SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to
Section 13 or 15(d) of
the Securities Exchange Act of 1934
( X ) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1999
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____
Commission File Number: 0-25380
ULTRADATA SYSTEMS, INCORPORATED
(Name of small business issuer in its charter)
Delaware 43-1401158
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
9375 Dielman Industrial Drive, St. Louis, MO. 63132
(Address of principal executive office) (Zip code)
Issuer's telephone number, including area code: (314) 997-2250
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to the Form 10-KSB.
State the issuer's revenues for its most recent fiscal year: $5,566,626
The aggregate market value at April 12, 2000 of the voting stock held by non-
affiliates, based on the closing price as reported by NASDAQ National Market
System (NMS), was approximately $13,249,734. The aggregate market value has
been computed by reference to a share price of $5.125 (The price at which
stock was sold, or the average bid or asked price of such stock on April 12,
2000). All directors and more than five percent of stockholders of the
Registrant have been deemed "affiliates" for the purpose of calculating such
aggregate market value.
The number of shares outstanding of the issuer's common stock, as of April
12, 2000, was 3,176,322.
Transitional Small Business Disclosure Format: Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE: None
FORWARD-LOOKING STATEMENTS: NO ASSURANCES INTENDED
This Item (1) contains certain forward-looking statements regarding the
Company, its business prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. A major risk inherent in the implementation of the Company's
revised business plan, referred to herein is executing the plan within the
constraint of financial resources available to the Company at this time.
Factors that may affect such forward-looking results include statements about
backlog, the Company's ability to successfully develop new products for new
markets, customer acceptance of new products, the possibility of the Company
losing a large customer or key personnel, the Company's ability to manage
growth and to successfully integrate recent strategic marketing and product
development alliances, the impact of competition on the Company's revenues,
delays in the Company's introduction of new products, and the possibility of
the Company failing to keep pace with emerging technologies.
Accordingly, no assurances can be given that events or results mentioned in any
such forward-looking statements will in fact occur. When used in this
discussion, words such as "believes" and phrases such as "are expected" and
similar expressions are intended to identify forward-looking statements, but
are not the exclusive means of identifying forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this report. The Company undertakes no
obligation to revise any forward-looking statements in order to reflect events
or circumstances that may subsequently arise. Readers are urged to carefully
review and consider the various disclosures made by the Company in this report
and in the Company's reports filed with the Securities and Exchange Commission.
The analysis of the Company's financial condition, capital resources and
operating results should be viewed in conjunction with the accompanying
financial statements, including the notes thereto.
PART I
Item 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Ultradata Systems, Incorporated ("The Company") is engaged in the manufacture
and marketing of hand-held data retrieval devices that employ proprietary data
compression technology developed by the Company. The Company was formed, as a
corporation in 1986, named Laser Data Technologies, Inc. The name was changed,
in November 1994, to Ultradata Systems, Inc., to better reflect the Company's
business orientation.
The Company's primary focus has been in research, development, and marketing of
electronic consumer travel products which utilize the Company's proprietary
database and patented data compression technology for storing large quantities
of information on, and retrieving it rapidly from, a microprocessor memory chip.
The Company is in the process of expanding into the wireless/Internet
e-commerce market through its new products, new partners, and its invest-
ments. The Company has significant intellectual property in databases,
software, and patents that can be applied in innovative systems involving the
Internet and wireless applications. It has invested in Influence Data, LLC, as
a one-third owner with the objective that its web portal, DriveThere.com,
become a new kind of motor club for the new economy. DriveThere.com plans on
utilizing the Company's proprietary databases for innovative wireless
applications involving partnerships with major communications companies. The
Company also is completing development of an advanced portable auto navigation
product, a version of TRAVEL*STAR 24, that can connect through wireless
channels to the Internet to offer unique services. The Company's 25%
ownership in Talon Research and Development Company, LTD, of New Zealand
allows the Company to provide the TRAVEL*STAR 24 at an attractive price. The
Company also benefits from Talon's rapid growth in supplying GPS (Global
Positioning Satellite) receivers in OEM applications to the US and
international markets.
Each of the Company's consumer products is designed to allow the consumer to
access useful information stored in a convenient manner. The Company's
products generally sell at retail prices between $19.95 and $49.95 per unit.
The new TRAVEL*STAR 24, an auto after-market portable navigation system using
our databases, will be introduced later in 2000. It provides voice turn-by-
turn directions to services (gas stations, restaurants, etc.) and locations
across the country, including 12,000 towns and over 200,000 services. This
unit should be available at retail for less than $400, which should make it
very competitive in the auto aftermarket. The fact that it is very portable
and requires no elaborate installation offer advantages over the more
expensive in-car systems.
CONSUMER PRODUCTS
The Company's Consumer Products Division primarily develops and markets hand-
held travel computers, the majority of which bear the ROAD WHIZ registered
trademark. Various models contain custom developed data to provide the traveler
with directions and information regarding the services available along the U.S.
Interstate Highway System. Some versions include city information as well.
The travel database contained in most of the models offered by the Company is
proprietary and contained on a memory chip built into each unit. The travel
database contains over 100,000 services. This service information includes
destination, mileage, gas stations, hotels, motels, hospitals, 24-hour
restaurants, and highway patrol emergency numbers along the United States
Interstate Highway System. During 1998, the Company entered into an agreement
with the American Automobile Association (AAA) to develop an expanded database
to include restaurants, lodging facilities, camping and service facilities
approved by AAA. This database containing in excess of 100,000 facilities, and,
where available, their AAA rating or AAA approved status, has been incorporated
in a hand-held travel computer called the TripWizard. This unit is currently
being offered to AAA members. The Company's agreement with the AAA represents
an important commitment to private label products. TripWizard is being marketed
to AAA's affiliates, consisting of 93 clubs, 1,100 offices and over 41 million
members in the United States, as well as to specialty retailers. The Company
is expecting to introduce its TRAVEL*STAR 24 portable navigation system into
the auto after-market later in 2000, as well as Internet-related products.
MAJOR PRODUCT OFFERINGS
The hand-held travel computers made by the Company provide routing and services
similar to other travel software products in the market. The Company's
database containing in excess of 100,000 services, is proprietary to the
Company's travel computers. The Company sells its products through independent
sales representatives, mass merchandise retailers, catalog companies,
department stores, office supply stores, direct mail promotions, luggage stores
and selected television shopping channels.
ROAD WHIZ FAMILY
The ROAD WHIZ hand-held travel computer was introduced during 1990. Since 1990,
the Company has developed enhanced travel computer versions, based on a basic
design the of the original ROAD WHIZ(, including ROAD WHIZ PLUS(, ROAD WHIZ
ULTRA, RV SPECIAL, ROAD WHIZ COMPANION, SUPER ROAD WHIZ, AAA TripWizard,
ULTRAFINDER, KIDS ROAD WHIZ, GOLF GUIDE, GOLF FINDER, HOME AND GARDEN, GARDEN
GURU, ROAD MATE/PATHFINDER 2000, and CAR AND DRIVER. The strategy for the ROAD
WHIZ family of products is to expand its line of travel computers to include
additional features and functions at low retail prices and to further
penetrate the mass market.
ROAD WHIZ PLUS
ROAD WHIZ PLUS was introduced in 1991, and has been enhanced each year. It
provides complete routing information for over 90 cities giving driving
distances, driving time and detailed directions to major cities. ROAD WHIZ
PLUS contains over 60,000 services and has double the memory capacity of first
generation travel computers. This unit is marketed in mass merchandise
retailers, such as Kmart.
SUPER ROAD WHIZ
The SUPER ROAD WHIZ was introduced during 1997. It lists interstate highway
services including gas stations, restaurants, motels, campgrounds, malls,
tourist sites, and hospitals in over 160 major cities. During 1998, SUPER ROAD
WHIZ was featured on the QVC television network selling over 90,000 units in
one day as the "Today's Special Value" promotion. It is now in retail
distribution through such companies as Kohl's.
ULTRA ROAD WHIZ
The ULTRA ROAD WHIZ was introduced exclusively by QVC in December 1999. It has
many new features and more memory than the SUPER ROAD WHIZ. Over 70,000 units
were sold on introduction in one day as "Today's Special Value".
ULTRAFINDER
ULTRAFINDER was introduced in 1995. It is the most powerful hand-held travel
unit currently marketed by the Company. It contains over 60,000 city and
highway services and specific routes to over 250 cities, giving distance and
driving time. ULTRAFINDER features a two-line display and an updatable plug-in
memory module. It is generally distributed through third party catalogs, such
as SkyMall magazine.
AUTO PILOT
Auto Pilot is a ROAD WHIZ type unit which utilizes the Company's proprietary
technology and designs. It is manufactured and marketed by Idea Village, a
company engaged in media television marketing. Idea Village employ a broad
range of television advertising, including spot ads and an infomercial to
generate product awareness and mail order sales, before presenting the product
in mass merchandise retail, drug and other retail outlets.
TRAVEL*STAR 24
The Company has invested heavily in developing a portable true-GPS driver
navigation system for the 12-volt auto after market. The system is designed to
perform route calculations in real time and present voice output to alert
drivers when and where to turn to follow their route or to access services
along their route. The Company has demonstrated a prototype called TRAVEL*STAR
24 that includes turn-by-turn directions and information for more than 200,000
highway and city services, sites of interest in each of more than 250
metropolitan areas and turn-by-turn directions to over 12,000 smaller cities
and towns. The unit continually displays heading and distance to the desired
destination. Voice output identifies turns and alerts the driver to deviations
from the calculated route. This item was introduced to the market at the
Consumer Electronics Show held in Las Vegas, Nevada in 2000. Management
believes that variations of the TRAVEL*STAR 24 product are feasible by
including wireless capability for connection to the Internet.
DISCONTINUED PRODUCTS
The KIDS ROAD WHIZ, GOLF FINDER, GOLF GUIDE, HOME & GARDEN, and GARDEN GURU
were discontinued in 1999 due to insufficient sales. As a result of limited
market acceptance, the Company offered these products to a third party in
exchange for an advertising barter arrangement.
LASER SYSTEM CONTRACTS
The business of the Company at inception was primarily focused on the
fulfillment of research and development contracts leading to the manufacture of
laser communications systems. In 1995, the Company received a $1.7 million
government production contract from the Yuma Proving Ground to manufacture
their Laser Pointing and Tracking System PATS design. The contract was
essentially completed in 1998, but some small residual effort occurred in 1999
with little effect on the financial performance of the Company.
MANUFACTURING
The Company does not manufacture any of its consumer products and is entirely
dependent upon third parties to manufacture and assemble the components
comprising its products. The Company has assemblers who manufacture the
products, with the Company procuring the microprocessors and memory chips and
other unique items and supplying them to the company performing assembly. The
Company generally receives annual pricing from each of its manufacturers based
upon estimated annual quantities. Thereafter, the Company releases individual
purchase orders for production. The Company's arrangements with each
manufacturer are terminable at will by either party. If either or both
arrangements were to be terminated, the Company believes that alternate sources
would become readily available. The sudden loss of one of the manufacturers or
unanticipated interruptions or delays from present manufacturers would likely
result in a temporary interruption to the Company's planned operations. The
Company intends to maintain its practice of engaging subcontractors to meet its
future manufacturing requirements.
BACKLOG
As of December 31, 1999, the Company's total backlog was approximately $46,400,
versus a backlog of approximately $15,300 on December 31, 1998. Backlog is
generally very low at December 31, due to minimal post holiday demand and
normally short retailer lead times for standard products, which can be shipped
from inventory. Similar to others who have retail customers, the Company has
experienced higher demand in the fourth quarter relative to other quarters.
The Company has occasionally experienced cancellations or postponements in its
delivery of orders.
SALES AND MARKETING
The Company's sales and marketing strategy is to remain the leading supplier
of low-cost, portable travel computers and to expand into portable travel-
related products capable of connection to the Internet. To support this
strategy, the Company believes it must offer a growing line of standard,
private label, and GPS-based travel computers. Such new devices are
principally aimed at providing portability, increased consumer safety and
security, more features and functionality, at affordable prices compared to
travel information devices available from other sources.
The Company identifies its prospective customers and markets through a
combination of direct mail, telemarketing, media advertising, tradeshow
participation, and periodic appearances on home shopping television channels.
The Company advertises periodically in magazines, travel oriented journals
and periodically distributes promotional materials to increase market awareness
of its products. Since going public in early 1995, the Company has focused its
primary marketing efforts on establishing customer relationships with local and
regional retailers and upscale retail outlets.
The Company's products are also marketed through independent sales
representatives, mail order catalogs and office supply stores. In fiscal 1999,
the Company incurred $1,446,225 in advertising, promotion, and marketing
program expenses, as compared to $2,416,886 in 1998. During 1999, the
Company abandoned its expensive direct mail and advertising programs that
comprised the primary thrust of its direct sales efforts. These programs had a
negative effect on profitability during 1998 and the first quarter of 1999.
Instead we began in 1999 employing joint advertising strategies with
prospective mass-market customers. During 1999, the Company incurred $157,700
advertising allowances for a Road Whiz promotion at over 3,000 Kmart stores.
These expenses were computed in proportion to the number of units sold through
to their customers.
The Company continues to expand its mass-market distribution and expects to add
new large retail chains in 2000 to Kmart, Target, and others brought on in
1999, due to demonstrated success in this venue.
DEPENDENCE ON CUSTOMERS
Dependence on individual customers has been reduced in comparison to 1998 as
our mass-merchandiser customer base expands. 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%
================================================
COMPETITION
Competition in the consumer electronics industry is intense. Ultradata has
established a niche in this market in terms of unique product functionality
and perceived value to the consumer. The size of the market is not a limiting
factor in the opinion of management, since our products can have appeal to most
traveling consumers. Nonetheless, Ultradata has established and maintained a
position in this market for several reasons:
* Our patented data compression technology permits the storage of unusually
large volumes of information in very-low-cost devices.
* Our database is unique and would be difficult and time-consuming to duplicate.
* We have a developed insight into the needs and idiosyncrasies of the
traveling consumer and can translate that into specifically useful data
content and a user-friendly interface.
* We have a very simple, low-cost design for the product, which employs a
minimum of parts.
* We have developed very low-cost but high quality manufacturing sources.
* Those devices that could be considered to be competitive, in terms of
function, are much more expensive, and generally don't have the data quality
we offer.
These considerations constitute barriers to entry by would-be competitors. None-
theless, determined potential competitors, most of who have substantially
greater resources available to them, might decide to launch a competing
product, or to employ some emerging technology to try to compete on a price
basis. To this date, we know of no one who has done so. We will continue to
focus on providing the most utility for the lowest cost, with the simplest
user interface - tailored to the real needs of the traveling consumer.
This approach will be especially visible in the new TRAVEL*STAR 24 product,
which offers most of the performance features of competing $2000 systems such
as NeverLost and Visteon, at a retail price target under $400. For this
product, our competition includes a number of GPS-based products that employ
"moving-map" displays. Only the high-end products in this group offer features
similar to the TRAVEL*STAR 24. At the low end, there is mapping software
available for use on the home computer which will plan a route and provide
limited service information - but does not have the flexibility to compute
routes in the car, nor the en-route navigation capability. The benefits of
mobility are available to the owners of laptop computers, but we believe this
would appeal to a different class of consumer and is still a relatively small
market segment. To protect the Company's dominant position in affordable
travel computers, the Company invested $358,357, or approximately 6.4% of
its 1999 revenues in research and product development, compared to $672,090
or 9.3% in 1998, noting that much of 1998 expenditures were aimed at GPS
product development as well. There can be no assurance, however, that the
Company will be able to develop or acquire new products or increase market
channels at a rate to maintain the Company's position in its market. The
Company also cannot guarantee that its new or updated products will achieve
market acceptance.
RELATED PARTIES
TALON RESEARCH & DEVELOPMENT COMPANY, LTD.
In March 1998, the Company acquired an 18.9% ownership interest in Talon
Research & Development Company, Ltd. (Talon) of Auckland, New Zealand for
$282,500. Talon develops, manufactures and markets electronic components and
marine instruments including GPS receiver units, including the antennas used
in the Company's TRAVEL*STAR GPS product line. On August 12, 1998, the Company
paid $314,162 for an option to acquire an aggregate interest of up to 50.1% of
the outstanding common stock of Talon for approximately $ 820,000. The option
was amended during 1999 allowing the Company to apply its option value for an
additional 6% equity interest in Talon, thereby increasing the Company's
ownership in Talon to 24.9%. 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.
For the year ended December 31, 1999, Talon sales grew approximately 33%
compared with December 31, 1998. Our proportionate share of Talon's net income
after taxes was reduced to a $9,585 loss as a result of certain U.S. GAAP
adjustments and the amortization discussed above. Talon management indicates
that its backlog as of December 31, 1999 increased 22% compared to the year
ended December 31, 1998, and that it expects sales to increase during fiscal
year 2000. In order to give assistance with Talon's working capital needs,
the Company provided a twelve-month standby letter of credit maturing March
31, 2000 to Talon's bank in the amount of $400,000 to secure a new financing
arrangement.
DriveThere.com (INFLUENCE DATA, LLC)
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 and options for 160,000 shares of common stock (all
valued at $327,200) for a one-third interest in Influence Data, LLC. The
purpose of the joint venture is to develop a website that will offer a wide
variety of services for the motorist, including, but not limited to, parking
ticket settlements, access to regional home newspapers while traveling,
directions to a desired location, unique products for the traveler, emergency
road service, plus additional unique applications tied to the Internet. 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 Influence Data website,
DriveThere.com, became operational in October 1999 and was upgraded in
February 2000.
SCIENTIFIC COMMUNICATION & CONTROLS CORP.
The Company formed a joint development and marketing agreement in July 1998
with Scientific Communication & Controls Corporation (Sci-Com) of McLean,
Virginia. Sci-Com acquired the operating rights to the SmartTime Network from
Intellidata Technologies, Corp. Sci-Com was to complete the implementation of
network software to support the Company's E@syMail and internet personal data
assistant products. To facilitate this development and testing of the Company's
products, 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 decided it could not afford to invest further in E@syMail in early
1999. Management believes that Sci-Com will be able to repay the loans as
specified in the Agreement. However, $447,428 has been reserved, leaving a
remaining receivable of $272,683 at December 31, 1999.
RESEARCH AND DEVELOPMENT
The Company performs ongoing research and development, seeking to improve
existing products and to develop new products. These activities are primarily
conducted at the Company's corporate headquarters, although the Company
periodically engages outside computer system design consultants to expedite the
completion of the development and test stages.
In 1999, the Company incurred $358,357 in research and development costs
compared to $672,090 in 1998. Research activities for 1999 were primarily
focused on continued development of TRAVEL*STAR 24, the development of a new
database and product to incorporate American Automobile Association (AAA)
facility and rating data to support the TripWizard product, and Internet
Triplink handheld product. The Triplink will combine the features of an ULTRA
ROAD WHIZ with the ability to receive downloaded door-to-door directions from
a PC. These three major projects accounted for 67.2% of all research and
development expenses in 1999, with the majority of the effort devoted to
TRAVEL*STAR 24. In addition, the Company capitalized $110,214, included in
Property, Plant and Equipment, of development for the software tools required
to provide the database for the TRAVEL*STAR 24.
DATABASE RESEARCH
The Company believes that a broad and accurate proprietary database is one of
the most important factors for the competitive success of the consumer product
line. The potential for additional net sales, as well as the need to preserve
the Company's reputation for accuracy and reliability, requires that the
Company continuously validate and update its database. The Company uses
various means to update its ROAD WHIZ database, including publicly available
geographic and demographic data. A significant part of the ROAD WHIZ database
is gathered and verified by "Road Helpers." Road Helpers are generally
retirees and others that travel extensively and are nominally compensated by
the Company.
The Company maintains an on-site full-time staff of researchers who review and
augment the data gathered by the Road Helpers. In addition to the Road
Helpers, the research staff contacts travel services and Chambers of Commerce
across the country to gather other information.
During the fourth quarter of 1998, the Company reached an agreement with AAA to
develop a product which combined the Company's expertise in hand held travel
computers with the extensive database of travel, food and lodging information
compiled by AAA for the benefit of their members. The Company has combined its
travel database with that of AAA to provide a new information base for the AAA
TripWizard. This product is marketed by the 91 auto clubs affiliated with AAA
to the 41,000,000 AAA members in North America, and through AAA's 1100 local
offices throughout the United States and Canada.
The Company's research and development activities involve seven full-time
employees, including two software engineers, one hardware design engineer, and
one technician in addition to the three database research personnel. During
1999, the Company employed additional part-time software engineers and computer-
science consultants for development of the TRAVEL*STAR 24 and a number of
additional contract and part-time personnel for database research. Over 50
Road Helpers were used to augment the database research.
PATENTS AND TRADEMARKS
The Company files patent applications, when applicable, to protect its
technology, inventions and improvements. The Company owns five patents
relating to travel products. The first patent covers its method of
compressing data relating to travel information. This compression technology
permits the Company's travel products to store more data on smaller and less
expensive memory devices.
The Company has a second patent dealing with the methodology that enables its
travel devices to account for changes that occur when the traveler crosses a
state border. The Company believes that in order to manufacture a similar
product, a competitor would have to develop a substantially different
methodology, at considerable time and expense.
It also has a European patent that incorporates the same claims.
During 1999, the Company received a patent award relating to electronic coupons
in a handheld travel computer for discounts of services. The patent claims
include the handheld units alerting users of the location of coupons in a
printed coupon book on the traveler's current location, as well as electronic
coupons in the unit.
The Company also received in 1999 a patent relating GPS receivers and radar
detectors, offering unique benefits when the two were combined.
In addition to its patents, the Company attempts to further restrict access to
its proprietary technologies, trade secrets and processes. Key employees of
the Company are covered by employment contracts containing restrictive
covenants. These covenants require key employees, as a condition of their
employment, to hold all proprietary information confidential. The Company also
restricts customers and visitors site access to confidential information.
There can be no assurance that the Company can be successful in its efforts to
protect either its patents or its proprietary technologies and processes.
EMPLOYEES
The Company currently has 19 full-time employees, including six officers, all
of whom are located at the Company's headquarters in St. Louis, Missouri. The
Company employs 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. None of the
Company's employees belong to a collective bargaining union. The Company has
not experienced a work stoppage and believes that its employee relations are
good. In addition, a number of part-time consultants are retained for
database research and software development.
Item 2. PROPERTIES
The Company's headquarters and principal administrative offices and research
and development facilities are located in approximately 12,500 square feet of
leased office space in an industrial building located at 9375 Dielman
Industrial Drive, St. Louis, Missouri. The Company pays a monthly rent plus 31%
of all building expenses under an operating lease which expires October 31,
2001. The Company maintains no manufacturing operations on site and employs
outside contractors to perform all of its manufacturing requirements.
Aggregate rental expense totaled $114,247 for 1999, compared to $119,236 in
1998. The Company believes that its facilities are adequate for the Company's
present and foreseeable requirements.
Item 3. LEGAL PROCEEDINGS
There were no material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The following table sets forth the prices for the Company's Common Stock
(NASDAQ: ULTR) as quoted on the NASDAQ National Market for the eight quarters
starting January 1, 1998 and ending December 31, 1999.
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 $ 1.31
June 30, 1999 $ 2.63 $ 0.88
September 30, 1999 $ 2.44 $ 1.00
December 31, 1999 $ 2.06 $ 0.94
At March 28, 2000, the Company's common stock closed at $6.938 on the NASDAQ.
(b) Shareholders
At March 28, 2000, there were 139 registered stockholders of record of the
Company's Common Stock. Based upon information from nominee holders, the
Company believes the number of owners of its Common Stock exceeds 1,200.
(c) Dividends
The Company has never paid or declared any cash dividends on its Common Stock
and does not foresee doing so in the foreseeable future. The Company's line
of credit agreement precludes the payment of dividends. The Company intends
to retain any future earnings for the operation and expansion of the business.
Any decision as to future payment of dividends will depend on the available
earnings, the capital requirements of the Company, its general financial
condition and other factors deemed pertinent by the Board of Directors.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
The Company's net sales are derived primarily from consumer products, marketed
through retailers, catalog companies, and direct mail or other marketing
agencies or groups as employed by the Company. The Company's laser systems
contracts have been completed.
The following table summarizes the contributions of consumer products and
development contracts, respectively, to total net sales of the Company for each
of the last two years ended December 31, 1999. The table should be read in
conjunction with the financial statements and the related notes presented
elsewhere in this Form 10-KSB.
Net Sales
For the Two Years Ended December 31,
(in Thousands)
1999 % 1998 %
Consumer Products $5,567 100.0 $6,984 96.5
Laser System Contracts - - 250 3.5
-----------------------------------
$5,567 100.0 $7,234 100.0
==================================
Year Ended December 31, 1999 vs. Year Ended December 31, 1998
Consumer product sales for 1999 decreased by $1,417,178 (20.3%) to $5,566,626.
The decrease was primarily the result of eliminating direct market channels
that were unprofitable. In addition, delays in new products resulted in
missed sales opportunities. The Company changed its business strategy in late
1998 to work more closely with strategic partners having greater resources and
brand equity. These relationships have been of some benefit to the Company
albeit still below expectations during 1999. The Company reduced its workforce
and facilities expenses to help offset lower net sales.
The Company reduced its manufacturing costs by approximately 35.0% with a new
offshore manufacturer with chip-on-board capability. The reduced manufacturing
costs were reflected in sales beginning late in the third quarter, resulting in
significant operating profit in the fourth quarter 1999.
Overall gross profit totaled $2,415,580, or 43.4% of net sales for the year
ended December 31, 1999, compared to $3,061,874, or 42.3% for 1998. Totals
included the effect of expenses for government contract activities being phased
out. Gross profit for the consumer product group exclusive of contract
activities totaled $2,445,685, or 43.9% of sales, for the year ended December
31, 1999, compared to $3,081,895, or 44.1% for 1998. Gross profit was affected
by low-margin sales of obsolete inventory in the third quarter and the
compensating effect of lower product cost in the fourth quarter.
Selling expenses for 1999 decreased to $1,812,524 from $2,931,150 in 1998. The
decrease of $1,118,626, or 38.2%, was due primarily to a reduction in
advertising and marketing expenses by $970,661, as the Company curtailed a
number of expensive marketing programs, including credit card and other direct
mail activities.
General and administrative expenses decreased by $755,186 (26.8%) in 1999 to
$2,063,015 from $2,818,201 in 1998. The decrease reflects the efficiencies
introduced throughout 1999 by staff reductions, executive salary cuts, and
other cost-cutting measures in response to the revenue reductions experienced
in 1998. In addition, in 1998 the Company established a reserve of $400,000
against a note due from an affiliate, SciCom, Inc.
In 1999, the Company reduced research and development costs by $313,733, or
46.7%, to $358,357 compared to $672,090 in 1998 as another element in cost
reduction. Management believes the rate of research and development
expenditure has been reduced sufficiently and expects to continue at the
present rate through 2000. The capitalization of $110,214 of costs for the
internally developed software tools necessary for TRAVEL*STAR 24 permits
amortizing the investment over 5 years subsequent to product introduction.
During the year the Company established a strategic presence in e-commerce by
forming a joint venture company called Influence Data, LLC. The joint venture
launched its road travel portal website DriveThere.com on October 29, 1999. The
portal will offer a complete bundle of road travel products, services,
insurance, and license and vehicle information. DriveThere.com has been
actively upgrading its website, and major improvements were completed in
February 2000.
The Company's investment in Talon Research and Development Company, Ltd.
("Talon") was increased by 6.0% to 24.9%. Talon achieved record sales in their
fiscal year. Talon has been growing rapidly, and its management expects a
continuation of this trend. Both of its basic business areas, marine
electronics and GPS-based products, are growing. Talon is the main provider
of GPS receiver hardware to a major US company selling GPS equipment for the
Palm Pilot. Talon expanded its marketing internationally in 1999 into South
Africa and South America and has significant presence in Europe in marine
electronics under its own brand name, NAVMAN.
The Company also realized royalty income of $127,473 from IdeaVillage due to
their manufacture and sale through Radio Shack of over 90,000 Auto Pilot
products similar to the ROAD WHIZ. Total other income amounted to $191,302 for
1999, as compared to other income of $303,750 for the year ended December 31,
1998. The decrease is primarily due to the loss in equity in affiliated
companies.
As a result of the foregoing, the Company reported a loss before taxes of
$1,627,014 for 1999, compared to $3,055,817 in 1998. The Company has fully
reserved its deferred tax asset in view of its continuing losses in 1999.
However, efforts in 1999 led to a profitable fourth quarter, indicating
positive results in its effort to turn the Company to profitability.
The Company reported a net loss of $1,997,250, or $0.64 per share computed on
a basic and diluted method, as compared to net loss of $2,330,793, or $0.71 per
share, computed on both basic and diluted for the prior year. The weighted
average shares outstanding at December 31, 1999 were 3,122,138 and at December
31, 1998 were 3,299,636.
YEAR 2000 ISSUES
The Company implemented plans to address Year 2000 issues and did not
experience any Y2K problems at year's end. The primary focus of its
initiative to prepare for Y2K during 1999 included a complete review of the
Company's information technology systems, other support systems, and the
readiness of Company suppliers and customers. Expenses related to
determination of Year 2000 compliance have been expensed as incurred and have
not been material to the financial results of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and cash equivalents decreased by $33,957 from $1,254,091 at
December 31, 1998 to $1,220,134 at December 31, 1999. The reduction includes
$400,000 placed in a restricted cash account to secure the Talon line of
credit. The $400,000 is included within the restricted cash of $410,888 at
December 31, 1999. The small reduction in spite of the losses and investments
reflects the policies implemented to conserve cash and improve efficiency.
At the end of 1999, there were no material capital spending commitments out-
standing. The Company relies on outside vendors for all of its manufacturing.
Consequently, the Company's operations do not require substantial capital
expenditures other than for the periodic purchase of tooling, test equipment,
and fixtures. During 1999, the Company spent $115,468 for capital
expenditures, which included computer hardware and development of software
tools for TRAVEL*STAR 24. Total capital expenditures are expected to be less
than that total in 2000, based on the current business outlook.
In 1999, the Company negotiated a lending agreement with Southwest Bank of St.
Louis that provides a credit facility of $1 million, secured by the Company's
accounts receivable and inventories. This credit facility, which expires on
July 1, 2000, is expected to meet the Company's needs for the first six months
of 2000, but additional short-term credit may be sought when fourth quarter
production requirements become clearer based on early 2000 sales successes and
projections.
At December 31, 1999, the Company had working capital of $4.5 million as
compared to working capital of $6.0 million at December 31, 1998. Included in
working capital at December 31, 1999 was $1.6 million in cash and cash
equivalents, including $400,000 of restricted cash to collateralize Talon's
line-of-credit with the Bank of New Zealand per our working agreement with
Talon. Inventories decreased from $1,465,581, or 47% to $1,655,422 inclusive of
the reserve for excess and obsolete inventory of $536,347. Accounts receivable
decreased by $1,621,698, or 52.2%, to $1,482,267. The Company has collected
approximately $800,000 of this amount through February 2000.
The net cash surplus from operating activities resulted from converting
receivables and inventories to cash, offsetting the cash components of losses
and accruals. These latter were dominated by advertising expenses accrued for
in 1998 but paid in 1999. Significant investment cash flow events included the
$400,000 restricted cash set-aside to collateralize the Talon line of credit
with the Bank of New Zealand, the capitalization of software tools for
compressing roadmap topology into a format suitable for TRAVEL*STAR 24, and the
investments in Talon and Influence Data, L.L.C.
IMPACT OF ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 requires derivatives to be
recognized as assets or liabilities on the balance sheet and measured at fair
value. Changes in the fair value of derivatives should be recognized in
either net income or other comprehensive income, depending on the designated
purpose of the derivative. This statement, as amended, is effective for the
Company on January 1, 2001, and the Company has not yet determined the effects
this statement will have on its financial position or results of operations.
Item 7. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
Item 8. FINANCIAL STATEMENTS
The financial statements of Ultradata Systems, Incorporated, together with
notes and the Report of Independent Certified Public Accountants, are set forth
immediately following Item 13 of this Form 10-KSB.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table lists certain information regarding the officers and
directors of the Company as of March 31, 2000:
NAME AGE POSITION
- --------------------------------------------------------------------------
Monte Ross 67 President & Chief Executive Officer,
Director
Mark L. Peterson 43 Vice President-Engineering, Secretary,
Director
Ernest Clarke 60 Vice President-Controller, Director
Leonard Missler 54 Vice President-Software Development
Duane Crofts 63 Vice President-Advanced Products
David Biernbaum 45 Vice President
Daniel Muehlemann 35 Vice President-Sales
Steven H. Akre Esq. 47 Director
John J. Clancy 63 Director
Donald Rattner 67 Director
Directors hold office until the annual meeting of the Company's stockholders
and the election and qualification of their successors. Officers hold office,
subject to removal at any time by the Board, until the meeting of directors
immediately following the annual meeting of stockholders and until their
successors are appointed and qualified.
Background of Directors and Executive Officers:
Monte Ross founded the Company in 1986 and has served as its President, Chief
Executive Officer and Chairman since inception. For over 20 years prior to
founding the Company, Mr. Ross was employed by McDonnell Douglas Corporation
in a variety of positions. When he left McDonnell Douglas, Mr. Ross was
Director of Laser Systems, responsible for the group of approximately 400
employees, which developed the first laser space communication system and
first space laser radar. Mr. Ross is a Fellow of the Institute of Electrical
and Electronic Engineers and the past President of the International Laser
Communication Society. Mr. Ross was awarded a Master of Science degree in
Electrical Engineering by Northwestern University in 1962. He is the father-
in-law of Mark L. Peterson, the Company's Vice President-Engineering.
Mark L. Peterson has been a Director of the Company since it was founded in
1986. He has served as the Company's Vice President of Engineering since 1988.
He is responsible for the design of the Company's hand-held products. During
the four years prior to joining the Company, Mr. Peterson was employed by
McDonnell Douglas Corporation as an electronics engineer for fiber optic
products and satellite laser cross-link programs. Mr. Peterson was awarded a
Master of Science degree in Electrical Engineering by Washington University in
1980. He is the son-in-law of Monte Ross.
Ernest Clarke has been a Director of the Company since it was founded in 1986.
He has been employed as the Company's Vice President - Controller since June of
1999. From August 1990 to June 1999 he was Vice President - Government
Programs. His primary responsibility has been the development of custom test
systems for organizations involved in government laser systems programs. For
over 20 years prior to joining Ultradata, Mr. Clarke was employed by McDonnell
Douglas Corporation in a variety of positions. When he left McDonnell Douglas,
Mr. Clarke was its Laser Product Development Manager with responsibility to
supervise over 40 engineers. Mr. Clarke was awarded a Master of Science degree
in Electrical Engineering by Stanford University in 1966.
Leonard Missler has served as Vice President - Software Development for the
Company since 1990. His primary responsibility has been the development of
software for the Company's hand-held products. For over 20 years prior to
joining Ultradata, Mr. Missler was employed in software and electronics
development and management by Microterm, Inc., Magpower, Magnavox, and
Interface Technology. At Microterm, his most recent employer before joining
the Company, Mr. Missler was the Director of Operations. Mr. Missler was
awarded a Master of Science degree in Electrical Engineering by Washington
University in 1970.
Duane Crofts joined the Company as Vice President - Advanced Products in 1994.
Prior to joining the Company, Mr. Crofts served for over five years as a
Program Director with McDonnell Douglas Corporation. In that role he was
responsible for engineering management, production management, subcontract
management, and program management. Mr. Crofts most recently was manager of a
multi-million dollar electro-optic development program. Mr. Crofts was
awarded a Bachelor of Science degree in Mechanical Engineering by the
University of Missouri at Rolla.
David Biernbaum joined the Company in 1997 as Vice President. Prior to joining
the Company, Mr. Biernbaum had twenty years experience in consumer products
marketing, product development, sales management and finance. This experience
was in positions such as Senior Vice President, Marketing for Vi-Jon
Laboratories, Inc. a manufacturer of private label health and beauty care
products and as Regional Marketing Director for The Gillette Company,
responsible for market launches of new personal care products. Mr. Biernbaum
holds a Master's degree in Marketing from Southern Illinois University.
Daniel B. Muehlemann joined the Company in October 1996 as Vice President of
Sales. Prior to joining the Company, Mr. Muehlemann served for five years as
Senior Accounts Manager for Maxim Technologies, Inc. In that position he
developed and implemented key sales and marketing strategies to increase
Maxim Technology's national client base. Mr. Muehlemann holds a Bachelor's
degree in Communications from Southwest Missouri State University.
Steven Akre has served as a member of the Board of Directors and as the
corporate counsel for the Company since it was founded. Mr. Akre is an
attorney-at-law, whose specialization is in taxation and corporate mergers and
acquisitions.
John J. Clancy joined the Company in 1995 to serve as a member of the Board of
Directors. Mr. Clancy has served on the Board of Directors at Cimplex
Corporation, Inc. in San Jose, and Engineering Software Research & Development,
Inc. in St. Louis. Mr. Clancy was employed by McDonnell Douglas in a variety
of positions progressing from Programmer, to Salesman, to Divisional
President. Mr. Clancy was awarded a Bachelor of Science; Chemical Engineering:
University of Illinois; Master of Science: The Johns Hopkins University;
Master of Business Administration: Washington University - St. Louis; Master
of Liberal Arts: Washington University - St. Louis; Doctor of Philosophy in
History and Business: Washington University - St. Louis.
Donald Rattner joined the Company in 1999 to serve as a member of the Board of
Directors. Mr. Rattner is a member/partner in BrookWeiner, LLC, a Chicago-
based accounting firm, and a member of the American Institute of Certified
Public Accountants and the Illinois CPA Society. He has served on the boards
of several corporations.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
None of the directors, officers or beneficial owners of more than 10% of the
Company's common stock failed to file on a timely basis reports required during
1998 by Section 16(a) of the Exchange Act, except as follows: each of the
Company's five officers was late in filing a report on Form 4, each report
containing one transaction.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or paid
by the Company to the following persons for services rendered in all capacities
to the Company during each of the fiscal years ended December 31, 1999, 1998,
and 1997: (1) the Registrant's Chief Executive Officer, and (2) each of the
other executive officers whose total salary and bonus for the fiscal year ended
December 31, 1999 exceeded $100,000.
Annual Long-term
Compensation Compensation
------------------- ----------------------------
Name & Position Year Salary Bonus Other (1) Options
Monte Ross, 1999 $ 142,588 $ - $ 6,000 (2)
President 1998 $ 154,999 $ - $ 6,000 (3)
1997 $ 130,000 $ - $ 5,000 (4)
(1) Includes premium payments for a life insurance policy on Mr. Ross, with
his estate as beneficiary.
(2) During 1999 the Board's Stock Option Committee awarded Mr. Ross options
to purchase an additional 10,000 shares of Common Stock at an exercise
price of $2.00.
(3) During 1998 the Board's Stock Option Committee awarded Mr. Ross options
to purchase an additional 6,000 shares of Common Stock at an exercise
price of $3.00.
(4) During 1997 the Board's Stock Option Committee awarded Mr. Ross options
to purchase an additional 12,500 shares of Common Stock at an exercise
price of $5.75.
Employment Agreements; Royalty Agreement
Messrs. Ross, Peterson, and Clarke have individual employment agreements with
the Company beginning September 1, 1994. Except as noted herein, the terms of
the employment agreements are substantially identical. The agreements were
extended in 1997 by action of the Board of Directors to October 31, 2000. The
agreements provide for base salaries, which are adjusted annually by the Board
of Directors. If the majority of the Board cannot agree as to a level of
salary adjustment, the salary will increase by 10% for Mr. Clarke and Peterson
and 5% for Mr. Ross. The employment agreements restrict each officer from
competing with the Company for one year after the termination of his
employment unless that employee establishes that his employment by a competitor
will not involve the use of any information, which is considered confidential
by the Company. Mr. Biernbaum also has a separate employment agreement dated
January 1, 1999, which provides for salary and conditions similar to the above
officers.
Leonard Missler, Vice President - Software Development, has a Royalty Agreement
with the Company dated September 14, 1989. The Agreement terminates on
September 13, 2009. Mr. Missler specifies in the Agreement that he will keep
confidential all of the Company's information regarding its technology and
products. In exchange, the Agreement provides that the Company will pay Mr.
Missler a royalty equal to 1% of net sales of the Company's ROAD WHIZ products
and 0.5% of net sales of other products incorporating the ROAD WHIZ database.
During the two years ended December 31, 1999 and 1998, royalty expense totaling
$39,820 and $53,752, respectively, was recognized.
STOCK OPTION AWARDS
The following tables set forth certain information regarding the stock options
acquired by the Company's Chief Executive Officer during the year ended
December 31, 1999 and those options held by them on December 31, 1999:
OPTION GRANTS IN CURRENT FISCAL YEAR
Percent
of total
options Potential realizable
Number of Granted value at assumed
Securities to annual rates of
Underlying Employees Exercise Appreciation
Option in fiscal Price Expiration for option term
Name Granted Year ($/share) Date 5% 10%
- ------------------------------------------------------------------------------
Monte Ross 10,000 9.7% $ 2.00 12/31/04 $ 5,526 $ 12,210
AGGREGATED FISCAL YEAR OPTION VALUES
Number of securities underlying
Unexercised options at Value of unexercised in-the-money
fiscal year-end (#)(All Options at fiscal year-end
Name Exercisable) (all exercisable)
- -------------------------------------------------------------------------------
Monte Ross 73,500 $ -
Stock Option Plans
THE 1994 STOCK OPTION PLAN
On September 28, 1994, the Board of Directors of the Company adopted and the
shareholders approved the Ultradata Systems, Inc. 1994 Stock Option Plan (the
"Option Plan"). The Option Plan is designed to permit the Company to grant
either incentive stock options under Section 422A of the Internal Revenue Code
(the "Code") or non-qualified stock options. Under the Option Plan, a Stock
Option Committee (the "Option Committee") of the Board is authorized to grant
options to purchase up to 175,000 shares of stock to key employees, officers,
directors, and consultants of the Company. The Option Committee administers
the Option Plan and designates the optionees, the type of options to be granted
(i.e., non-qualified or incentive stock options), the number of shares subject
to the options, and the terms and conditions of each option. The terms and
conditions include the exercise price, date of grant, and date of exercise of
each option. An employee may, at the discretion of the Option Committee, be
permitted to exercise an option and make payment by giving a personal note.
Incentive stock options may only be granted to employees of the Company and not
to directors or consultants who are not so employed. The exercise price for
incentive stock options must be at least one hundred percent (100%) of the
fair market value of the Common Stock as determined by the Option Committee on
the date of grant. All incentive stock options under the Option Plan must be
granted within ten years from the date of adoption of the Option Plan and each
option must be exercised, if at all, within five years of the date of grant.
In no event may any employee be given incentive stock options whereby more than
$100,000 of options can be exercised for the first time in a single calendar
year. All incentive stock options must be exercised by an optionee within 30
days after termination of optionee's employment, unless such termination is as
a result of death, disability, or retirement. In the event an optionee's
employment is terminated as a result of death or disability, such optionee or
his designated beneficiary shall be entitled to exercise any and all options
for a period of six months after such termination. If an optionee's employment
is terminated as a result of retirement, the optionee shall be entitled to
exercise his options for a period of three months following such termination.
Non-qualified stock options under the Option Plan are generally subject to the
same rules as discussed above. Non-qualified stock options may, however, also
be granted to directors and consultants, whether or not such individuals are
employees of the Company. The exercise price for non-qualified stock options
may not be granted at less than eighty-five percent (85%) of the fair market
value of the shares on the date of grant.
THE 1996 STOCK OPTION PLAN
The 1996 Plan is designed to permit the Company to grant either incentive stock
options under Section 422A of the Internal Revenue Code (the "Code") or non-
qualified stock options. Under the 1996 Plan, a Stock Option Committee (the
"Option Committee") of the Board is authorized to grant options to purchase up
to 175,000 shares of stock to key employees, officers, directors and
consultants of the Company. The Option Committee administers the 1996 Plan and
designates the optionees, the type of options to be granted (i.e., non-
qualified or incentive stock options), the number of shares subject to the
options, and the terms and conditions of each option. The terms and conditions
include the exercise price, date of grant, and date of exercise of each
option. An employee may, at the discretion of the Option Committee, be
permitted to exercise an option and make payment by giving a personal note.
Incentive stock options may only be granted to employees of the Company and not
to directors or consultants who are not so employed. The exercise price for
incentive stock options must be at least one hundred percent (100%) of the fair
market value of the Common Stock as determined by the Option Committee on the
date of grant. All incentive stock options under the 1996 Plan must be granted
within ten years from the date of adoption of the Option Plan and each option
must be exercised, if at all, within five years of the date of grant. In no
event may any employee be given incentive stock options whereby more than
$100,000 of options become exercisable for the first time in a single calendar
year. All incentive stock options must be exercised by an optionee within 30
days after termination of optionee's employment, unless such termination is as
a result of death or disability. In the event an optionee's employment is
terminated as a result of death or disability, such optionee or his designated
beneficiary shall be entitled to exercise any and all options for a period of
six months after such termination. If an optionee's employment is terminated
as a result of retirement, the optionee shall be entitled to exercise his
options for a period of three months following such termination.
Non-qualified stock options under the 1996 Plan are generally subject to the
same rules as discussed above. Non-qualified stock options may, however, also
be granted to directors and consultants, whether or not such individuals are
employees of the Company. The exercise price for non-qualified stock options
may not be granted at less than eighty-five percent (85%) of the fair market
value of the shares on the date of grant.
In December 1998, the Board of Directors approved a resolution to increase the
number of shares authorized under the 1996 option plan by 100,000 shares to
provide continued incentive for key personnel. None of these shares will be
granted until this matter is approved by stockholders.
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 issued additional incentive stock options to purchase
103,538 shares of Common Stock at an exercise price between $1.44 and $2.13.
The following officers have received a cumulative total number of options shown
below since the inception of the plans at the weighted average exercise price
given:
NAME Number of Shares Average Exercise Price
- ----------------------------------------------------------
Monte Ross 73,500 $ 3.65
Mark L. Peterson 58,000 $ 3.24
Ernest Clarke 34,500 $ 3.54
Leonard Missler 25,500 $ 3.45
Duane Crofts 27,000 $ 3.48
David Biernbaum 38,500 $ 3.56
Daniel Muehlemann 14,500 $ 3.03
REMUNERATION OF DIRECTORS
Prior to April 21, 1994, the Directors of the Company who were not officers
received 208 shares of Common Stock per meeting as compensation for their
services. That policy was terminated on April 21, 1994. Outside Directors now
receive $500 per meeting and are reimbursed for out-of-pocket expenses incurred
on the Company's behalf.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of outstanding shares
of Common Stock of the Company as of March 25, 2000 by any person who, to the
knowledge of the Company, owns beneficially more than 5% of the outstanding
Common Stock, by all directors of the Company, by all executive officers, and
by the directors and officers of the Company as a group. Shares are owned of
record except where otherwise noted. None of the persons identified below owns
any securities of the Company other than the Common Stock listed below:
Amount and
Nature of
Name and Address of Beneficial Percentage of
Title of Class Beneficial Owner (1) Owner Class (8)
- ---------------------------------------------------------------------
Common Monte Ross 452,500 (2) 13.93%
Common Mark L. Peterson 162,382 (3) 5.11%
Common Ernest Clarke 165,352 (4) 5.15%
Common Steven H. Akre Esq.(4) 4,496 (5) 0.14%
Common Donald Rattner 14,000 0.44%
Common John J. Clancy 3,692 (6) 0.12%
Common Officers and Directors
As a Group
(10 persons) 901,565 (7) 26.18%
(1) 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 for 58,000 shares.
(4) Includes options for 34,500 shares.
(5) 3,120 shares owned by the G. Akre Irrevocable Trust, over which Mr. Akre's
wife has investment control. Also includes options for 1000 shares.
(6) Includes options for 3,692 shares.
(7) Includes options for 267,192 shares.
(8) In determining the percentage of outstanding shares, all presently
exercisable options owned by the shareholder or the group are treated as
having been exercised.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 17, 1994, the Board of Directors of the Company approved the sale
of 150,000 shares of Common Stock to the Company's three officers/directors as
follows:
Shares Notes
Monte Ross 100,000 $ 187,500
Mark L. Peterson 25,000 $ 46,875
Ernest Clarke 25,000 $ 46,875
------- --------
TOTAL 150,000 $ 281,250
======= ========
The purchase price for the shares was $1.875 per share, which was paid by each
officer/director in the form of a promissory note bearing interest at 6% per
annum. The principal amount of each note, plus accrued interest, is payable on
July 1, 2001.
In August and September of 1994 nine employees of the Company, including all
five of its officers, exercised incentive stock options and paid the purchase
price of $1.20 per share by delivering to the Company promissory notes. The
promissory notes bear interest at 6% per year and are payable upon the earlier
of the date on which the employee's employment by the Company is terminated or
the date on which the employee sells the shares. The number of shares so
purchased and the principal amount of the notes given were as follows:
Employee Shares Notes
Monte Ross 55,734 $ 67,000
Mark Peterson 13,725 $ 16,500
Ernest Clarke 13,725 $ 16,500
Leonard Missler 17,676 $ 21,250
Duane Crofts 2,080 $ 2,500
Other Employees 416 $ 500
------- --------
TOTAL 103,340 $ 124,250
======= ========
On June 11, 1999, three of the officers of the Company surrendered a portion of
the shares they had purchased in exchange for forgiveness of a portion of the
notes. The surrendered shares were valued at the weighted average market price
for the 30 trading days preceding that date per board resolution. The number
of shares so purchased and the number so surrendered is set forth below:
Shares Purchased Shares Surrendered
---------------------------- ---------------------------
Total Price Average Total Price Average
Monte Ross 155,734 $254,500 $1.63 100,000 $215,000 $2.145
Mark Peterson 38,725 $ 63,375 $1.64 37,423 $ 80,459 $2.145
Leonard Missler 17,676 $ 21,250 $1.20 12,548 $ 26,978 $2.145
The Company has an agreement with Leonard Missler, its Vice President -
Software Development, under which, through September 13, 2009, it pays Mr.
Missler a 1% royalty on all net sales of ROAD WHIZ( products and 0.5% on net
sales of other products incorporating the ROAD WHIZ( database. During the
years ended December 31, 1999 and 1998, the Company paid royalties to Mr.
Missler of $39,820 and $53,752, respectively.
Steven H. Akre, Esquire, a member of the Company's Board of Directors, has
performed legal services as general counsel for the Company since its
inception. During 1999 and 1998, Mr. Akre's firm was paid $108,411 and
$103,984, respectively, for legal services.
Item 13. EXHIBITS, LIST, AND REPORTS
(a) Financial Statements
List of Financial Statements Under Item 7 of this Report:
Report of Independent Certified Public Accountants
Balance Sheet as of December 31, 1999.
Statements of Operations for each year in the two-year period ended December
31, 1999.
Statements of Stockholders' Equity for each year in the two-year period ended
December 31, 1999.
Statements of Cash Flows for each year in the two-year period ended December
31, 1999.
Notes to Financial Statements for each year in the two-year period ended
December 31, 1999.
(b) Exhibits Index and Reports on Form 8-K
Exhibit Number
3-a. Articles of Incorporation, and 1989 amendment. (1)
3-a.(1) Amendment to Articles of Incorporation dated March 4, 1991,
March 22, 1994, and November 18, 1994. (1)
3-a.(2) Certification of Correction of Articles of Incorporation. (1)
3-b. By-laws. (1)
4-a. Specimen of Common Stock Certificate. (1)
10-a. Lease dated May 23, 1990, as amended on November 31, 1993, for
premises at 9375 Dielman Industrial Drive, St. Louis, Missouri.(1)
10-a.(1)Lease Addendum dated October 17, 1995, for premises at 9375 Dielman
Industrial Drive, St. Louis, Missouri.(1)
10-b. 1994 Stock Option Plan.(1)
10-c. Employment Agreement with Monte Ross.(1)
10-d. Employment Agreement with Mark L. Peterson.(1)
10-e. Employment Agreement with Ernest Clarke.(1)
10-f. Royalty Agreement dated September 14, 1989, between the Company and
Leonard Missler.(1)
10-f. Modification Agreement dated November 4, 1995, to Royalty Agreement
dated September 14, 1989, between the Company and Leonard
Missler. (1)
10-o Extended employment agreement as of September 30, 1997 between the
Company and Monte Ross (3)
10-p Extended employment agreement as of September 30, 1997 between the
Company and Mark L. Peterson (3)
10-q Extended employment agreement as of September 30, 1997 between the
Company and Ernest Clarke (3)
10-r Employment Agreement as of October 13, 1997 between the Company and
David Biernbaum (3)
21. Subsidiaries - None.
23. Consent of BDO Seidman, LLP (2)
27. Article 27 Financial Data Schedule (2)
(1) Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (33-85218 C) and incorporated herein by reference.
(2) Filed herewith.
(3) Previously filed on Form 10-KSB for the period ended December 31, 1997,
and incorporated herein by reference.
(c) Reports on Form 8-K
None during the fourth quarter
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) earnings in 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 the adoption of a new accounting method based
on the estimated fair value of employee stock options. Pro forma net income and
income per share, determined as if the Company had applied SFAS No. 123, are
discussed with Note 13.
Reclassifications
Certain 1998 balances have been reclassified to conform to the 1999
presentation.
Impact of Recent Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (FAS133). FAS 133 requires as derivatives to be
recognized as assets or liabilities on the balance sheet and measured at fair
value. Changes in the fair value of derivatives should be recognized in either
net income or other comprehensive income, depending on the designated purpose
of the derivative. This statement, as amended, will be effective for the
Company on January 1, 2001, and the Company has not yet determined the effects
this statement will have on its financial position or results of operations.
Significant Customers
For the year ended December 31, 1999, the company relied on four customers for
approximately 19.8%, 14.6%, 10.5%, and 10.3% of consumer product sales.
Accounts receivable from those customers totaled $623,030, $363,630, $0, and
$66,240, respectively, at December 31, 1999.
For the year ended December 31, 1998, the customer relied on two customers for
approximately 21.6% and 19.7% of consumer product sales, respectively.
Accounts receivable from those customers totaled $1,175,214 and $310,798,
respectively, at December 31, 1998.
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. The Company sells the
products in the United States through direct marketing and through independent
sales representatives, mail order catalogs and mass market retailers.
Note 2. Inventories
Inventories at December 31, 1999 consist of the following:
Raw Materials $ 815,337
Work in Process 62,360
Finished Goods 1,314,072
---------
2,191,769
Reserve for obsolescence (536,347)
---------
$1,655,422
=========
Note 3. Prepaid Expenses
Prepaid expenses at December 31, 1999 consist of the following:
Prepaid advertising $ 24,781
Other prepaid expenses 80,997
--------
$ 105,778
========
Note 4. Property and Equipment
Property, plant and equipment, as of December 31, 1999 consisted of:
Research & development equipment $ 160,890
Production equipment 45,051
Tooling and test equipment 790,811
Office furniture and equipment 394,878
Sales displays 52,101
Leasehold Improvements 141,671
Construction in progress - software 130,915
---------
1,716,317
Less: accumulated depreciation
and amortization 1,032,381
---------
$ 683,936
=========
Depreciation and amortization expense for the years ended December 31, 1999
and 1998 totaled $259,870 and $246,435, respectively. Estimated costs to
complete construction in progress at December 31, 1999 was $75,000.
Note 5. Comprehensive Income
The Company follows SFAS No. 130, "Reporting Comprehensive Income". This
statement establishes standards for reporting and display of comprehensive
income and its components.
The components of other comprehensive income (loss), net, are as follows:
Year ended December 31,
1999 1998
Unrealized losses on deferred
compensation investments:
Unrealized (losses) gains arising
during the period, net $(62,661) $23,736
Reclassification for unrealized
gains previously recognized in
net income, net 14,014 -
------- ------
Other comprehensive income (loss) $(48,647) $23,736
======= ======
Note 6. Leases
The Company amended and expanded its corporate facilities lease as of November
1, 1995. The lease is an operating lease, which expires October 31, 2001. The
Company pays monthly rent plus 31% of all building expenses. Rental expense
totaled approximately $114,247 and $119,236 for the years ended December 31,
1999 and 1998, respectively.
Future minimum lease payments and the related totals expensed for financial
reporting under the operating lease consist of the following:
Cash Expense to be
Payment Recognized
Year ending December 31,
2000 $ 126,868 $ 119,404
2001 105,723 99,503
------- -------
$ 232,591 $ 218,907
======= =======
Note 7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at December 31, 1999 consist of the
following:
Accrued sales commissions
and royalties $ 39,948
Payroll and payroll-related
liabilities 83,978
Accrued advertising 58,250
Other 80,288
-------
$ 262,464
=======
Note 8. Deferred Compensation
Deferred compensation represents the market value of investments made by the
Company in conjunction with a deferred compensation arrangement with the
Company's President for services provided prior to 1991. Five annual payments
of $12,800 were paid through December 31, 1995 to a Rabbi trust for the benefit
of the Company's President. The Plan permits diversification, and the employee
has diversified. A distribution to the beneficiary of $36,850 was made during
1999. The amortized cost and unrealized gain on the investments were $44,820
and $61,014, respectively, at December 31, 1999.
Note 9. Line of Credit
In April 1999, the Company negotiated a lending agreement with Southwest Bank
of St. Louis that provides a credit facility of $1 million, secured by the
Company's accounts receivable and inventories, which expires on July 1, 2000.
This credit facility is expected to meet the Company's needs for the first six
months of 2000, but additional short-term credit will be sought when fourth
quarter production requirements become clearer based on early 2000 sales
successes and projections. The Bank reserves against this line of credit a
Standby Letter of Credit in the amount of $400,000 related to the guarantee of
Talon's line of credit discussed below. There were no borrowings at December
31, 1999.
The line of credit contains certain covenants requiring a minimum of $6.5
million net worth, a maximum level of debt at 25% on net worth, and that no
dividends be declared. In addition, Ultradata may not 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 stockholder's 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.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Ultradata Systems, Incorporated
By:
/s/ Monte Ross
Monte Ross, President, Chief
Executive Officer and Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by the
following persons, on behalf of the registrant and in the capacities and on
the dates indicated.
April 21, 2000
/s/ Monte Ross
Monte Ross
President, Chief Executive Officer
and Chairman of the Board
April 21, 2000
/s/ Mark L. Peterson
Mark L. Peterson,
Vice President of Engineering,
Secretary and Director
April 21, 2000
/s/Ernest Clarke
Ernest Clarke,
Vice President, Controller and Director
April 21, 2000
/s/ Steven H. Akre
Steven H. Akre, Director
April 21, 2000
Donald Rattner, Director
April 21, 2000
/s/ John J. Clancy
John J. Clancy, Director
EXHIBIT 23:
Consent of Independent Certified Public Accountants
Ultradata Systems, Inc.
St. Louis, Missouri
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File Number 333-32098) of our report dated
March 2, 2000 relating to the financial statements of Ultradata Systems,
Inc. appearing in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1999.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
St. Louis, Missouri
April 21, 2000
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,220,134
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<RECEIVABLES> 1,482,267
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