value because of
the short-term maturity of the instruments.
Research and Development Costs
Research and development costs consist primarily of expenditures incurred
bringing a new product to market or significantly enhancing existing products.
The Company expenses all research and development costs as they are incurred
unless they are associated with the development of tools or processes for
production used in-house rather than for product delivered to a customer.
Deferred Compensation Trust Investments
Investments are stated at the estimated fair value in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities", and consist of investments in U.S. government
agency securities or corporate stocks. The deferred compensation trust
represents contributions made by the Company to a Rabbi trust. The amounts are
restricted from use for operational purposes, and investment decisions are made
by the trust beneficiary.
Available-for-sale securities, which include any security for which the
beneficiary has no immediate plan to sell but which may be sold in the future,
are valued at fair value. Realized gains and losses, based on the amortized
cost of the specific security, are included in other income as investment gains
(losses). Unrealized gains and losses are recorded, net of related income tax
effects, as a separate component of equity.
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
an exercise price greater than or equal to the fair value of the shares at the
date of grant. The Company accounts for stock options in accordance with
Accounting Principles Board Opinion No. 25 (APB Opinion No. 25) "Accounting for
Stock Issued to Employees." The Opinion requires that compensation cost related
to fixed stock option plans be recognized only to the extent that the fair
value of the shares at the date of grant exceeds the exercise price.
Accordingly the Company recognizes no compensation expense for its stock
option grants.
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 allows
companies to continue to account for their stock option plans in accordance
with APB No. 25, but encourages acquire other companies,
increase holdings in existing affiliates, or merge with any entity if any loans
are outstanding without written concurrence from the Bank.
The Company has extended its agreement to be guarantor on a $400,000 line of
credit issued to Talon GPS, LLC, by a commercial bank in New Zealand.
Note 10. Notes Receivable Issued for Purchase of Common Stock
Notes receivable issued for purchase of common stock represent unsecured
advances made by the Company to various employees for stock options exercised.
The notes bear interest at 6% per annum and are due, together with accrued
interest, on demand on either the termination of employment or the sale of
underlying stock, whichever comes first. During 1999, the Company reduced the
notes receivable and accrued interest by $321,688 in exchange for its
repurchase of 149,971 shares of common stock.
Note 11. Earnings Per Share
A reconciliation of the numerator and denominator of the loss per share
calculations is provided for all periods presented. The numerator for basic
and diluted loss per share is net loss for all periods presented. The
denominator for basic and diluted loss per share for 1999 and 1998, as
follows:
For the twelve months ended December 31,
1999 (a) 1998 (b)
Numerator:
Net loss $(1,997,250) $(2,330,793)
Numerator for basic and diluted
loss per share - income available
to common shareholders $(1,997,250) $(2,330,793)
========== ==========
Denominator:
Denominator for basic and diluted
earnings per share - weighted
average shares 3,122,138 3,299,636
Basic and diluted loss Per Share $ (0.64) $ (0.71)
(a) Options to purchase 412,430 shares of common stock at prices between
$1.44 and $7.39 per share were outstanding at December 31,1999, but were
not included in the computation of diluted loss per share because the
options' exercise price was greater than the average market price of
common shares, with the exception of a few recent options whose dilutive
effect is negligibly small.
(b) Options to purchase 326,192 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 loss per share because the
options' exercise price was greater than the average market price of
common shares.
Note 12. Income Taxes
Income tax expense (benefit) for the years ended December 31, 1999 and 1998
consist of:
1999
--------------------------------------------
Current Deferred Total
Federal $ (105,913) $ 426,028 $ 320,115
State - 50,121 50,121
-----------------------------------------
$ (105,913) $ 476,149 $ 370,236
=========================================
1998
--------------------------------------------
Current Deferred Total
Federal $ (231,227) $ (466,367) $ (697,594)
State - (27,430) (27,430)
-----------------------------------------
$ (231,227) $ (493,797) $ (725,024)
=========================================
Income tax expense for the years ended December 31, 1999 and 1998 differed
from amounts computed by applying the statutory U. S. federal corporate income
tax rate of 34% to income before income tax benefit as a result of the
following:
1999 1998
Expected income tax (benefit) expense $(553,185) $(1,042,139)
Increase (decrease) in income taxes
resulting from:
Valuation allowance increase 962,937 648,422
State income taxes, net of federal
expense (benefit) 33,080 (80,919)
Nondeductible expenses for federal
income tax purposes 2,458 5,993
Research and experimentation credits - (72,353)
Foreign Operations 3,642 (45,118)
Other, net (78,696) (138,910)
-------- -------
Income tax expense (benefit) $ 370,236 $ (725,024)
======== ========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1999 and 1998
include the following:
1999 1998
Deferred tax assets:
Net operating loss carryforward $ 1,467,945 $ 1,216,659
Research and experimentation credit
carryforward - 72,353
Note receivable reserved for
financial reporting purposes 170,023 158,243
Notes and accounts receivable reserves 188,125 109,642
Inventory reserves, principally due
to accruals for financial reporting
purposes and basis differences 203,812 211,248
Other 35,092 29,285
---------- -----------
Total deferred tax assets $ 2,064,998 $ 1,797,430
Deferred tax liabilities:
Prepaid advertising $ (9,416) $ (210,818)
Property, plant and equipment,
principally due to differences in
depreciation basis (1,248) (18,401)
Unrealized gain on deferred compensation
trust investments (23,185) -
---------- ----------
Total deferred tax liabilities (33,850) (229,219)
---------- ----------
Gross deferred tax asset 2,031,148 1,568,211
Valuation allowance (2,031,148) (1,068,211)
---------- ----------
Net deferred tax asset $ - $ 500,000
========== ==========
During 1999, the Company received tax refunds for carryback of net operating
losses of $337,140.
A valuation allowance has been provided for those net operating loss
carryforwards and temporary differences in view of the Company's continuing
losses in 1999.
The net operating loss carryforward of approximately $3.9 million will expire
in 2020.
Note 13. Employee Benefit Plans
(a) Employee Saving and Retirement Plan (Section 401-k plan)
Effective January 1, 1998, the Board of Director's approved a savings and
retirement plan covering all full-time employees. Subject to approval by
the Board of Directors, the Company fully matches employee contributions
up to 3% of total compensation paid to participating employees and one-
third of one percent is matched for each percentage of participating
employee contributions between 4% and 6% of total compensation. Expense
attributable to Company contributions totaled $43,015 and $54,138 during
the years ended December 31, 1999 and 1998, respectively.
(b) Incentive Stock Option Plans
At December 31, 1999, the Company has two fixed stock option plans, which
are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation
cost has been recognized for its fixed stock option plans. Had
compensation cost for the Company's two fixed stock option plans been
determined consistent with SFAS No. 123, the Company's net loss and loss
per share would have been increased to the pro forma amounts indicated
below:
1999 1998
Net loss As reported $(1,997,250) $(2,330,793)
Pro forma $(2,163,741) $(2,689,415)
Basic and diluted As reported $ (0.64) $ (0.71)
loss per share Pro forma $ (0.69) $ (0.82)
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 canceled incentive stock options to purchase 236,292
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. There were no
cancellations for the purpose of repricing during 1999.
During 1999, the Company cancelled incentive stock options to purchase 17,300
shares of common stock at exercise prices ranging from $3.00 to $4.00 per
share.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1999 and 1998, respectively: dividend yield of
zero for all years; expected volatility of 68.0% and 59.1%; risk-free interest
rates of 6.30% and 5.42%; 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, 1999 and 1998, and the changes during the years then ended is
presented below:
1999 1998
Weighted Weighted
average average
exercise exercise
Fixed Options Shares price Shares price
------------------------------------------------------------------------------
Outstanding at beginning
of year 326,192 $ 4.25 285,792 $ 5.85
Granted (including repriced
options) 103,538 $ 1.98 276,692 $ 3.85
Forfeit (17,300) $ 3.73 (236,292) $ 5.72
------- --------
Outstanding at end of year 412,430 $ 3.70 326,192 $ 4.25
======= =======
Options exercisable at year end 412,430 326,192
Weighted average fair value of
options granted to employees
during the year $ 0.65 $ 1.77
Options outstanding and exercisable
Number of shares Weighted average
Range of Outstanding at remaining Weighted average
Exercise prices December 31, 1999 contractual life Exercise price
-----------------------------------------------------------------------------
$1.00 - $1.99 4,748 4.9 years $ 1.44
$2.00 - $2.99 98,790 4.9 years $ 2.00
$3.00 - $3.99 36,200 3.9 years $ 3.00
$4.00 - $4.99 222,692 3.2 years $ 4.00
$5.00 - $5.99 5,000 0.6 years $ 5.75
$6.00 - $6.99 35,000 0.5 years $ 6.39
$7.00 - $7.39 10,000 1.7 years $ 7.39
-------
412,430
Note 14. Commitments and Contingencies
On September 14, 1989, the Company entered into a royalty agreement relating to
its ROAD WHIZ product. After 20,000 ROAD WHIZ units are sold, the agreement
provides for a 1% royalty payment on net sales of the ROAD WHIZ product and
0.5% on the Company's other products, which incorporate the ROAD WHIZ
database. Royalty payments are made quarterly until September 13, 2009.
During the years ended December 31, 1999 and 1998, royalty expense totaled
$39,820 and $53,752, respectively.
On December 29, 1998, the Company entered into a three-year royalty agreement
with Feldstein and Associates of Finley, Ohio, with regard to the AAA
TripWizard for 1% of sales to customers other than their own, for which they
earn their normal independent sales representative commissions.
On September 15, 1998, the Company entered into a three-year royalty agreement
with AAA related to the AAA TripWizard. The terms are automatically renewable
for one year and amount to 10% of the wholesale price on sales other than
through AAA stores and $1.00 per unit on AAA sales. This agreement recognizes
the benefit of the AAA logo and data and their promotion of the product through
their travel stores. During the year ending December 31, 1999 royalty expenses
totaled $33,250. There was no royalty expense in 1998.
Note 15. Investments in Affiliated Companies
On March 23, 1998, the Company acquired an 18.9% interest in Talon for
$282,500. In August 1998, the Company acquired an option to purchase
additional shares in Talon for $312,147. During 1999, the option to purchase
additional shares was amended, and the above amount was utilized to purchase an
additional 6.0% interest in Talon. Legal and consulting costs associated with
the acquisition and option to purchase additional shares are capitalized as
part of the cost of the investment, and totaled $124,108 during December 31,
1999.
The Company's 24.9% interest in Talon is accounted for using the equity method
of accounting and is stated at amortized cost plus equity in undistributed
earnings since acquisition. The equity in earnings of Talon is adjusted for
the annual amortization of the difference between acquisition cost and the
Company's proportionate share of Talon's net assets. Amortization is computed
on a straight-line basis over nine years. The unamortized difference between
the investment cost and the Company's proportionate share of Talon is $568,655
at December 31, 1999. The Company's share of the earnings for 1999 was
$61,496 after accounting for the differences between New Zealand GAAP and US
GAAP. As discussed above, the earnings were further reduced by amortization
of $71,081, bringing the equity in loss of affiliate to $9,585. The Company's
equity in earnings of affiliate from inception was $118,733 as of December
31, 1998.
In addition to the above transactions, the Company has purchased certain
electronic components, including parts for TRAVEL*STAR 24( which have been
sold to Talon at cost. These sales totaled $3,530 and $477,580 for the years
ended December 31, 1999 and 1998, respectively. The Company purchased from
Talon, at cost, electronic components which are integral to the TRAVEL*STAR 24
which totaled $15,068 and $638,627 for the years ended December 31, 1999 and
1998, respectively. A net balance of $164,550 was receivable by the Company
at December 31, 1999 and is included in trade accounts receivable.
In May 1999, the Company formed a joint venture with Influence Content, LLC,
a website developer, to form Influence Data, LLC. The Company issued 80,000
shares of common stock (at quoted market price) from the treasury and options
(valued at market upon the Black Scholes method) to purchase 160,000 shares of
common stock for a one-third interest in Influence Data, LLC. The original
value of the investment, based upon the consideration given to form the joint
venture, was $327,200.
The Company's 33.3% interest in Influence Data, LLC is accounted for using the
equity method of accounting and is stated at amortized cost plus equity in
undistributed earnings since acquisition. The equity in earnings of Influence
Data, LLC is adjusted for the annual amortization of the difference between
acquisition cost and the Company's proportionate share of Influence Data,
LLC's members' equity net assets. Amortization is computed on a straight-
line basis over ten years. The unamortized difference between the investment
cost and the Company's proportionate share of Influence Data, LLC is $156,053
at December 31, 1999. The Company's share of the losses for 1999 totaled
$60,386. As discussed above, the losses were increased by $11,147 to bring
the equity in loss of affiliate to $71,533.
The Company has two investments in affiliates accounted for under the equity
method. The affiliates are Talon Research and Development, Ltd. (a New Zealand
company) (25%) and Influence Data, LLC (33%). The Company's share of earnings
of these affiliates is included in income as earned. Equity (Loss) Earnings
from Affiliates amounts to $(81,118) and $118,733 in 1999 and 1998,
respectively. The Company has advanced to Talon $272,683 at December 31, 1999.
Note 16. 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 transferred all
software and documentation of the service software acquired from Intellidata
in exchange for a promissory note bearing interest at prime rate of $400,000.
In addition, the Company leased computer equipment acquired from Intellidata
to Sci-Com at favorable rates. 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. The
Company has reserved $447,428 at December 31, 1999. The remaining
receivables balance is $272,693 at December 31, 1999.
Note 17. Significant Fourth Quarter Adjustments
In the fourth quarter of 1999, the Company recorded adjustments that increased
net loss by approximately $450,000. These adjustments included $330,000
related to the investments in Influence Data, LLC, and Talon, $40,000 for an
increase in the inventory reserve for obsolescence, and $80,000 of other
various expenses.
Note 18. Prior Period Adjustment
The Company adopted FAS 115, "Accounting for Certain Investments in Debt and
Equity Securities" during 1999. As a result of this adoption, the Company has
made several balance sheet reclassifications from the deferred compensation
trust investment account to record the unrealized gain on investments of
$62,740 as a component of stockholders' equity and restricted cash of $12,290
as of January 1, 1998. In addition, an adjustment of $62,740 was recorded to
reduce previously reported retained earnings. In order to properly record the
1998 activity, adjustments for deferred compensation expense of $23,961 and
investment income of $225 were recorded in the 1998 income statement.
Note 19. Supplemental Disclosures of Cash Flow Information
Years ended December 31, 1999 1998
Interest - $3,790
Taxes - -
Supplemental non-cash investing and financing activities were as follows:
Year ended December 31, 1999
----------------------------
The Company issued 80,000 shares of treasury stock and options to purchase
160,000 shares of its common stock, with an aggregate fair value of $327,200,
for a one-third ownership interest in Influence Data, LLC.
The Company redeemed 149,971 shares of common stock in exchange for related
notes receivable of $321,688.
The Company exchanged slow-moving inventory for advertising credits from a
third party valued at $249,685.
Year ended December 31, 1998
----------------------------
The Company sold capitalized software development costs in exchange for a note
receivable of $400,000.
ULTRADATA SYSTEMS, INCORPORATED
Balance Sheet
As of March 31, 2000 and December 31, 1999
March 31, December 31,
2000 1999
Assets (Unaudited)
Current assets:
Cash and cash equivalents $1,903,003 $1,220,134
Restricted cash 402,493 410,888
Trade accounts receivable, net of allowance
for doubtful accounts of $5,000 and
$16,475, respectively 438,027 1,482,268
Inventories 1,732,158 1,655,422
Prepaid expenses and other current assets 172,995 105,778
--------- ---------
Total current assets 4,648,676 4,874,490
Property and equipment, net 671,600 683,936
--------- ---------
Total property and equipment 671,600 683,936
Deferred compensation trust investments,
available for sale 126,088 105,834
Investment in Talon Research and
Development, Ltd. 882,715 827,903
Investment in Influence Data, LLC 228,688 255,667
Advances to affiliates 277,352 272,683
Advertising credits 249,685 249,685
Other assets 8,594 38,594
--------- ---------
Total assets $7,093,398 $7,308,792
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $197,154 $156,214
Accrued expenses and other liabilities 108,970 262,464
--------- ---------
Total current liabilities 306,124 418,678
Deferred rent 11,818 13,684
Deferred compensation liability 128,580 116,722
--------- ---------
Total liabilities 446,522 549,084
Stockholders' equity:
Common stock, $.01 par value; 10,000,000
shares authorized; 3,504,516 and 3,410,000
shares issued, respectively 35,045 34,100
Additional paid-in capital 10,165,574 9,851,894
Accumulated deficit (2,451,474) (2,024,687)
Treasury stock (326,171 shares at cost) (942,311) (942,311)
Notes receivable issued for purchase of
common stock (198,805) (197,117)
Accumulated other comprehensive income, net 38,847 37,829
---------- ----------
Total stockholders' equity 6,646,876 6,759,708
---------- ----------
Total liabilities and stockholders' equity $7,093,398 $7,308,792
========== ==========
See accompanying summary of accounting policies and notes to financial
statements.
ULTRADATA SYSTEMS, INCORPORATED
Statements of Operations
Three months ended March 31, 2000 and 1999
2000 1999
(Unaudited)
Net sales $ 289,687 $1,083,791
Cost of sales 175,116 536,754
-------- ---------
Gross profit 114,571 547,037
Selling expense 78,959 718,510
General and administrative expenses 443,792 535,491
Research and development expense 96,233 99,226
-------- ---------
Operating loss (504,413) (806,190)
Other income (expense):
Interest income 18,934 17,908
Equity in earnings of affiliated companies 27,832 54,084
Other, net 30,860 35,376
-------- ---------
Total other income 77,626 107,368
-------- ---------
Loss before income tax expense (426,787) (698,822)
Income tax expense - -
-------- ---------
Net loss $ (426,787) $ (698,822)
======== =========
Loss per share:
Basic and diluted $ (0.14) $ (0.22)
======== =========
Weighted Average Shares Outstanding:
Basic and diluted 3,105,235 3,154,682
========= =========
See accompanying summary of accounting policies and notes to financial
statements.
ULTRADATA SYSTEMS, INCORPORATED
Statements of Stockholders' Equity
<TABLE>
Quarter ended March 31, 2000
Notes Accumulated Current Year
Additional Retained Receivable Comprehensive Classification
Common Paid-in Earnings Treasury for Purchase Income, Net Total
Stock Capital (Deficit) Stock of Common Stock S/H Equity
========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 2000 34,100 $ 9,851,894 $(2,024,687) $(942,311) $(197,117) $ 37,829 $6,759,708
Exercise of 94,516
stock options 945 313,680 314,625
Accrued interest on
notes receivable
issued for purchase
of common stock (1,688) (1,688)
Comprehensive income
Net loss (426,787) (426,787)
Other comprehensive
loss, net of tax:
Net unrealized
gain on deferred
Compensation trust
available for sale
Securities 1,018 1,018
Comprehensive loss (425,769)
=====================================================================================================
Balance at
March 31, 2000 35,045 $10,165,574 $(2,451,474) $(942,311) $(198,805) $ 38,847 $6,646,876
===================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
ULTRADATA SYSTEMS, INCORPORATED
Statements of Cash Flows
Three months ended March 31, 2000 and 1999
2000 1999
Unaudited
Cash flows from operating activities:
Net loss $ (426,787) $ (698,822)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 58,980 67,869
Inventory reserve 30,000 27,500
Equity in earnings of unconsolidated
affiliates (27,832) (54,084)
Realized gain on investments (10,602) -
Bad debt expense on notes receivable 7,750 7,750
Increase (decrease) in cash due to
changes in operating assets and
liabilities:
Trade accounts receivable, net 1,044,241 1,616,595
Costs and estimated earnings on
long-term contracts - 85,773
Inventories (106,736) 182,964
Prepaid expenses and other current
assets (67,217) 490,109
Accounts payable 40,940 (530,645)
Accrued expenses and other liabilities (153,494) (1,420,534)
Deferred rent (1,866) (1,866)
Deferred compensation trust liability 11,858 -
Other assets 28,312 231
--------- ---------
Net cash provided by (used in) operating
activities 419,476 (227,160)
Cash flows from investing activities:
Investment in affiliated company - (9,223)
Deferred compensation trust investments (8,634) -
Advances to affiliated company (4,669) (16,423)
Capital expenditures (46,644) (640)
------- -------
Net cash used in investing activities (59,947) (26,286)
Cash flows from financing activities:
Repurchase of common stock at cost - (2,125)
Proceeds from exercise of employee
stock options 314,625 -
Restricted cash 8,395 -
--------- --------
Net cash provided by (used in) financing
activities 323,020 (2,125)
--------- --------
Net increase (decrease) in cash and cash
equivalents 682,869 (255,571)
Cash and cash equivalents at beginning of
year 1,220,134 1,254,091
--------- ---------
Cash and cash equivalents at end of the
quarter $ 1,903,003 $ 998,520
========= =========
See accompanying summary of accounting policies and notes to financial
statements.
ULTRADATA SYSTEMS, INCORPORATED
March 31, 2000
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim financial statements included herein have been
prepared by Ultradata Systems, Incorporated (the "Company"), without audit
in accordance with generally accepted accounting principles and pursuant to
the rules and regulations of the Securities and Exchange Commission for
interim financial information. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures made
are adequate to make the information presented not misleading. The Company's
investment in Talon Research and Development, Ppty., Auckland, NZ Ltd. of
24.9% and in Influence Data, LLC, of 33.3% are accounted for using the equity
method.
In the opinion of management, the information furnished for the three-month
periods ended March 31, 2000 and 1999, respectively, includes all adjustments,
consisting solely of normal recurring accruals necessary for a fair
presentation of the financial results for the respective interim periods and
is not necessarily indicative of the results of operations to be expected for
the entire fiscal year ending December 31, 2000.
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.
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.
Note 2. Incentive Stock Option Plan
As of March 31, 2000, the Company's outstanding employee stock options
totaled 320,407 shares. These options have been issued to key employees,
officers, directors and consultants of the Company. The Company is authorized
to issue 350,000 shares of incentive stock options or non-qualified stock
options. These options are in addition to the 160,000 options issued per the
Option Agreement with Influence Content, LLC, for the joint venture,
Influence Data, LLC. In addition, there are 100,000 incentive stock options
approved by the Board of Directors that are subject to shareholder approval
in a future proxy statement.
Note 3. Inventories
Inventories consist of the following:
March 31, December 31,
2000 1999
Raw Materials $1,132,164 $ 815,337
Work in Process 62,360 62,360
Finished Goods 1,103,981 1,314,072
--------- ---------
2,298,505 2,191,769
Reserve for obsolescence (566,347) (536,347)
--------- ---------
$1,732,158 $1,655,422
========= =========
Note 4. Prepaid Expenses
Prepaid expenses consist of the following:
March 31, December 31,
2000 1999
Prepaid advertising $ - $ 24,781
Prepaid insurance 34,754 9,940
Other prepaid expenses 138,241 71,057
------- -------
$172,995 $105,778
======= =======
Note 5. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
March 31, December 31,
2000 1999
Accrued sales commissions and
royalties $ 3,506 $ 39,948
Payroll and payroll-related
liabilities 63,446 83,978
Other 42,018 138,538
-------- --------
$ 108,970 $ 262,464
======== ========
A provision for income taxes has not been recorded based upon the net
operating loss carryforward of approximately $3.9 million and the Company's
first quarter net loss. A valuation allowance has been provided for those
net operating loss carryforwards and temporary differences in view of the
Company's continuing losses for 2000.
Part II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation to provide indemnification to a director, officer,
employee or agent of the corporation, including attorneys' fees, judgments,
fines and amounts paid in settlement, actually and reasonably incurred by him
in connection with such action, suit or proceeding, if such party acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful as determined in accordance with the statute, and except that with
respect to any action which results in a judgment against the person and in
favor of the corporation the corporation may not indemnify unless a court
determines that the person is fairly and reasonably entitled to the
indemnification. Section 145 further provides that indemnification shall be
provided if the party in question is successful on the merits.
Our certificate of incorporation provides that our directors shall be
indemnified by us to the extent authorized by Delaware law. This
indemnification would cover all expenses and liabilities reasonably incurred
in connection with their services as directors.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of Ultradata pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than payment
by Ultradata of expenses incurred or paid by a Director, officer or
controlling person of Ultradata in the successful defense of any action, suit
or proceeding) is asserted by such Director, officer or controlling person in
connection with the securities being registered, Ultradata will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Our certificate of incorporation also provides that our directors will
not be personally liable to us for monetary damages for breaches of their
fiduciary duty as directors, unless they violated their duty of loyalty to us
or our stockholders, acted in bad faith, knowingly or intentionally violated
the law, authorized illegal dividends or redemptions or derived an improper
personal benefit from their action as directors.
Item 25. Other Expenses of Issuance and Distributions
The following are the expenses that Ultradata expects to incur in
connection with the registration and distribution of the shares being
registered. All of these expenses (other than the filing fee and the
insurance premium) are estimated, and will not be certain until after the
registration statement is declared effective. Ultradata will pay all of these
expenses; the selling shareholders will pay none of them.
Filing Fee......................$ 2,270
Accounting fees................. 5,000
Transfer Agent ................. 1,000
Legal fees...................... 10,000
Printing expenses............... 2,000
Insurance premium............... 25,300
TOTAL............$45,570
Item 26. Recent Sales of Unregistered Securities.
On May 16, 2000 Ultradata sold 800 shares of Series A Convertible
Preferred Stock and Common Stock Purchase Warrants to each of BH Capital
Investments, L.P. and Excalibur Limited Partnership. The securities were sold
for a total of $1,600,000, from which Ultradata paid $327,000 as commissions
to individuals and entities involved in the placement. The sale was exempt
pursuant to Section 4(2) of the Act since the sale was not made in a public
offering and was made to individuals who had access to detailed information
about the Company and were buying for their own account. There were no
underwriters.
Item 27. Exhibits and Financial Statement Schedules
Exhibits
3-a Articles of Incorporation, and 1989 amendment. (1)
3-a(1) Amendment to Articles of Incorporation dated March 4, 1991,
March 22, 1994, and November 18, 1994. (1)
3-a(2) Certification of Correction of Articles of Incorporation. (1)
3-a(3) Amendment to Articles of Incorporation dated July 26, 1996 - filed
herewith.
3-a(4) Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock - filed herewith.
3-b By-laws. (1)
4-a Specimen of Common Stock Certificate. (1)
5 Opinion of Robert Brantl, Esq. - filed herewith.
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 1996 Stock Option Plan, as amended - filed as an exhibit to the
Company's Registration Statement on Form S-8 (File No. 333-32098) and
incorporated herein by reference.
10-d Employment Agreement with Monte Ross.(1)
10-d(1) Extended employment agreement as of September 30, 1997 between the
Company and Monte Ross. (2)
10-e Employment Agreement with Mark L. Peterson.(1)
10-e(1) Extended employment agreement as of September 30, 1997 between the
Company and Mark L. Peterson. (2)
10-f Employment Agreement with Ernest Clarke.(1)
10-f(1) Extended employment agreement as of September 30, 1997 between the
Company and Ernest Clarke. (2)
10-g Royalty Agreement dated September 14, 1989, between the Company and
Leonard Missler. (1)
10-g(1) Modification Agreement dated November 4, 1995, to Royalty Agreement
dated September 14, 1989, between the Company and Leonard Missler.(1)
10-h Employment Agreement as of October 13, 1997 between the Company and
David Biernbaum (3)
10-i Convertible Preferred Stock and Warrants Purchase Agreement dated May
10, 2000 - filed as an exhibit to the Company's Current Report on
Form 8-K dated May 16, 2000 and incorporated herein by reference.
10-j Option Agreement between the Company and Influence Incubator, L.L.C.
dated May 30, 2000 - filed as an exhibit to the Company's Current
Report on Form 8-K dated May 30, 2000 and incorporated herein by
reference.
10-k Internet Marketing Agreement dated May 1, 1999 between the Company and
Influence Data, LLC. (3)
10-l Operating Agreement of Influence Data, LLC dated May 3, 1999. (3)
10-m Share Issue and Option Agreement dated March 23, 1998 among the
Company, Talon Research & Development Co., Limited, and certain
shareholders of Talon.
10-n Variation of Option Deed dated August 27, 1998 between Talon Research
& Development Co., Limited, certain shareholders of Talon, and the
Company.
10-o Deed made in 1999 relating to Variation of Option Deed between Talon
Research & Development Co., Limited, certain shareholders of Talon,
and the Company.
21 Subsidiaries - None.
23-a Consent of BDO Seidman, LLP - filed herewith.
23-b Consent of Robert Brantl, Esq. is contained in his opinion.
27-a Financial Data Schedule as of March 31, 2000 - filed as an Exhibit to
the Company's Quarterly Report on Form 10-QSB for the period ended
March 31, 2000 and incorporated herein by reference.
27-b Financial Data Schedule as of December 31, 1999 - filed as an Exhibit
to the Company's Annual Report on Form 10-KSB for the period ended
December 31, 1999 and incorporated herein by reference.
==============================================
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 33-85218 C) and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997, and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the period ended March 31, 2000 and incorporated herein
by reference.
Item 28. Undertakings
See Item 24 for the undertaking regarding the indemnification of
officers, directors and controlling persons.
The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, post-effective amendments to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
Ultradata Systems, Incorporated certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form SB-2 and
authorized this registration statement to be signed on its behalf by the
undersigned in the City of St. Louis and the State of Missouri on the 14th day
of June, 2000.
ULTRADATA SYSTEMS, INCORPORATED
By:\s\Monte Ross
Monte Ross, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities stated on June 14, 2000.
Name Title
/s/Monte Ross Chief Executive Officer, Director
Monte Ross
/s/Ernest Clarke Chief Financial and Accounting Officer, Director
Ernest Clarke
/s/Mark L. Peterson Director
Mark L. Peterson
/s/Steven H. Akre Director
Steven H. Akre
/s/John J. Clancy Director
John J. Clancy
Director
Donald Rattner
<PAGE>
INDEX TO EXHIBITS
3-a Articles of Incorporation, and 1989 amendment. (1)
3-a(1) Amendment to Articles of Incorporation dated March 4, 1991,
March 22, 1994, and November 18, 1994. (1)
3-a(2) Certification of Correction of Articles of Incorporation. (1)
3-a(3) Amendment to Articles of Incorporation dated July 26, 1996 - filed
herewith.
3-a(4) Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock - filed herewith.
3-b By-laws. (1)
4-a Specimen of Common Stock Certificate. (1)
5 Opinion of Robert Brantl, Esq. - filed herewith.
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 1996 Stock Option Plan, as amended - filed as an exhibit to the
Company's Registration Statement on Form S-8 (File No. 333-32098) and
incorporated herein by reference.
10-d Employment Agreement with Monte Ross.(1)
10-d(1) Extended employment agreement as of September 30, 1997 between the
Company and Monte Ross (2)
10-e Employment Agreement with Mark L. Peterson.(1)
10-e(1) Extended employment agreement as of September 30, 1997 between the
Company and Mark L. Peterson (2)
10-f Employment Agreement with Ernest Clarke.(1)
10-f(1) Extended employment agreement as of September 30, 1997 between the
Company and Ernest Clarke. (2)
10-g Royalty Agreement dated September 14, 1989, between the Company and
Leonard Missler.(1)
10-g(1) Modification Agreement dated November 4, 1995, to Royalty
Agreement dated September 14, 1989, between the Company and
Leonard Missler. (1)
10-h Employment Agreement as of October 13, 1997 between the Company and
David Biernbaum. (3)
10-i Convertible Preferred Stock and Warrants Purchase Agreement dated May
10, 2000 - filed as an exhibit to the Company's Current Report on
Form 8-K dated May 16, 2000 and incorporated herein by reference.
10-j Option Agreement between the Company and Influence Incubator, L.L.C.
dated May 30, 2000 - filed as an exhibit to the Company's Current
Report on Form 8-K dated May 30, 2000 and incorporated herein by
reference.
10-k Internet Marketing Agreement dated May 1, 1999 between the Company and
Influence Data, LLC. (3)
10-l Operating Agreement of Influence Data, LLC dated May 3, 1999. (3)
10-m Share Issue and Option Agreement dated March 23, 1998 among the
Company, Talon Research & Development Co., Limited, and certain
shareholders of Talon.
10-n Variation of Option Deed dated August 27, 1998 between Talon
Research & Development Co., Limited, certain shareholders of Talon,
and the Company.
10-o Deed made in 1999 relating to Variation of Option Deed between Talon
Research & Development Co., Limited, certain shareholders of Talon,
and the Company.
21 Subsidiaries - None.
23-a Consent of BDO Seidman, LLP - filed herewith.
23-b Consent of Robert Brantl, Esq. is contained in his opinion.
27-a Financial Data Schedule as of March 31, 2000 - filed as an Exhibit
to the Company's Quarterly Report on Form 10-QSB for the period ended
March 31, 2000 and incorporated herein by reference.
27-b Financial Data Schedule as of December 31, 1999 - filed as an Exhibit
to the Company's Annual Report on Form 10-KSB for the period ended
December 31, 1999 and incorporated herein by reference.
===============================================
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 33-85218 C) and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997, and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the period ended March 31, 2000 and incorporated herein
by reference.
********************************************************************
<PAGE>
Exhibit 3-a(3)
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ULTRADATA SYSTEMS, INCORPORATED
ULTRADATA SYSTEMS, INCORPORATED, a corporation organized and
existing under the General Corporation Law of the State of Delaware, does
hereby certify:
FIRST: That the Board of Directors of the said corporation, by
the unanimous consent of its members, filed with the minutes of the Board,
adopted a resolution proposing and declaring advisable the following amendment
to the Certificate of Incorporation of said corporation:
RESOLVED, that the Certificate of Incorporation of
this corporation be amended by changing the Article thereof
numbered "III" so that, as amended, said Article be and read as
follows:
III. The aggregate number of shares of stock which the
Corporation shall have the authority to issue is fifteen
million (15,000,000) shares, consisting of ten million
(10,000,000) shares of Common Stock having a par value of
$.01 per share and five million (5,000,000) shares of
Preferred Stock having a par value of $.01 per share. The
Board of Directors shall have full power and authority,
subject to limitations prescribed by law, to provide for the
issuance from time to time of any unissued Preferred Stock in
one or more series, and by filing a certificate pursuant to
Sections 103 and 151 of the Delaware General Corporation Law,
as amended from time to time, to establish the number of
shares to be included in each such series, and to set the
voting powers, designations, preferences, conversion or other
rights, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption of such
shares of stock for each such series not fixed hereby. The
aforesaid authorization of the Board shall include, but not
be limited to, the power to provide for the issuance of
shares of any series of Preferred Stock convertible, at the
option of the holder or of the Corporation or both, into
shares of any other class or classes or of any series of the
same or any other class or classes. All shares of stock of a
series shall represent the same interest in the Corporation
and shall have the same voting powers, designations,
preferences, rights and qualifications, limitations or
restrictions as the other shares of stock of such series,
except to the extent the Board of Directors provides
otherwise, as is filed with the Secretary of State, or as
otherwise determined in accordance with law.
SECOND: That the said amendment has been adopted at a meeting of
the shareholders of the corporation duly called for that purpose by a
favorable vote of the holders of the majority of the issued and outstanding
stock.
THIRD: That the aforesaid amendment was duly adopted in
accordance with the applicable provisions of Section 242 of the General
Corporation Law of Delaware.
IN WITNESS WHEREOF, said ULTRADATA SYSTEMS, INCORPORATED has
caused this certificate to be signed by its President and Secretary this 31st
day of July, 1996.
ULTRADATA SYSTEMS, INCORPORATED
By /s/ Monte Ross
Monte Ross, President
Attest:
/s/ Mark Peterson
Mark Peterson, Secretary
*******************************************************************
<PAGE>
Exhibit 3-a(4)
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS OF
SERIES A CONVERTIBLE PREFERRED STOCK OF
ULTRADATA SYSTEMS, INC.
PURSUANT TO SECTION 151 OF THE DELAWARE
GENERAL CORPORATION LAW
Ultradata Systems, Inc., a corporation organized and existing under and
by virtue of the laws of the State of Delaware (hereinafter the
"Corporation"), DOES HEREBY CERTIFY:
Pursuant to authority expressly granted and vested in the Board of
Directors of the Corporation by the provisions of the Corporation's
Certificate of Incorporation, the Board of Directors adopted the following
resolution on May 9, 2000 (i) authorizing a series of the Corporation's
previously authorized preferred stock, par value $.01 per share, and
(ii) providing for the designations, preferences and relative, participating,
optional or other rights, and the qualifications, limitations or restrictions
thereof, of Three Thousand Three Hundred Twenty (3,320) shares of Series A
Convertible Preferred Stock of the Corporation, as follows:
RESOLVED: That pursuant to the authority vested in the Board of
Directors of the Corporation by the Corporation's Certificate of Incorporation
(the "Certificate of Incorporation"), a series of Preferred Stock of the
Corporation be, and it hereby is, created out of the authorized but unissued
shares of the capital stock of the Corporation, such series to be designated
Series A Convertible Preferred Stock (the "Series A Convertible Preferred
Stock"), to consist of Three Thousand Three Hundred Twenty (3,320) shares, par
value $.01 per share, which shall have the following preferences, powers,
designations and other special rights;
1. Number of Shares of Series A Convertible Preferred Stock. Of the
5,000,000 shares of authorized but undesignated Preferred Stock, $.01 par
value ("Preferred Stock") of the Corporation, Three Thousand Three Hundred
Twenty (3,320) shares shall be designated and known as Series A Convertible
Preferred Stock, par value $.01 per share ("Series A Convertible Preferred
Stock").
2. Voting.
(a)No Voting Rights.Unless required by law, no holder of any shares of
Series A Convertible Preferred Stock shall be entitled to vote at any meeting
of stockholders of the Corporation (or in any written action of stockholders
in lieu of a meeting) with respect to any matters presented to the stock-
holders of the Corporation for their action or consideration. Notwithstanding
the foregoing, the Corporation shall provide each holder of record of Series
A Convertible Preferred Stock with timely notice of every meeting of stock-
holders of the Corporation and shall provide each holder with copies of all
proxy materials distributed in connection therewith.
(b)Exceptions.So long as any shares of Series A Convertible Preferred
Stock are outstanding, the Corporation shall not, without first obtaining the
approval (by vote or written consent, as provided by the Delaware General
Corporation Law) of the holders of at least sixty-six and two-thirds percent
(66 %) of the then outstanding shares of Series A Convertible Preferred Stock:
(i)change this Certificate of Designations or the Corporation's
Certificate of Incorporation to amend, alter, change or repeal any of the
powers, designations, preferences and rights of the Series A Convertible
Preferred Stock;
(ii)issue shares of the Series A Convertible Preferred
Stock other than pursuant to the Convertible Preferred Stock and Warrant
Purchase Agreement between the Corporation and the initial holders of the
Series A Convertible Preferred Stock concerning the purchase of the Series A
Convertible Preferred Stock (the "Securities Purchase Agreement");
(iii)create any new class or series of capital stock having parity
with or a preference over the Series A Convertible Preferred Stock as to
payment of dividends or distribution of assets upon liquidation, dissolution
or winding up of the Corporation ("Senior Securities") or alter or
change the rights, preferences or privileges of any Senior Securities so as to
affect adversely the Series A Convertible Preferred Stock;
(iv)increase the authorized number of shares of Series A Convertible
Preferred Stock; or
(v)do any act or thing not authorized or contemplated by this
Certificate of Designations that would result in taxation of the holders of
shares of the Series A Convertible Preferred Stock under Section 305 of the
Internal Revenue Code of 1986, as amended (or any comparable provision of the
Internal Revenue Code as hereafter from time to time amended).
(c)Conversion Rights of Dissenting Holders. If holders of at
least sixty-six and two-thirds percent (66 %) of the then outstanding shares
of Series A Convertible Preferred Stock authorize the Corporation to alter or
change the rights, preferences or privileges of the Series A Convertible
Preferred Stock pursuant to Section 2(b) above, so as to affect the Series A
Convertible Preferred Stock, then the Corporation will deliver notice of such
approved change to the holders of the Series A Convertible Preferred Stock
that did not agree to such alteration or change (the "Dissenting Holders"),
and the Dissenting Holders shall have the right for a period of thirty (30)
days from the date of notice thereof to convert any and all shares of then
held Series A Convertible Preferred Stock pursuant to the terms of this
Certificate of Designation as in effect prior to such alteration or change
(without giving effect to any restriction or limitation on conversion), or to
continue to hold their shares of Series A Convertible Preferred Stock pursuant
to the altered or changed terms.
3. Dividends.
The Series A Convertible Preferred Stock shall not bear any dividends.
4. Liquidation.
(a)Rank. All shares of Common Stock shall be junior in rank
to the Series A Convertible Preferred Stock in respect to the preferences as
to distributions and payments upon the liquidation, dissolution and winding up
of the Corporation. The rights of the shares of Common Stock shall be subject
to the preferences and relative rights of the Series A Convertible Preferred
Stock. Upon a Liquidation Event (as hereinafter defined), the holders of the
Series A Convertible Preferred Stock shall be entitled to receive in cash out
of the assets of the Corporation, whether from capital or from earnings
available for distribution to its stockholders (the "Preferred Funds"), before
any amount shall be paid to the holders of any of the capital stock of the
Company of any class junior in rank to the Series A Convertible Preferred
Stock in respect of the preferences as to the distributions and payments on
the liquidation, dissolution and winding up of the Company, an amount per
share of Series A Convertible Preferred Stock equal to the Liquidation
Preference (as defined below). No distribution shall be made to the holders of
any shares of capital stock of the Corporation other than Senior Securities
upon such Liquidation Event unless prior thereto, the holders of shares of
Series A Convertible Preferred Stock shall have received the Liquidation
Preference with respect to each such share. If, upon the occurrence of a
Liquidation Event, the assets and funds available for distribution among the
holders of the Series A Convertible Preferred Stock and holders of securities
ranking pari passu as to preference upon liquidation with the Series A
Convertible Preferred Stock shall be insufficient to permit the payment to
such holders of the preferential amounts payable thereon, then the entire
assets and funds of the Corporation legally available for distribution to the
Series A Convertible Preferred Stock and such pari passu securities shall be
distributed ratably among such shares in proportion to the ratio that that
Liquidation Preference payable on each such share bears to the aggregate
Liquidation Preference payable on all such shares.
(b)Liquidation Event Definition. A "Liquidation Event" shall
occur (i) if (A) the Corporation shall (1) commence a voluntary case under the
federal bankruptcy laws or any other applicable federal or state bankruptcy,
insolvency or similar law, or (2) consent to the entry of an order for relief
in an involuntary case under any such law or to the appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or other similar
official) of the Corporation or of any substantial part of its property, or
(3) make an assignment for the benefit of its creditors, or (4) admit in
writing its inability to pay its debts generally as they become due, or (B) a
decree or order (1) for relief in respect of the Corporation shall be entered
by a court having jurisdiction in the premises in an involuntary case under
the federal bankruptcy laws or any other applicable federal or state
bankruptcy, insolvency or similar law resulting in the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its
property, or (2) ordering the winding up or liquidation of its affairs, and
any such decree or order shall be unstayed and in effect for a period of
thirty (30) consecutive days, and on account of any such event specified in
clause (A) or (B) above, the Corporation shall liquidate, dissolve or wind up,
(ii) the Corporation shall otherwise liquidate, dissolve or wind up, or (iii)
a holder deems certain events enumerated in Section 4(d) as a Liquidation
Event for purposes of this Certificate of Designations.
(c)Liquidation Preference Definition. The "Liquidation
Preference" with respect to a share of Series A Convertible Preferred Stock
shall be equal to the sum of (i) the "Stated Value" of $1,000 per share of
Series A Convertible Preferred Stock, plus (ii) an amount equal to the product
of (0.1125) (N1/360) ($1,000), plus (ii) an amount equal to the product of
(0.225) (N2/360) ($1,000), where
"N1" means the number of days from, but excluding the first date
on which the Corporation issued such share of Series A Convertible
Preferred Stock (the "Issuance Date") through and including (1)
the date on which the holder shall have converted such share of
Series A Convertible Preferred Stock (the "Conversion Date") for
the Series A Convertible Preferred Stock for which conversion is
being elected, or (2) such other date of determination, as the
case may be, or (3) if earlier than either of the dates specified
in clauses (1) and (2) , the date on which the Corporation's
Common Stock ceases to be listed on a national securities exchange
or the Nasdaq Stock Market, as the case may be (the "Delisting
Date"); and
"N2" means the number of days from, but excluding, the Delisting
Date through and including (1) the Conversion Date for such share
of Series A Convertible Preferred Stock, or (2) such other date of
determination, as the case may be.
(d)Liquidation Event at Option of Holder. At the option of
each holder of Series A Convertible Preferred Stock, the sale, conveyance or
disposition of all or substantially all of the assets of the Corporation and
the occurrence of an Organic Change (as defined in Subsection 5(f)(iv)) in
which the Company fails to satisfy its obligations under Subsection 5(f)(iv)
shall each be deemed to be a Liquidation Event pursuant to which the
Corporation shall be required to distribute, upon consummation of and as a
condition to such transaction, an amount equal to the Liquidation Preference
with respect to each outstanding share of Series A Convertible Preferred Stock
held by such holder in accordance with and subject to the terms of this
Section 4.
(e)Events Deemed Not To Be Liquidation Events. The Corporation's
purchase or redemption of stock of any class, in any manner permitted by law,
shall not, for the purposes hereof, be regarded as a Liquidation Event.
Except as provided in Section 4(d) above, neither the consolidation or merger
of the Corporation with or into any other Person, nor the sale or transfer by
the Corporation of less than substantially all of its assets, shall, for the
purposes hereof, be deemed to be a Liquidation Event. No holder of Series A
Convertible Preferred Stock shall be entitled to receive any amounts with
respect thereto upon any Liquidation Event other than the amounts provided
for herein; provided, however, that a holder of Series A Convertible Preferred
Stock shall be entitled to all amounts previously accrued with respect to
amounts owed hereunder.
5. Conversion. The holders of shares of Series A Convertible
Preferred Stock shall have the following conversion rights and obligations:
(a)Right to Convert.
(i)Subject to the terms, conditions, and restrictions
of this Section 5, at any time after the Issuance Date the holder of any
shares of Series A Convertible Preferred Stock shall have the right to convert
each whole share of Series A Convertible Preferred Stock into that number of
fully paid and nonassessable shares of Common Stock (rounded to the nearest
whole share in accordance with Section 5(e)), at the Conversion Rate (as
defined below).
(ii)Anything in Subsection 5(a)(i) to the contrary
notwithstanding, in no event shall any holder be entitled to convert Series A
Convertible Preferred Stock in excess of that number of shares of Series A
Convertible Preferred Stock that, upon giving effect to such conversion, would
cause the aggregate number of shares of Common Stock beneficially owned by the
holder and its "affiliates" (as defined in Rule 405 under the Securities Act
of 1933, as amended (the "Securities Act")) to exceed 9.99% of the outstanding
shares of the Common Stock following such conversion. For purposes of this
Subsection, the aggregate number of shares of Common Stock beneficially owned
by the holder and its affiliates shall include the number of shares of Common
Stock issuable upon conversion of the Series A Convertible Preferred Stock
with respect to which the determination is being made, but shall exclude the
number of shares of Common Stock that would be issuable upon (i) conversion of
the remaining, nonconverted Series A Convertible Preferred Stock beneficially
owned by the holder and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Corporation
(including, without limitation, any warrants or convertible preferred stock)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by the holder and its affiliates. Except
as set forth in the preceding sentence, for purposes of this Subsection
5(a)(ii), beneficial ownership shall be calculated in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
For purposes of this Subsection, in determining the number of outstanding
shares of Common Stock a holder may rely on the number of outstanding shares
of Common Stock as reflected in (1) the Corporation's most recent Form 10-Q or
Form 10-K, as the case may be, (2) a more recent public announcement by the
Corporation or (3) any other notice by the Corporation or its transfer agent
setting forth the number of shares of Common Stock outstanding. For any
reason at any time, upon the written or oral request of any holder, the
Corporation shall immediately confirm orally and in writing to any such holder
the number of shares of Common Stock then outstanding. In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to conversions of Series A Convertible Preferred Stock by such holder
since the date as of which such number of outstanding shares of Common Stock
was reported. To the extent that the limitation contained in this Subsection
5(a)(ii) applies, the determination of whether shares of Series A Convertible
Preferred Stock are convertible (in relation to other securities owned by a
holder) and of which shares of Series A Convertible Preferred Stock are
convertible shall be in the sole discretion of such holder, and the submission
of shares of Series A Convertible Preferred Stock for conversion shall be
deemed to be such holder's determination of whether such shares of Series A
Convertible Preferred Stock are convertible (in relation to other securities
owned by such holder) and of which shares of Series A Convertible Preferred
Stock are convertible, in each case subject to such aggregate percentage
limitation, and the Corporation shall have no obligation or right to verify or
confirm the accuracy of such determination. Nothing contained herein shall be
deemed to restrict the right of a holder to convert such shares of Series A
Convertible Preferred Stock at such time as such conversion will not violate
the provisions of this Subsection. A holder of Series A Convertible Preferred
Stock may waive the provisions of this Subsection 5(a)(ii) as to itself (and
solely as to itself) upon not less than 75 days' prior notice to the
Corporation, and the provisions of this Subsection 5(b)(ii) shall continue to
apply until such 75th day (or such later date as may be specified in such
notice of waiver). No conversion in violation of this Subsection 5(b)(ii), but
otherwise in accordance with this Certificate of Designations, shall affect
the status of the Common Stock issued upon such conversion as validly issued,
fully-paid and nonassessable. Section 5(g) sets forth additional limitations
on the Corporation's obligation to issue shares of Common Stock upon
conversion of the Series A Convertible Preferred Stock.
(b)Conversion Rate and Other Definitions. The number of
shares of Common Stock issuable upon conversion of each share of Series A
Convertible Preferred Stock pursuant to Section (5)(a) shall be determined
according to the following formula (the "Conversion Rate"):
Conversion Amount
-----------------
Conversion Price
For purposes of this Certificate of Designations, the following terms
shall have the following meanings:
"Additional Amount" means the result of the following formula:
[(0.1125)(N1/360)($1,000)] + [(0.225)(N2/360)($1,000)].
"Base Price" means, with respect to a share of Series A
Convertible Preferred Stock, $3.50.
"Closing Bid Price" or "Closing Ask Price" means, for any
security as of any date, the last closing bid or ask price, as the case may
be, for such security on the Principal Market as reported by Bloomberg
Financial Markets ("Bloomberg"), or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last
closing bid or ask price of such security on the principal securities exchange
or trading market where such security is listed or traded as reported by
Bloomberg, or if the foregoing do not apply, the last closing bid or ask price
of such security in the over-the-counter market on the electronic bulletin
board for such security as reported by Bloomberg, or, if no closing bid or ask
price is reported for such security by Bloomberg, the last closing trade price
of such security as reported by Bloomberg, or, if no last closing trade price
is reported for such security by Bloomberg, the average of the bid or ask
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price or Closing
Ask Price cannot be calculated for such security on such date on any of the
foregoing bases, the Closing Bid Price or Closing Ask Price of such security
on such date shall be the fair market value as mutually determined by the
Corporation and the holders of sixty-six and two-thirds percent (66 %)) of
the shares of Series A Convertible Preferred Stock then outstanding. If the
Corporation and the holders of Series A Convertible Preferred Stock are unable
to agree upon the fair market value of the Common Stock, then such dispute
shall be resolved pursuant to Section 5(h). (All such determinations to be
appropriately adjusted for any stock dividend, stock, split or other similar
transaction during such period).
"Conversion Amount" means as to each share of Series A
Convertible Preferred Stock the sum of (A) the Additional Amount and (B)
$1,000.
"Conversion Price" means, as of any Conversion Date or other
date of determination, the lower of (x) the Base Price, and (y) 75% of the
average of the Closing Bid Prices in the five (5) Trading Days immediately
preceding such date; provided, however, that the Conversion Price will be
reduced an additional 5% if the securities of the Corporation are not listed
on the Principal Market, each in effect as of such date and subject to
adjustment as provided herein, but in no event lower than the Floor Price.
"Floor Price" means, during the period of eighteen (18) months
after the Issuance Date of a share of Series A Convertible Preferred Stock,
$2.50, except that (x) if the Conversion Price for any twenty (20) Trading
Days during such eighteen (18) month period would have been less than $2.50,
but for the Floor Price, then the "Floor Price" shall be reduced to $2.00, and
(y) if Conversion Price for any twenty (20) Trading Days during the period
commencing one (1) year after the Issuance Date of such share and ending
eighteen (18) months after the Issuance Date thereof would have been less than
$2.00 but for the Floor Price then in effect, then the "Floor Price' shall be
reduced to $1.50. There will be no Floor Price after eighteen (18) months
after the Issuance Date of such share.
"N1" and "N2" have the meanings set forth in Section 4(c).
"Principal Market" means the Nasdaq Smallcap Market.
"Registration Rights Agreement" means that certain registration
rights agreement between the Corporation and the initial holders of the Series
A Convertible Preferred Stock concerning the registration of the resale of the
shares of Common Stock issuable upon conversion of the Series A Convertible
Preferred Stock.
"Trading Day" means any day during which the Principal Market
shall be open for business.
(c)Conversion Notice. A holder of Series A Convertible
Preferred Stock may exercise its conversion right by giving a written
conversion notice in the form of Exhibit A hereto (the "Conversion Notice") to
the Corporation (x) by facsimile confirmed by a telephone call or (y) by
registered mail or overnight delivery service, with a copy by facsimile to the
Corporation's transfer agent for its Common Stock, as designated by the
Corporation from time to time. If such conversion will result in the
conversion of all of such holder's shares of Series A Convertible Preferred
Stock, such holder shall also surrender the certificate or certificates
representing the shares so to be converted (the "Preferred Stock
Certificates") to the Corporation at its principal office (or such other
office or agency of the Corporation as the Corporation may designate by notice
in writing to the holders of the Series A Convertible Preferred Stock) at any
time during its usual business hours on the date set forth in the Conversion
Notice.
(d)Issuance of Certificates; Time Conversion Effected.
(i)Promptly, but in no event more than three (3)
Trading Days, after the receipt of the Conversion Notice referred to in
Section 5(c) and surrender of the Preferred Stock Certificates (if required),
the Corporation shall issue and deliver, or cause to be issued and delivered,
to the holder, registered in such name or names as such holder may direct, a
certificate or certificates for the number of whole shares of Common Stock
into which such shares of Series A Convertible Preferred Stock have been
converted. In the alternative, if the Corporation's transfer agent is a
participant in the electronic book transfer program, the transfer agent shall
credit such aggregate number of shares of Common Stock to which the holder
shall be entitled to the holder's or its designee's balance account with The
Depository Trust Company. Such conversion shall be deemed to have been
effected, and the Conversion Date shall be deemed to have occurred, on the
date on which such Conversion Notice shall have been received by the
Corporation and at the time specified stated in such Conversion Notice, which
must be during the calendar day of such notice. The rights of the holder of
such share or shares of Series A Convertible Preferred Stock shall cease, and
the person or persons in whose name or names any certificate or certificates
for shares of Common Stock shall be issuable upon such conversion shall be
deemed to have become the holder or holders of record of the shares
represented thereby, on the Conversion Date. Issuance of shares of Common
Stock issuable upon conversion that are requested to be registered in a name
other than that of the registered holder shall be subject to compliance with
all applicable federal and state securities laws.
(ii)The Corporation understands that a delay in the
issuance of the shares of Common Stock beyond three (3) Trading Days after the
Conversion Date could result in economic loss to the holder of shares of
Series A Convertible Preferred Stock. As compensation to the holder for such
loss, the Corporation agrees to pay late payments to the holder for late
issuance of shares of Common Stock upon conversion in accordance with the
following schedule (where "No. Trading Days Late" means the number of Trading
Days after three (3) Trading Days from the date of receipt by the Corporation
of the Conversion Notice with electronic book entry transfer instructions if
the Company's Transfer Agent participates in the DWAC System of the Depository
Trust Company, or without electronic book entry transfer instructions if the
Company's Transfer Agent does not participate in such DWAC System) to and
including the date of the holder's or its designees' receipt of such shares):
No. Trading Days Late Late Payment For Each
$5,000 of Conversion Amount of
Amount Being Converted
-------------------------------------------------------------
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
>10 $1,000 + $100 for each Trading Day
late after 10 Calendar Days
The Corporation shall make all payments due under this Subsection 5(d)(ii) in
immediately available funds upon demand. Nothing herein shall limit a
holder's right to pursue injunctive relief and/or actual damages for the
Corporation's failure to issue and deliver Common Stock to such holder as
required by Subsection 5(d)(i), including, without limitation, such holder's
actual losses occasioned by any "buy-in" of Common Stock necessitated by such
late delivery. Furthermore, in addition to any other remedies that may be
available to such holder, if the Corporation fails for any reason to effect
delivery of such shares of Common Stock within five (5) Trading Days after the
Conversion Date, such holder will be entitled to revoke the relevant
Conversion Notice by delivering a notice to such effect to the Corporation.
Upon delivery of such notice of revocation, the Corporation and the holder
shall each be restored to their respective positions immediately prior to
delivery of such Conversion Notice, except that holder shall retain the right
to receive both the late payment amounts set forth above plus the actual cost
of any "buy-in."
(iii)If, at any time (a) the Corporation challenges,
disputes or denies the right of a holder to effect the conversion of the
Series A Convertible Preferred Stock into Common Stock or otherwise dishonors
or rejects any Conversion Notice properly delivered in accordance with this
Section 5 or (b) any third party who is not and has never been an affiliate of
a holder obtains a judgment or order from any court or public or governmental
authority that denies, enjoins, limits, modifies, or delays the right of such
holder to effect the conversion of the Series A Convertible Preferred Stock
into Common Stock, then such holder shall have the right, by written notice to
the Corporation, to require the Corporation to promptly redeem the Series A
Convertible Preferred Stock in accordance with Section 6(b). Under any of the
circumstances set forth above, the Corporation shall indemnify the holder
against and hold it harmless from, and be responsible for the payment of, all
costs and expenses of the holder, including its reasonable legal fees and
expenses, as and when incurred in disputing any such action or pursuing its
rights hereunder (in addition to any other rights of such holder). The
Corporation shall not refuse to honor any Conversion Notice unless its has
actually been enjoined by a court of competent jurisdiction from doing so, and
if so enjoined, the Corporation shall post with such court a performance bond
equal to 150% of the Conversion Amount of the shares sought to be converted by
the holder that are the subject of such injunction.
(iv)The holders of Series A Convertible Preferred Stock
shall be entitled to exercise their conversion privilege notwithstanding the
commencement of any case under 11 U.S.C. 101 et seq. (the "Bankruptcy
Code"). The Corporation hereby waives to the fullest extent permitted any
rights to relief it may have under 11 U.S.C. 362 in respect of the holder's
conversion privilege, if it becomes a debtor under the Bankruptcy Code. The
Corporation agrees to take or consent to any and all action necessary to
effectuate relief under 11 U.S.C. 362 without cost or expense to the holder.
(e)Fractional Shares. The Corporation shall not issue any
fraction of a share of Common Stock upon any conversion. All shares of Common
Stock (including fractions thereof) issuable upon conversion of more than one
share of Series A Convertible Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would result in
the issuance of a fraction of a share of Common Stock. If, after such
aggregation, the issuance would result in the issuance of a fraction of a
share of Common Stock, the Corporation shall round such fraction of a share of
Common Stock up to the nearest whole share.
(f)Adjustment to Conversion Price; Dilution and Other Events.
In order to prevent dilution of the rights granted under this Certificate of
Designations, the Conversion Price will be subject to adjustment from time to
time as provided in this Section 5(f).
(i)Adjustment of Base Price upon Issuance of Common Stock. If the
Corporation issues or sells, or is deemed to have issued or sold,
any shares of Common Stock (other than Conversion Shares (as defined in
the Convertible Preferred Stock and Warrants Purchase Agreement) and shares of
Common Stock deemed to have been issued by the Corporation in connection with
Approved Issuances (as defined below)) for a consideration per share less than
the Base Price (an "Offering"), as in effect immediately prior to such time
(the "Applicable Price"), then immediately after such issue or sale, the Base
Price shall be reduced to an amount equal to the product of (x) the Base Price
or Maximum Base Price in effect immediately prior to such issue or sale and
(y) the quotient determined by dividing (1) the sum of (I) the product of the
Applicable Price and the number of shares of Common Stock Deemed Outstanding
(as defined below) immediately prior to such issue or sale, and (II) the
consideration, if any, received by the Corporation upon such issue or sale by
(2) the product of (I) the Applicable Price and (II) the number of shares of
Common Stock Deemed Outstanding immediately after such issuance or sale. For
purposes of determining the adjusted Base Price under this Subsection 5(f)(i),
the following shall be applicable:
(A)Issuance of Options. If the Corporation in any manner grants
any rights or options to subscribe for or to purchase
Common Stock (other than in connection with an Approved Issuance
or upon conversion of the Series A Convertible Preferred Stock)
or any stock or other securities convertible into or exchangeable
for Common Stock (such rights or options being herein called
"Options" and such convertible or exchangeable stock or securities
being herein called "Convertible Securities") and the price per
share for which Common Stock is issuable upon the exercise of
such Options or upon conversion or exchange of such Convertible
Securities is less than the Applicable Price, then the total
maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon conversion or exchange of the
total maximum amount of such Convertible Securities issuable upon
the exercise of such Options shall be deemed to be outstanding
and to have been issued and sold by the Corporation for such price
per share. For purposes of this Subsection 5(f)(i)(A), the "price
per share for which Common Stock is issuable upon exercise of
such Options or upon conversion or exchange of such Convertible
Securities" is determined by dividing (I) the total amount, if any,
received or receivable by the Corporation as consideration for
the granting of such Options, plus the minimum aggregate amount of
additional consideration payable to the Corporation upon the
exercise of all such Options, plus in the case of such Options
which relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable to the
Corporation upon the issuance or sale of such Convertible Securities
and the conversion or exchange thereof, by (II) the total maximum
number of shares of Common Stock issuable upon exercise of such
Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options. No adjustment
of the Base Price shall be made upon the actual issuance of such
Common Stock or of such Convertible Securities upon the exercise
of such Options or upon the actual issuance of such Common Stock
upon conversion or exchange of such Convertible Securities.
Notwithstanding the foregoing, no adjustment shall be made pursuant
to this Subsection 5(f)(i)(A) to the extent that such adjustment is
based solely on the fact that the Convertible Securities issuable
upon exercise of such Option are convertible into or exchangeable
for Common Stock at a price that varies with the market price of
the Common Stock.
(B)Issuance of Convertible Securities. If the Corporation in any
manner issues or sells any Convertible Securities and the
price per share for which Common Stock is issuable upon such
conversion or exchange is less than the Applicable Price, then the
maximum number of shares of Common Stock issuable upon conversion or
exchange of such Convertible Securities shall be deemed to be
outstanding and to have been issued and sold by the Corporation for
such price per share. For the purposes of this Subsection 5(f)(i)(B),
the "price per share for which Common Stock is issuable upon such
conversion or exchange" is determined by dividing (I) the total
amount received or receivable by the Corporation as consideration for
the issue or sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the
Corporation upon the conversion or exchange thereof, by (II) the total
maximum number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities. No adjustment of
the Base Price shall be made upon the actual issue of such Common
Stock upon conversion or exchange of such Convertible Securities,
and if any such issue or sale of such Convertible Securities is made
upon exercise of any Options for which adjustment of the
Base Price had been or are to be made pursuant to other provisions
of this Subsection 5(f)(i), no further adjustment of the Base
Price shall be made by reason of such issue or sale. Notwithstanding
the foregoing, no adjustment shall be made pursuant to this Subsection
5(f)(i)(B) to the extent that such adjustment is based solely on
the fact that such Convertible Securities are convertible into or
exchangeable for Common Stock at a price that varies with
the market price of the Common Stock.
(C)Change in Option Price or Rate of Conversion. If the purchase
price provided for in any Options, the additional consideration,
if any, payable upon the issue, conversion or exchange of any
Convertible Securities, or the rate at which any Convertible
Securities are convertible into or exchangeable for Common Stock
change at any time, the Base Price in effect at the time of such
change shall be readjusted to the Base Price that would have been
in effect at such time had such Options or Convertible Securities
still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case
may be, at the time initially granted, issued or sold; provided
that no adjustment shall be made if such adjustment would result
in an increase of the Base Price then in effect.
(D)Certain Definitions. For purposes of determining the adjusted
Base Price under this Subsection 5(f)(i), the following terms
have meanings set forth below:
(I)"Approved Issuances" shall mean (i) the issuance of
securities upon exercise or conversion of the Corporation's options, warrants
or other convertible securities outstanding as of the date hereof, or (ii) the
grant of additional options or warrants, or the issuance of additional
securities, under any Corporation stock option plan, restricted stock plan,
stock purchase plan or other plan or written compensation contract for the
benefit of the Corporation's employees, directors or consultants in effect on
the date hereof.
(II)"Common Stock Deemed Outstanding" means, at any
given time, the number of shares of Common Stock actually outstanding at such
time, plus the number of shares of Common Stock deemed to be outstanding
pursuant to Subsections 5(f)(i)(A) and 5(f)(i)(B) hereof regardless of whether
the Options or Convertible Securities are actually exercisable at such time,
but excluding any shares of Common Stock issuable upon conversion of the
Series A Convertible Preferred Stock.
(E)Effect on Base Price of Certain Events. For purposes of
determining the adjusted Base Price under this Section 5(f),
the following shall be applicable:
(I) Calculation of Consideration Received. If any Common Stock,
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed
to be the amount received by the Corporation therefor, before deduction of
reasonable commissions, underwriting discounts or allowances or other
reasonable expenses paid or incurred by the Corporation in connection with
such issuance or sale. In case any Common Stock, Options or Convertible
Securities are issued or sold for a consideration other than cash, the amount
of the consideration other than cash received by the Corporation will be the
fair value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the
Corporation will be the arithmetic average of the Closing Bid Prices of
such security for the five consecutive trading days immediately preceding
the date of receipt. In case any Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Corporation is the surviving entity the amount
of consideration therefor will be deemed to be the fair value of such
portion of the net assets and business of the non-surviving entity
as is attributable to such Common Stock, Options or Convertible
Securities, as the case may be. The fair value of any consideration other
than cash or securities will be determined jointly by the Corporation and
the holders of sixty-six and two-thirds percent (66 %)) of the Series A
Convertible Preferred Stock then outstanding. If such parties are unable to
reach agreement within ten (10) days after the occurrence of an event
requiring valuation (the "Valuation Event"), the fair value of such
consideration will be determined within forty-eight (48) hours of the tenth
(10th) day following the Valuation Event by an independent, reputable
appraiser selected by the Corporation. The determination of such appraiser
shall be deemed binding upon all parties absent manifest error.
(II)Integrated Transactions. In case any Option is issued in
connection with the issue or sale of other securities of the Corporation,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the
Options will be deemed to have been issued for a consideration of $0.01.
(III)Treasury Shares. The number of shares of Common
Stock outstanding at any given time does not include shares owned or held by
or for the account of the Corporation, and the disposition of any shares so
owned or held will be considered an issue or sale of Common Stock.
(IV)Record Date. If the Corporation takes a record of
the holders of Common Stock for the purpose of entitling them (1) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (2) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date will be deemed to be
the date of the issue or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
(ii)Adjustment of Base Price upon Subdivision or
Combination of Common Stock. If the Corporation at any time subdivides (by
any stock split, stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, the Base Price in effect immediately prior to such subdivision will be
proportionately reduced. If the Corporation at any time combines (by
combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Base
Price in effect immediately prior to such combination will be proportionately
increased.
(iii)Adjustment of Variable Conversion Price upon
Issuance of Convertible Securities. If the Corporation in any manner issues
or sells Convertible Securities that are convertible into Common Stock at a
price that varies with the market price of the Common Stock (the formulation
for such variable price being herein referred to as, the "Variable Price") and
such Variable Price is not calculated using the same formula used to calculate
the Variable Conversion Price in effect immediately prior to the time of such
issue or sale, the Corporation shall provide written notice thereof via
facsimile and overnight courier to each holder of the Series A Convertible
Preferred Stock ("Variable Notice") on the date of issuance of such
Convertible Securities. If the holders of Series A Convertible Preferred
Stock representing at least sixty-six and two-thirds percent (66 %)) of the
Series A Convertible Preferred Stock then outstanding provide written notice
via facsimile and overnight courier (the "Variable Price Election Notice") to
the Corporation within five (5) business days of receiving a Variable Notice
that such holders desire to replace the Variable Conversion Price then in
effect with the Variable Price described in such Variable Notice, then from
and after the date of the Corporation's receipt of the Variable Price Election
Notice, the Variable Conversion Price will automatically be replaced with the
Variable Price (together with such modifications to this Certificate of
Designations as may be required to give full effect to the substitution of the
Variable Price for the Variable Conversion Price). A holder's delivery of a
Variable Price Election Notice shall serve as the consent required to amend
this Certificate of Designation pursuant to Section 20 below. In the event
that a holder delivers a Conversion Notice at any time after the Corporation's
issuance of Convertible Securities with a Variable Price but before such
holder's receipt of the Corporation's Variable Notice, then such holder shall
have the option by written notice to the Corporation to rescind such
Conversion Notice or to have the Conversion Price be equal to such Variable
Price for the conversion effected by such Conversion Notice.
(iv)Reorganization, Reclassification, Consolidation,
Merger or Sale. Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Corporation's
assets to another Person (as defined below) or other transaction which is
effected in such a way that holders of Common Stock are entitled to receive
(either directly or upon subsequent liquidation) stock, securities or assets
with respect to or in exchange for Common Stock is referred to herein as an
"Organic Change." Prior to the consummation of any Organic Change, the
Corporation will make appropriate provision (in form and substance reasonably
satisfactory to the holders of sixty-six and two-thirds percent (66 %) of the
Series A Convertible Preferred Stock then outstanding) to insure that each of
the holders of the Series A Convertible Preferred Stock will thereafter have
the right to acquire and receive in lieu of or in addition to (as the case may
be) the shares of Common Stock otherwise acquirable and receivable upon the
conversion of such holder's Series A Convertible Preferred Stock, such shares
of stock, securities or assets as would have been issued or payable in such
Organic Change with respect to or in exchange for the number of shares of
Common Stock that would have been acquirable and receivable had all of such
holder's Series A Convertible Preferred Stock been converted into shares of
Common Stock immediately prior to such Organic Change (without taking into
account any limitations or restrictions on the timing or amount of
conversions). In any such case, the Corporation will make appropriate
provision (in form and substance reasonably satisfactory to the holders of
sixty-six and two-thirds percent (66 %) of the Series A Convertible Preferred
Stock then outstanding) with respect to such holders' rights and interests to
insure that the provisions of this Section 5(f) will thereafter be applicable
to the Series A Convertible Preferred Stock (including, in the case of any
such consolidation, merger or sale in which the successor entity or purchasing
entity is other than the Corporation, an immediate adjustment of the Base
Price in accordance with Subsection 5(f)(i) using the value for the Common
Stock reflected by the terms of such consolidation, merger or sale, if the
value so reflected is less than the Base Price in effect immediately prior to
such consolidation, merger or sale). The Corporation will not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor entity (if other than the Corporation) resulting from consolidation
or merger or the entity purchasing such assets assumes, by written instrument
(in form and substance reasonably satisfactory to the holders of sixty-six and
two-thirds percent (66 %) of the Series A Convertible Preferred Stock then
outstanding), the obligation to deliver to each holder of Series A Convertible
Preferred Stock such shares of stock, securities or assets as, in accordance
with the foregoing provisions, such holder may be entitled to acquire.
"Person" shall mean an individual, a limited liability company, a partnership,
a joint venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.
(v)Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 5(f) but not expressly provided
for by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity
features), then the Corporation's Board of Directors will make an appropriate
adjustment in the Conversion Price so as to protect the rights of the holders
of the Series A Convertible Preferred Stock; provided, however, that no such
adjustment will increase the Conversion Price as otherwise determined pursuant
to this Section 5(f).
(g)Limitation on Number of Conversion Shares. Notwithstanding
any other provision herein, the Corporation shall not be obligated to issue
any shares of Common Stock upon conversion of the Series A Convertible
Preferred Stock if the issuance of such shares of Common Stock would exceed
635,668 shares (the "Exchange Cap") without breaching the Corporation's
obligations under the rules or regulations of the Nasdaq Stock Market, except
that such limitation shall not apply in the event that the Corporation (i)
obtains the approval of its stockholders as required by applicable rules and
regulations of the Nasdaq Stock Market for issuances of Common Stock in excess
of the Exchange Cap, or (ii) obtains a written opinion from outside counsel to
the Corporation that such approval is not required, which opinion shall be
reasonably satisfactory to the holders of sixty-six and two-thirds percent
(66 %) of the shares of Series A Convertible Preferred Stock then
outstanding. Until such approval or written opinion is obtained or such
action has been taken by the required number of holders, no purchaser of
Series A Convertible Preferred Stock pursuant to the Securities Purchase
Agreement (the "Investors") shall be issued, upon conversion of Series A
Convertible Preferred Stock, shares of Common Stock in an amount greater than
the product of (x) the Exchange Cap amount multiplied by (y) a fraction, the
numerator of which is the number of shares of Series A Convertible Preferred
Stock issued to such Investor pursuant to the Securities Purchase Agreement
and the denominator of which is the aggregate amount of all the Series A
Convertible Preferred Stock issued to the Investors pursuant to the Securities
Purchase Agreement (the "Cap Allocation Amount"). In the event that any
Investor shall sell or otherwise transfer any of such Investor's Series A
Convertible Preferred Stock, the transferee shall be allocated a pro rata
portion of such Investor's Cap Allocation Amount. In the event that any
holder of Series A Convertible Preferred Stock shall convert all of such
holder's Series A Convertible Preferred Stock into a number of shares of
Common Stock that, in the aggregate, is less than such holder's Cap Allocation
Amount, then the difference between such holder's Cap Allocation Amount and
the number of shares of Common Stock actually issued to such holder shall be
allocated to the respective Cap Allocation Amounts of the remaining holders of
Series A Convertible Preferred Stock on a pro rata basis in proportion to the
number of Series A Convertible Preferred Stock then held by each such holder.
(h)Dispute Resolution. In the case of a dispute as to the
determination of the Closing Ask Price or Closing Bid Price of any security or
the arithmetic calculation of the Conversion Rate, the Corporation shall
promptly issue to the holder the number of shares of Common Stock that is not
disputed and shall submit the disputed determinations or arithmetic
calculations to the holder via facsimile within one (1) business day of
receipt of such holder's Conversion Notice. If such holder and the
Corporation are unable to agree upon the determination of such Closing Ask
Price or Closing Bid Price, as the case may be, or arithmetic calculation of
the Conversion Rate within one (1) business day of such disputed determination
or arithmetic calculation being submitted to the holder, then the Corporation
shall within one (1) business day following such date of delivery submit via
facsimile (A) the disputed determination of the Closing Ask Price or Closing
Bid Price, as the case may be, to an independent, reputable investment bank
or (B) the disputed arithmetic calculation of the Conversion Rate to its
independent certified public accounting firm. The Corporation shall cause the
investment bank or the accounting firm, as the case may be, to perform the
determinations or calculations and notify the Corporation and the holder of
the results no later than forty-eight (48) hours from the time it receives the
disputed determinations or calculations. Such investment bank's or accounting
firm's determination or calculation, as the case may be, shall be binding upon
all parties absent manifest error.
(i)Mandatory Conversion at Maturity. If any shares of Series
A Convertible Preferred Stock remain outstanding on the Maturity Date (as
defined below), then all such shares shall be converted as of such date in
accordance with this Section 5 as if the holders of such shares had given the
Conversion Notice on the Maturity Date. All holders of shares of Series A
Convertible Preferred Stock shall thereupon surrender all Preferred Stock
Certificates, duly endorsed for cancellation, to the Corporation. "Maturity
Date" means, with respect to any share of Series A Convertible Preferred
Stock, the date that is three (3) years after the Issuance Date thereof,
subject to extension pursuant to Section 3(u) of the Registration Rights
Agreement, which extension shall be equal to one day for each day in any
Allowable Grace Period (as defined in the Registration Rights Agreement).
(6)Redemption of Series A Convertible Preferred Stock.
(a)Intentionally Omitted.
(b)Mandatory Redemption.
(i)Holder's Option if Corporation Cannot Fully Convert
or Holder Cannot Sell Without Restriction. If (i) upon the Corporation's
receipt of a Conversion Notice, the Corporation fails to issue shares of
Common stock as contemplated by Subsection 5(d)(iii) or cannot issue shares of
Common Stock registered for resale under the Registration Statement (or which
are exempt from the registration requirements under the 1933 Act pursuant to
Rule 144(k) under the 1933 Act) for any reason, including, without limitation,
because the Corporation (X) does not have a sufficient number of shares of
Common Stock authorized and available, (y) is otherwise prohibited by
applicable law or by the rules or regulations of any stock exchange,
interdealer quotation system or other self-regulatory organization with
jurisdiction over the Corporation or its Securities, including without
limitation the Exchange Cap, from issuing all of the Common Stock which is to
be issued to a holder of Series A Convertible Preferred Stock pursuant to a
Conversion Notice or (z) fails to have a sufficient number of shares of Common
Stock registered for resale under the Registration Statement, or (ii) a
Registration Default (as defined in the Registration Rights Agreement) shall
have occurred and be continuing,then in the case of clause (i), the
Corporation shall issue as many shares of Common Stock as it is able to issue
in accordance with such holder's Conversion Notice (if the holder shall have
given such a Conversion Notice) and pursuant to Section 5(d), and with respect
to all or any part of its unconverted Series A Convertible Preferred Stock
held by such holder, the holder, solely at such holder's option, can elect to:
(A)require the Corporation to redeem from such holder all or any part
of its remaining shares of Series A Convertible Preferred Stock
("Mandatory Redemption") at a price per share of Series A Convertible
Preferred Stock equal to the greater of (I) the sum of: (a) $1,300 plus
(b)the Additional Amount and (II) the product of (a) the Conversion Rate
on the date of such holder's delivery of an Election Response Notice (as
defined below) and (b) the greater of (i) the 5 day closing average
Closing Ask Price of the Common Stock on the Trading Days immediately
preceding the event giving rise to Mandatory Redemption or (ii) the
Closing Ask Price of the Common Stock on the date of the holder's
delivery to the Company of a Notice of Mandatory Redemption or, if such
date of delivery is not a Trading Day, the next date on which the
exchange or market on which the Common Stock is traded is open (the
"Mandatory Redemption Price");
(B)if the Corporation's inability to fully convert Series A
Convertible Preferred Stock is pursuant to clause (i)(z) above of this
Section 6(b), require the Corporation to issue restricted shares of
Common Stock in accordance with such holder's Conversion Notice and
pursuant to Section 5(d);
(C)void its Conversion Notice and retain or have returned, as the
case may be, the nonconverted shares of Series A Convertible Preferred
Stock that were to be converted pursuant to such holder's Conversion
Notice (provided that a holder's voiding its Conversion Notice shall not
affect the Corporation's obligations to make any payments which have
accrued prior to the date of such notice); or
(D)if the Corporation's inability to fully convert Series A
Convertible Preferred Stock is pursuant to clause (i)(y) above of this
Section 6(b), require the Corporation to issue shares of Common Stock in
accordance with such holder's Conversion Notice and pursuant to Section
5(d) at a Conversion Price equal to the average of the Closing Bid
Prices of the Common Stock for the five consecutive trading days
preceding such holder's Election Response Notice or such other market
price that satisfies the applicable exchange or trading market.
(ii)Mechanics of Fulfilling Holder's Election. The
Corporation shall within one (1) business day send via facsimile to a holder
of Series A Convertible Preferred Stock, upon receipt of a facsimile copy of a
Conversion Notice from such holder that cannot be fully satisfied as described
in Section 6(d), a notice of the Corporation's inability to fully satisfy such
holder's Conversion Notice (the "Inability to Fully Convert Notice"). Such
Inability to Fully Convert Notice shall indicate (i) the reason why the
Corporation is unable to fully satisfy such holder's Conversion Notice,
(ii) the number of shares of Series A Convertible Preferred Stock which cannot
be converted and (iii) the applicable Mandatory Redemption Price. Such holder
shall notify the Corporation of its election pursuant to Subsection 6(b)(i)
above by delivering written notice via facsimile to the Corporation ("Election
Response Notice").
(iii)Intentionally Omitted.
(iv)Payment of Mandatory Redemption Price. If such
holder shall elect to have its shares of Series A Convertible Preferred Stock
Redeemed pursuant to Subsection 6(b)(i)(A) or if the Corporation is required
to redeem a holder's shares of Series A Convertible Preferred Stock on the
Maturity Date, the Corporation shall pay the Mandatory Redemption Price to
such holder in cash by wire transfer of immediately available funds in
accordance with such holder's written wire transfer instructions within five
(5) days after the Corporation's receipt of the holder's Election Response
Notice or the Maturity Date, as the case may be. If the Corporation shall
fail to pay the applicable Mandatory Redemption Price to such holder within
such five (5) day period (other than pursuant to a dispute as to the
determination of the arithmetic calculation of the Mandatory Redemption
Price), in addition to any remedy such holder of Series A Convertible
Preferred Stock may have under any Certificate of Designations, the Securities
Purchase Agreement and the Registration Rights Agreement, such unpaid amount
shall bear interest at the rate of 3.0% per month (prorated for partial
months) until paid in full. Until the Mandatory Redemption Price is paid in
full to such holder, such holder may void the Mandatory Redemption with
respect to those shares of Series A Convertible Preferred Stock for which the
full Mandatory Redemption Price has not been paid and receive back the
Preferred Stock Certificates representing such Series A Convertible Preferred
Stock. Notwithstanding the foregoing, if the Corporation fails to pay the
applicable Mandatory Redemption Price within such period of five (5) days due
to a dispute as to the determination of the Mandatory Redemption Price, such
dispute shall be resolved pursuant to Section 5(h) with the term "Mandatory
Redemption Price" being substituted for the term "Conversion Rate".
(v)Pro-rata Conversion and Redemption. If the
Corporation receives a Conversion Notice or Election Response Notice electing
Mandatory Redemption from more than one holder of Series A Convertible
Preferred Stock on the same day, and the Corporation can convert and/or redeem
some, but not all, of the Series A Convertible Preferred Stock pursuant to
this Section 6, the Corporation shall convert and/or redeem from each holder
of Series A Convertible Preferred Stock electing to have its Series A
Convertible Preferred Stock converted and redeemed at such time an amount
equal to such holder's pro-rata amount (based on the number of shares of
Series A Convertible Preferred Stock held by such holder relative to the
number of Series A Convertible Preferred Stock outstanding) of all Series A
Convertible Preferred Stock being converted and redeemed at such time.
8. Notices. In case at any time:
(i)the Corporation shall declare any dividend upon its Common Stock
payable in cash or stock or make any other pro rata distribution to the
holders of its Common Stock; or
(ii)the Corporation shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or
other rights; or
(iii)there shall be any Organic Change; or
(iv)there shall be a Liquidation Event;
then, in any one or more of such cases, the Corporation shall give, by first
class mail, postage prepaid, or by facsimile or by recognized overnight
delivery service to non-U.S. residents, addressed to each holder of any shares
of Series A Convertible Preferred Stock at the address of such holder as
shown on the books of the Corporation, (i) at least twenty (20) Trading Days'
prior written notice of the date on which the books of the Corporation shall
close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of any such
Organic Change or Liquidation Event and (ii) in the case of any such Organic
Change or Liquidation Event, at least twenty (20) Trading Days' prior written
notice of the date when the same shall take place. Such notice in accordance
with the foregoing clause (i) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders
of Common Stock shall be entitled thereto, and such notice in accordance with
clause (ii) shall also specify the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such Organic Change or Liquidation Event, as the
case may be.
9. Stock to be Reserved. The Corporation, upon the effective date
of this Certificate of Designations, has a sufficient number of shares of
Common Stock available to reserve for issuance upon the conversion of all
outstanding shares of Series A Convertible Preferred Stock, assuming immediate
conversion. The Corporation will at all times reserve and keep available out
of its authorized Common Stock, solely for the purpose of issuance upon the
conversion of Series A Convertible Preferred Stock as herein provided, such
number of shares of Common Stock as shall then be issuable upon the conversion
of all outstanding shares of Series A Convertible Preferred Stock. The
Corporation covenants that all shares of Common Stock that shall be so issued
shall be duly and validly issued, fully paid and non-assessable. The
Corporation will take all such action as may be so taken without violation of
any applicable law or regulation to have a sufficient number of authorized but
unissued shares of Common Stock to issue upon conversion of the Series A
Convertible Preferred Stock. The Corporation will not take any action which
results in any adjustment of the conversion rights if the total number of
shares of Common Stock issued and issuable after such action upon conversion
of the Series A Convertible Preferred Stock would exceed the total number of
shares of Common Stock then authorized by the Corporation's Certificate of
Incorporation.
10. No Reissuance of Series A Convertible Preferred Stock. Shares of
Series A Convertible Preferred Stock that are converted into shares of Common
Stock as provided herein shall not be reissued.
11. Issue Tax. The issuance of certificates for shares of Common
Stock upon conversion of Series A Convertible Preferred Stock shall be made
without charge to the holder for any United States issuance tax in respect
thereof, provided that the Corporation shall not be required to pay any tax
that may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the holder of the
Series A Convertible Preferred Stock which is being converted.
12. Closing of Books. The Corporation will at no time close its
transfer books against the transfer of any Series A Convertible Preferred
Stock or of any shares of Common Stock issued or issuable upon the conversion
of any shares of Series A Convertible Preferred Stock in any manner which
interferes with the timely conversion of such Series A Convertible Preferred
Stock, except as may otherwise be required to comply with applicable
securities laws.
13. Definitions. As used in this Certificate of Designations, the
term "Common Stock" shall mean and include the Corporation's authorized Common
Stock, $0.01 par value, as constituted on the date of filing of this
Certificate of Designations, and shall also include any capital stock of any
class of the Corporation thereafter authorized which shall neither be limited
to a fixed sum or percentage of par value in respect of the rights of the
holders thereof to participate in dividends nor entitled to a preference in
the distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; provided that the shares of
Common Stock receivable upon conversion of shares of Series A Convertible
Preferred Stock shall include only shares designated as Common Stock of the
Corporation on the date of filing of this instrument, or in case of any
reorganization, reclassification, or stock split of the outstanding shares
thereof, the stock, securities or assets provided for in Sections 5(f) and
(g). Any capitalized terms used in this Certificate of Designations but not
defined herein shall have the meanings set forth in the Securities Purchase
Agreement, a copy of which will be provided to any stockholder of the
Corporation upon request to the Secretary of the Corporation, without charge.
14. Loss, Theft, Destruction of Preferred Stock Certificates. Upon
receipt of evidence satisfactory to the Corporation of the loss, theft,
destruction or mutilation of certificates representing shares of Series A
Convertible Preferred Stock and, in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (which shall not include the posting of any bond), or, in the case
of any such mutilation, upon surrender and cancellation of the Series A
Convertible Preferred Stock certificate, the Corporation shall make, issue and
deliver, in lieu of such lost, stolen, destroyed or mutilated certificates for
Series A Convertible Preferred Stock, new certificates for Series A
Convertible Preferred Stock of like tenor. The Series A Convertible Preferred
Stock shall be held and owned upon the express condition that the provisions
of this Section 13 are exclusive with respect to the replacement of mutilated,
destroyed, lost or stolen shares of Series A Convertible Preferred Stock and
shall preclude any and all other rights and remedies notwithstanding any law
or statue existing or hereafter enacted to the contrary with respect to the
replacement of negotiable instruments or other securities without the
surrender thereof.
15. Record Owner. The Corporation may deem the person in whose name
the Series A Convertible Preferred Stock shall be registered upon the registry
books of the Corporation to be, and may treat it as, the absolute owner of the
Series A Convertible Preferred Stock for the purpose of conversion of the
Series A Convertible Preferred Stock and for all other purposes, and the
Corporation shall not be affected by any notice to the contrary. All such
payments and such conversion shall be valid and effectual to satisfy and
discharge the liability upon the Series A Convertible Preferred Stock to the
extent of the sum or sums so paid or the conversion so made.
16. Register. The Corporation shall maintain a transfer agent, which
may be the transfer agent for the Common Stock or the Corporation itself, for
the registration of the Series A Convertible Preferred Stock. Upon any
transfer of the Series A Convertible Preferred Stock in accordance with the
provisions hereof, the Corporation shall register or cause the transfer agent
to register such transfer on the Series A Convertible Preferred Stock
register.
17. Remedies, Characterizations, Other Obligations, Breaches and
Injunctive Relief. The remedies provided in this Certificate of Designations
shall be cumulative and in addition to all other remedies available under this
Certificate of Designations, at law or in equity (including a decree of
specific performance and/or other injunctive relief), no remedy contained
herein shall be deemed a waiver of compliance with the provisions giving rise
to such remedy and nothing herein shall limit a holder's right to pursue
actual damages for any failure by the Corporation to comply with the terms of
this Certificate of Designations. Amounts set forth or provided for herein
with respect to payments, conversion and the like (and the computation
thereof) shall be the amounts to be received by the holder thereof and shall
not, except as expressly provided herein, be subject to any other obligation
of the Corporation (or the performance thereof). The Corporation acknowledges
that a breach by it of its obligations hereunder will cause irreparable harm
to the holders of the Series A Convertible Preferred Stock and that the remedy
at law for any such breach may be inadequate. The Corporation therefore
agrees that, in the event of any such breach or threatened breach, the holders
of the Series A Convertible Preferred Stock shall be entitled, in addition to
all other available remedies, to an injunction restraining any breach, without
the necessity of showing economic loss and without any bond or other security
being required.
18. Construction. This Certificate of Designations shall be deemed to
be jointly drafted by the Corporation and the initial holders of the Series A
Convertible Preferred Stock and shall not be construed against any person as
the drafter hereof.
19. Failure or Indulgence Not Waiver. No failure or delay on the part
of a holder of Series A Convertible Preferred Stock in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof (except
to the extent that such power, right or privilege must, in accordance with the
terms of this Certificate of Designations, be exercised within a specified
period of time and such period of time has lapsed without such power, right or
privilege being exercised), nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privilege.
20. Vote to Change the Terms of or Issue Series A Convertible
Preferred Stock. The affirmative vote at a meeting duly called for such
purpose, or the written consent without a meeting, of the holders of not less
than sixty-six and two-thirds percent (66 %) of the then outstanding shares
of Series A Convertible Preferred Stock shall be required for (i) any change
to this Certificate of Designations or the Corporation's Certificate of
Incorporation that would amend, alter, change or repeal any of the powers,
designations, preferences and rights of the Series A Convertible Preferred
Stock, or (ii) any issuance of shares of Series A Convertible Preferred Stock
other than as contemplated by the Securities Purchase Agreement.
21. Withholding. To the extent required by applicable law, the
Corporation may withhold amounts for or on account of any taxes imposed or
levied by or on behalf of any taxing authority in the United States having
jurisdiction over the Corporation from any payments made pursuant to the
Series A Convertible Preferred Stock.
22. Headings. The headings of the Sections of this Certificate of
Designations are inserted for convenience only and do not constitute a part of
this Certificate of Designations.
IN WITNESS WHEREOF, Monte Ross, Chief Executive Officer of the
Corporation, under penalties of perjury, does hereby declare and certify that
this is the act and deed of the Corporation and the facts stated herein are
true and accordingly has signed this Certificate of Designations as of
this 9th day of May, 2000.
ULTRADATA SYSTEMS, INC.
By:/s/ Monte Ross
Monte Ross
Chief Executive Officer
<PAGE>
EXHIBIT A
ULTRADATA SYSTEMS, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock (the "Certificate of Designations"). In
accordance with and pursuant to the Certificate of Designations, the undersigned
hereby elects to convert the number of shares of Series A Convertible Preferred
Stock, par value $0.01 per share (the "Preferred Shares"), of Ultradata Systems,
Inc., a Delaware corporation (the "Company"), indicated below into shares of
Common Stock, par value $0.01 per share (the "Common Stock"), of the Company, by
tendering the stock certificate(s) representing the Preferred Shares specified
below as of the date specified below.
Date of Conversion:
Number of Preferred Shares to be converted:
Stock certificate no(s). of Preferred Shares to be converted:
Please confirm the following information:
Conversion Price:
Number of shares of Common Stock to be issued:
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to:
Facsimile Number:
Authorization:
By:
Title:
Dated:
Applicable only if the Transfer Agent is a participant in the electronic book
entry transfer program:
Account Number:
(if electronic book entry transfer):
Transaction Code Number
(if electronic book entry transfer):
Participant Code:
THIS NOTICE MUST BE DELIVERED TO COMPANY AND TRANSFER AGENT
*******************************************************************
Exhibit 5
ROBERT BRANTL, ESQ.
322 Fourth Street
Brooklyn, NY 11215
718-768-6045
June 14, 2000
Ultradata Systems, Incorporated
9375 Dielman Industrial Drive
St. Louis, MO 63132
Gentlemen:
I am submitting this letter to be filed as an exhibit to the Registration
Statement on Form SB-2 which Ultradata Systems, Incorporated proposes to file
with the Securities and Exchange Commission registering a total of 2,835,890
shares of common stock for resale by six selling shareholders. The shares
consist of: (a) 300,000 shares issuable upon exercise of the options held by
Influence Incubator L.L.C., (b) 128,000 shares issuable upon exercise of an
option held by Thornhill Group, Inc., (c) 9,570 shares owed by Victoria Davis-
Lee, and (d) 200% of (i) 720,654 shares which would be issued if 1776
outstanding shares of Series A Convertible Preferred Stock were converted on
June 14, 2000 and (ii) 478,506 shares issuable upon exercise of outstanding
Common Stock Purchase Warrants
I am of the opinion that all proper corporate proceedings have been taken so
that the shares, if and when sold by the selling shareholders, will be legally
issued, fully paid, and non-assessable.
I hereby consent to the filing of this opinion with the Securities and
Exchange Commission in connection with the Registration Statement referred to
above.
Yours,
/s/ Robert Brantl
Robert Brantl
******************************************************************
Exhibit 23-a
Consent of Independent Certified Public Accountants
Ultradata Systems, Incorporated
St. Louis, Missouri
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated March 2, 2000,
relating to the financial statements of Ultradata Systems, Incorporated.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
St. Louis, Missouri
June 15, 2000
