SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Amendment No. 2)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2004
[ ] 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
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(Name of small business issuer in its charter)
Delaware 43-1401158
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1240 Dielman Industrial Court, St. Louis, MO. 63132
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(Address of principal executive office) (Zip code)
Issuer's telephone number, including area code: (314) 997-2250
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
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(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 [ ]
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. [X]
State the issuer's revenues for its most recent fiscal year: $3,970,434
The aggregate market value at March 4, 2005 of the voting stock held
by non-affiliates, based on the closing price as reported by the OTC
Bulletin Board, was approximately $3,140,992. The aggregate market value
has been computed by reference to a share price of $0.49 (the price at
which stock was sold, or the average bid or asked price of such stock on
March 4, 2005). All directors, officers, and stockholders owning more
than five percent of the outstanding common stock of the Registrant have
been deemed "affiliates" for the purpose of calculating such aggregate
market value.
The number of shares outstanding of the issuer's common stock, as of
March 4, 2005, was 6,410,187
Transitional Small Business Disclosure Format: Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE: None
Amendment No. 2
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This amendment is being filed in order to modify the disclosure set forth
under Item 8A - Controls and Procedures.
This amended Annual Report has not been updated, except for the
correction to Item 8A. As a result, this amended Annual Report
contains forward-looking information which has not been updated for
events subsequent to the date of the original filing. All information
in this amended Annual Report is subject to updating and supplementing
by means of the periodic reports that the Company has filed after the
original filing date of the Annual Report.
YOU SHOULD NOT RELY ON FORWARD LOOKING STATEMENTS
This annual report contains a number of forward-looking statements
regarding our future prospects. Among the forward-looking statements are
descriptions of our plans to introduce new products to the market, to
expand our customer base, to develop products for ease of travel, and to
return our company to profitability. These forward-looking statements are
a true statement of our present intentions, but are neither predictions of
the future nor assurances that any of our intentions will be fulfilled.
Many factors beyond our control could act against Ultradata in its efforts
to develop and market its products. Among these factors are:
* The fact that our financial resources are minimal and will not
sustain us past this year without continued success of the
Talking Road Whiz(tm) product line;
* The fact that our lack of capital severely limits our ability to
market our products. As a result, the loss of a significant
customer could imperil the marketing of an entire product line;
* The difficulty of attracting mass-market retailers to a seasonal
product like the Talking Road Whiz(tm).
There may also be factors that we have not foreseen which could
interfere with our plans. In addition, changing circumstances may cause
us to determine that a change in plans will be in the best interests of
Ultradata. For this reason, you should not place undue reliance on any of
the forward-looking statements in this report, as there is a significant
risk that we will not be able to fulfill our expectations for Ultradata.
PART I
ITEM 1. BUSINESS
Overview
The Company mission is to aid the road traveler with useful
information with products easy to use and affordable in price. Since 1987
we have been engaged in the business of manufacturing and marketing
handheld computers that provide travel information. The products are
based upon a data compression technology that we developed, portions of
which we have patented. Recent developments in communications and speech
technology have opened up new opportunities for us to integrate our
technology and create new products merging these technologies with our
own. The Company is completing development of several new products which
are based on adding significant features to the successful Talking Road
Navigator such as a Spanish-speaking unit and a voice-recognition unit
which allows for hands-free operation. These new products are consistent
with our goal of improved ease of use by the consumer. The Spanish-
speaking unit was completed in 2004 and initial deliveries to customers
have been made. The voice-recognition unit should be completed and
available for sale in Spring 2005. The voice recognition product is
called the Road Genie Audio Navigation System and represents a quantum
jump in user convenience. We believe this product will achieve
significant success in 2005.
The Company has sold over 3 million of its low-cost handheld travel
computers, demonstrating that there is a market for travel information
products. To re-awaken that market with an improved product that speaks,
the Company has developed a Talking Road Whiz(tm). Significant deliveries
of this product began in September of 2003 and, the Company received
significant revenue in the last four months of 2003 from sales of this new
addition to its product line. Company earnings in the fourth quarter of
2003 were sufficient to offset losses in the first three quarters of 2003.
This success continued in the first two quarters of 2004, which have
traditionally been weak quarters for Ultradata. Our growth was stalled,
however, in the second half of 2004, when our primary distributor and one
significant customer both ceased placing orders. We are now engaged in
efforts to replace those lost sales.
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Each of our consumer products is designed to allow the consumer to
access useful information stored in a convenient manner. Our handheld
computers generally sell at retail prices between $19.95 and $59.95 per
unit. The products have been available in retail mass-market chains,
catalogs, credit-card inserts, and other channels.
The goals of the Company's research and development investments are
targeted at attaining the right product at the right price. There are
over 125 million drivers in the U. S., and there is a great demand for
useful, easy-to-access information for convenience and safety on the road.
Low-cost products that achieve these benefits have a significant niche in
the marketplace. Thus far, Management feels the Company has barely
penetrated this huge, largely untapped market. The Company expects to
continue to exploit this niche over the next few years by bringing the
results of merged technologies to bear on the goals stated above with
significant impact on Company sales and profits. Ease of use and low cost
are major considerations. With the new voice-recognition unit, we believe
we are close to tapping this large market. The introduction of expensive
GPS navigation systems has brought more awareness to this category.
However, most consumers do not wish to pay over $500 or monthly fees for
directions. Our low-cost user-friendly products offer an affordable
alternative.
Handheld Travel Computers
The Road Whiz(tm) Line of Products
Our core business is a line (currently 7 products) of hand-held
computers that utilize our proprietary data compression technology to
provide a library of information in a pocket-size box. Most of the
products contain travel information, customized to specific markets, and
so the flagship products have carried variations of the trademark "Road
Whiz(tm)." Within the chip that powers a Road Whiz(tm) can be found
information regarding over 100,000 services and amenities along the U.S.
Interstate Highway System and directions on how to reach the service or
amenity of choice. Some versions of the Road Whiz(tm) also contain
information about services and attractions within the cities linked by
the Interstate Highway System, and some versions include U.S. highways
as well as Interstates. The products also provide distances between major
U. S. cities, with over 100,000 pre-calculated routes. The service
information provided by a Road Whiz(tm) product includes directions
and mileage to gas stations, hotels, motels, hospitals, and 24-hour
restaurants, as well as highway patrol emergency numbers. We sell
our handheld products through independent sales representatives,
mass merchandise retailers, catalog companies, department stores,
office supply stores, direct mail promotions, luggage stores and
selected television shopping channels.
We have achieved a significant advance in the technology in our
product with the introduction of the Talking Road Whiz(tm). The unit speaks
in a clear, loud, real voice appropriate prompts for the user's next
action as well as the information presented on the display. This
technological improvement makes the unit easier to use and more attractive
to buy, and paves the way for other applications of this new technology
such as the new Road Genie(r) Audio Navigation System. This new product
enables the user to operate the unit hands-free with eyes on the road. It
will recognize voice commands and respond with appropriate recorded voice
responses - not computer-generated voice.
Among the other hand-held products we currently offer are the following:
Road Whiz(tm) Plus provides complete routing information for over 90
cities, giving driving distances, driving time and detailed directions. A
similar product made by Ultradata is sold by one of our major distributors
under the name Auto Pilot(tm). Our products are designed to be marketed by
mass merchandise retailers.
The Road Whiz(tm) RV Special adds to the standard Road Whiz(tm) features
useful for an RV owner, such as the location of dump stations and the
availability of parking for recreational vehicles at restaurants, and is
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sold through RV magazines and Camping World stores. It contains over
60,000 services and stored routes between 250 cities.
Our Marketing Strategy
After our initial public offering of securities in 1995, we were
able to commence widespread marketing of the handheld products. We priced
them to the upper range gift market ($49 to $129) and focused our
marketing efforts on direct sales through television and print ads, as
well as through a sales representative network. That strategy was
successful in expanding our sales for three years, while the products were
new to the market. The expansion of sales, however, did not bring with it
a proportionate expansion of profits. Too many of our marketing
techniques were only marginally profitable, and as our products lost some
of their newness, marketing techniques such as direct mailing produced
diminishing returns. For that reason, beginning late in 1998 we revised
our marketing strategy. Products without the voice feature now generally
retail for $19.95 to $29.95. At this price point, we expected to gain
sufficient volume to achieve economies of scale with new low-cost
manufacturing methods, permitting us to operate profitably at a lower
level of annual sales. We have been successful in reducing the cost of
marketing as well as other operating costs. In addition, we successfully
increased the volume of sales in 2003 and reached profitability.
In 2004, we expected to have the entire year for Talking Road Whiz(tm)
sales as compared with only the last four months of 2003. However, market
forces and business problems for some of our biggest customers truncated
Talking Road Whiz(tm) sales to those customers in the latter half of the
year. We are consequently attempting to broaden the markets for our
products in 2005 and are taking on the tasks of promoting the products
that traditionally have been performed by our customers. This development
will add to our marketing costs in 2005 but should permit us to command a
higher margin than we could with customers burdened with these tasks and
expenses themselves.
Distribution through mass merchandise channels accounted for almost
75% of our revenue in 2004. We expect that a small group of mass-market
channels will continue to be an important source of sales for our handheld
computer products. We also expect to increase the share of direct sales
as result of these new marketing initiatives mentioned above. The
following table identifies the most significant customers on the basis of
sales in the past two years as well as other mass-market retailers that
carry our products. In 2002, sales emphasis shifted from mass-market
retailers to other channels of mass distribution that require far less
marketing costs. This approach continued throughout 2003 and 2004.
Channel of Distribution
2004 Sales % of Sales 2003 Sales % of Sales
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Media Solutions Services $ 2,200,642 55.4% $ 1,608,052 56.2%
Office Max $ 560,352 14.1% - -
QVC $ 484,219 12.2% $ 481,619 16.8%
AAA Clubs $ 162,220 4.1% $ 118,657 4.1%
Central to the marketing strategy is our effort to develop a variety
of distribution paths, so as to maximize our penetration of the potential
market for our products. Our 2005 success depends on steering our
marketing thrust more to direct sales through TV advertising and to use
those inroads to pull sales through retail channels in response to the TV
ads.
The objective of this marketing strategy is an increase in sales
revenue and gross margin with attendant increases in selling expenses.
With expected success of existing proven products as well as new products
soon to be available in the marketplace, we expect to continue the
profitability begun in 2003 and exhibited in 2004.
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Manufacturing
We do not manufacture any of our products. We retain assemblers to
manufacture the products. At present, there is one manufacturer to whom
we contracted all of our assembly work in 2004. Each year, the
manufacturer quotes prices to us based upon estimated annual quantities.
Exact pricing is usually good for 90 days. Significant changes in chip
prices result in similar changes from our manufacturer. Then we place
individual purchase orders for production. Our arrangements with this
manufacturer - up to the point of a purchase order - are terminable at
will by either party. If the manufacturer becomes unavailable to us,
alternate sources would be readily available. Nevertheless, the sudden
loss of our manufacturer or unanticipated interruptions or delays from our
present manufacturer would likely result in a temporary interruption to
our planned operations.
Backlog
As of March 4, 2005 our total backlog was $68,147, as compared to
$973,865 on March 7, 2004.
Patents
We own four patents - two that are utilized in our present Road
Whiz(tm) products. They provide us a technological advantage which, to date,
has prevented any similar product from appearing. One patent covers our
method of compressing data relating to travel information. This
compression technology permits our travel products to store more data on
smaller and less expensive memory devices. The second patent covers the
methodology that enables our travel devices to account for changes that
occur when the traveler crosses a state border. We have another patent
involving electronic coupons while traveling that we believe would be
valuable for future use in up-scale travel information products.
We hold two additional patents that have potential utility in the
road navigation market. Patent 5,943,653 was awarded in August, 1999 and
covers the delivery of electronic coupons in a handheld computer for
discounts of services. The technology can be combined with a location
function to cause time and site-specific coupons to be delivered to the
driver offering, for example, a discount at the upcoming hotel. We would,
of course, receive a fee for each customer that the hotel gained in this
fashion.
The other related patent, which was awarded in May of 1999, covers a
method of integrating a GPS receiver into a radar detection device. By
use of this patented technology, it becomes practical to eliminate many
false radar detection alarms, as well as to provide audible warnings of
speed zones.
Database Research
A broad and accurate database is essential to the success of our
products. For this reason, we have developed a systematic approach to
updating our ROAD WHIZ database. 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 report to us
regarding the facilities they encounter. The data provided by the Road
Helpers is, in turn, reviewed and augmented at our corporate headquarters
along with use of publicly available information from chains and states on
businesses and facilities.
Competition
To date, we have not faced significant competition in selling our
handheld computer products. The primary reasons for the lack of
competition are:
* Our patented data compression technology permits the storage of
unusually large volumes of information in low-cost devices.
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* Our database is unique, and it would be time-consuming to
replicate it.
* We have fourteen years of experience in developing this line of
products, which gives us insight into the needs and desires of the
traveling consumer.
* We have a simple, low-cost design for our products, which
employs a minimum of parts.
* We have developed low-cost, but high quality manufacturing
sources.
* The devices that perform functions similar to those performed by
our handheld products are considerably more expensive, and often
lack the data quality of our products.
These several factors have, thus far, served as a barrier to any
effective competition with our handheld products.
Research and Development
Ultradata performs ongoing research and development, seeking to
improve existing products and to develop new products. These activities
are primarily conducted at our corporate headquarters, although we
periodically engage outside computer system design consultants to expedite
the completion of the development and test stages. The success of the
Talking Road Whiz(tm) came directly from our R&D efforts, and we plan to
carry the product line to the next level of voice recognition. This
feature promises to further simplify product use and attract a wider
market by requiring less of the user to access valuable information.
In 2004, the Company incurred $140,507 in research and development
costs compared to $63,156 in 2003. Research activities for 2004 were
primarily focused on continued development of the Talking Road Whiz(tm)
products and the Road Genie(tm) Audio Navigation System. In 2005, we plan
to add features to the Road Genie(tm) which will enhance its usefulness to
the road traveler. We plan to develop a digital voice recorder feature to
be added in late 2005. Further, we have been developing a cell-phone
application that would make our software and database available to a cell-
phone user who opts to subscribe to this service thought his service
provider. We see this channel as a new opportunity for revenue from our
patents. Thus, two different paths to enhance profitability will be
advanced in 2005: the voice-activated Road Genie(tm) with a digital voice
recorder and the cell-phone Road Whiz application.
Employees
The Company currently has 8 full-time employees, including four
officers, all of whom are located at the Company's headquarters in St.
Louis, Missouri. The Company employs two people in sales, customer
service and shipping, two people in executive management and
administration, two people in product development, and two people in
inventory management and accounting. None of the Company's employees
belongs to a collective bargaining union. In addition, a number of part-
time consultants are retained for database research, website development
and maintenance, and software development. The Company has not
experienced a work stoppage and believes that its employee relations are
good.
Item 2. PROPERTIES
Our headquarters, principal administrative offices, and research and
development facilities are located in approximately 5,000 square feet of
leased office space in an industrial building located at 1240 Dielman
Industrial Court, St. Louis, Missouri. The Company pays a monthly rent
plus 16% of all building expenses under a new lease that expires October
31, 2005. The Company maintains no manufacturing operations on site and
employs outside contractors to perform all of its manufacturing
requirements.
Aggregate rental expense totaled $45,500 for 2004, compared to
$47,299 in 2003. The Company believes that its facilities are adequate
for the Company's present and foreseeable requirements.
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Item 3. LEGAL PROCEEDINGS
On February 14, 2005, Ultradata filed suit against Office Max, Inc.,
in the Circuit Court of St. Louis County, State of Missouri, for the
collection of $190,320 outstanding on deliveries for Purchase Orders
placed with the Company plus 9% per annum interest from July 18, 2004.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS,
AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Information
The following table sets forth the prices for the Company's Common
Stock (OTC Bulletin Board: ULTR) for the eight quarters starting January
1, 2003 and ending December 31, 2004. Since August 29, 2001 the Common
Stock has been quoted on the OTC Bulletin Board. The bid prices quoted
reflect inter-dealer prices without retail mark-up, mark-down or
commission, and may not represent actual transactions.
Bid
Quarter Ending High Low
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March 31, 2003 0.30 0.13
June 30, 2003 0.16 0.05
September 30, 2003 0.16 0.10
December 31, 2003 0.17 0.12
March 31, 2004 1.52 0.15
June 30, 2004 2.09 1.47
September 30, 2004 1.50 0.57
December 31, 2004 0.91 0.41
(b) Shareholders
At January 31, 2005, there were 124 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 3,000.
(c) Dividends
The Company has never paid or declared any cash dividends on its
Common Stock and does not foresee doing so in the foreseeable future. The
Company 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.
(d) Sale of Unregistered Securities
The Company did not sell any securities during the 4th quarter of
2004 that were not registered under the Securities Act.
(e) Repurchase of Equity Securities
The Company did not repurchase any of its equity securities that
were registered under Section 12 of the Securities Act during the 4th
quarter of 2004.
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Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Overview
The downward sales trend was reversed in 2003 due to the successful
introduction of the Talking Road Whiz(tm) in the third quarter of 2003. The
success of this new product enabled the Company to overcome losses in the
first three quarters of the year with a superb fourth quarter and be
profitable for the year. In 2004, this trend continued through the first
two quarters of the year. In the second half of the year, sale declined
due to internal problems at two of our major customers. We are working to
rectify that situation in 2005 by expanding our channels of distribution
and introducing new attractive products. Because of our present lean
operation, profitability can take place at a lower level of sales than in
previous years.
Results of Operations
SALES. Sales for 2004 increased 38.7% to $3,970,434 from $2,863,258
in 2003 due to the success of the Talking Road Whiz(tm) in the first half of
2004. Our plan is to continue to pursue mass-market outlets for both our
traditional products as well as new products and to grow sales in this
fashion. In addition, we have engaged the services of new representative
organizations in an effort to reach new retail sales channels with which
they have significant contacts.
GROSS PROFIT. Because of the increase in sales of new products, our
gross profit in 2004 was $1,943,678, or 49.0% of sales, compared to
$1,376,716, or 48.1% of sales, in 2003.
SELLING EXPENSES. During 2004, we incurred $329,137, or 8.3% of
sales, in advertising, promotion, and marketing program expenses, as
compared to $253,564, or 8.9% of sales, in 2003. The reduced percentage
is primarily due to the increased sales base. Our 2005 plan expects an
increase in similar selling costs on the order of 12% in pursuit of direct
channels and the costs associated with reaching that market.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development
expenses in 2004 were $140,507 as compared with $63,156 in 2003, an
increase of $77,351, or 122.5%. The primary reason for the increase was
the fact that an additional engineer was hired to develop the software for
the Road Genie(tm), the Spanish Talking Road Navigator, and for other R&D
activities. We will continue to perform research and development in our
own niche market, leading to improved products. R&D work in early 2005
will be devoted to completing the Road Genie,pursuing other
applications of this new speech-recognition technology, and developing the
cell-phone Road Whiz.
GENERAL AND ADMINISTRATIVE EXPENSES. Our G&A expenses were
$1,151,439 in 2004 as compared to $876,528 in 2003, representing an
increase of $274,911, or 31.4%. This increase is primarily due to the
recognition an unexpected bad-debt expense of $170,000 that we are
continuing to pursue through legal action. Another source of increased
expense is the resumption of our employee matching savings plan that we
had suspended throughout most of 2003.
OTHER EXPENSE. During 2004, other expense was ($4,773) compared to
($73,773) in 2003, a decrease of $69,000, or 93.5%. This reduction was
due to the elimination of most of the interest-bearing debt that had
burdened this item in 2003.
NET INCOME. As a result of the foregoing, net income for 2004 was
$317,822 as compared to $109,695 for 2003. Net income available to common
stockholders for 2004 was $317,822, or $0.05 per basic and diluted share,
compared with $104,505, or $0.02 per basic and diluted share in 2003,
including $5,190 of preferred dividends.
Liquidity and Capital Resources
The Company has achieved a significant increase in its cash position
during the year. Cash provided by operations more than offset the cash
used in capital expenditures and paying off remaining debt, such that a
surplus of $383,040 was added to the cash assets of the Company.
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Disappointing sales in the latter half of 2004 and difficulty
collecting a key receivable has put pressure on our cash reserves going
into 2005. As a result, we have entered into an agreement with Golden
Gate Investors to provide needed working capital in 2005 in order to
promote the Road Genie(tm) and other new products. The specific terms of
the arrangement are set forth in Note 15 to our financial statements. The
agreement contemplates that Golden Gate Investors will provide us $90,000
per month by purchasing our common stock at a discount to the market
price, commencing when the Securities and Exchange Commission declares
effective a prospectus that will permit Golden Gate Investors to resell
the shares to the public. The transaction, which may involve up to
$3,300,000 in additional capital, is likely to put pressure on the market
price of our common stock. Without the transaction, however, we would be
unable to fund the introduction of Road Genie(tm). Since we are optimistic
about the prospects of the Road Genie(tm) to lead the Company to a
profitable 2005 and beyond, we believe that the transaction with Golden
Gate Investors is in the best interests of Ultradata.
Impact of Accounting Pronouncements
Critical Accounting Policies and Estimates
In preparing our financial statements we are required to formulate working
policies regarding valuation of our assets and liabilities and to develop
estimates of those values. In our preparation of the financial statements
for 2004, there were estimates made which were (a) subject to a high degree
of uncertainty and (b) material to our results. Those were
* Estimating returns and allowances
* Estimating allowance for doubtful accounts
* Estimating reserve for excess and obsolete inventory
* Estimating a tax asset valuation allowance
(1) our determination, detailed in Note 11 to the Financial Statements,
that we should record a valuation allowance for the full value of the
deferred tax asset created by our net operating loss carryforward. The
primary reason for the determination was our lack of certainty as to whether
Ultradata would carry on profitable operations in the future, and (2) the
reserving of a receivable that has required the Company to file a collection
suit. The aging of the receivable from a company undergoing some business
problems has led us to be in significant doubt as to its collectibility.
We made no material changes to our critical accounting policies in connection
with the preparation of financial statements for 2004.
Estimating returns and allowances
Net revenue consists of product revenue reduced by estimated sales returns
and allowances. To estimate sales returns and allowances, we analyze, both
when we initially establish the reserve, and then each quarter when we review
the adequacy of the reserve, the following factors: historical returns,
current economic trends, levels of inventories of our products held by our
customers, and changes in customer demand and acceptance of our products.
This reserve represents a reserve of the gross margin on estimated future
returns and is reflected as a reduction to accounts receivable in the
accompanying consolidated balance sheet. Increases to the reserve are
recorded as a reduction to net revenue equal to the expected customer credit
memo and a corresponding credit is made to cost of sales equal to the
estimated cost of the returned product. The net difference, or gross margin,
is recorded as an addition to the reserve. Because the reserve for sales
returns and allowances is based on our judgments and estimates, particularly
as to future customer demand and acceptance of our products, our reserves
may not be adequate to cover actual sales returns and other allowances.
If our reserves are not adequate, our future net revenues could be adversely
affected.
-9-
Estimating allowance for doubtful accounts
As needed based on specific customers' circumstances affecting his
probability of payment, we reserve an allowance for losses we may incur as
a result of our customers' inability to make required payments. Any increase
in the allowance results in a corresponding increase in our general and
administrative expenses. In establishing this allowance, and then evaluating
the adequacy of the allowance for doubtful accounts each quarter, we analyze
historical bad debts, customer concentrations, customer credit-worthiness,
current economic trends and changes in our customer payment terms. If the
financial condition of one or more of our customers deteriorates, resulting
in their inability to make payments, or if we otherwise underestimate the
losses we incur as a result of our customers' inability to pay us, we could
be required to increase our allowance for doubtful accounts which could
adversely affect our operating results. We have a case whereby the aging
of the receivable from a company undergoing some business problems has led
us to be in significant doubt as to its collectibility and has caused us to
institute legal proceedings for collection. This situation has caused the
allowance to be unusually large in the present financial statements.
Estimating reserve for excess and obsolete inventory
We identify excess and obsolete products and analyze historical usage,
forecasted production based on demand forecasts, current economic trends,
and historical write-offs when evaluating the adequacy of the reserve for
excess and obsolete inventory. This reserve is reflected as a reduction to
inventory in the accompanying consolidated balance sheet, and an increase
in cost of revenues. If actual market conditions are less favorable than our
assumptions, we may be required to take additional reserves, which could
adversely impact our cost of revenues and operating results.
Estimating a tax asset valuation allowance
Note 11 to the Financial Statements details our determination that we should
record a valuation allowance for the full value of the deferred tax asset
created by our net operating loss carryforward. The primary reason for the
determination was our lack of certainty as to whether Ultradata would carry
on profitable operations in the future.
We made no material changes to our critical accounting policies in connection
with the preparation of financial statements for 2004.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition or
results of operations.
There were no recent accounting pronouncements that have had or are
likely to have a material effect on the Company's financial position or
results of operations.
Item 7. 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 14 of this Form
10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not applicable.
Item 8A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: As of December 31,
2004, the Company's management carried out an evaluation, under the
supervision of the Company's Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's system of disclosure controls and procedures pursuant to the
Securities and Exchange Act (Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls are effective
to provide reasonable assurance that information we are required to disclose
in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that such information
is accumulated and communicated to our management, including our chief
executive officer and chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
Changes in internal controls: There were no changes in internal
controls over financial reporting that occurred during the period covered
by this report that have materially affected, or are reasonably likely to
materially effect, our internal control over financial reporting.
-10-
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists certain information regarding the officers
and directors of the Company as of March 10, 2004:
NAME AGE POSITION
---------------------------------------------------------------------
Monte Ross 72 Chief Executive Officer, Director
Ernest Clarke 65 President & Chief Financial Officer,
Director
Mark L. Peterson 48 Vice President-Engineering, Secretary,
Director
Donald Rattner 72 Director
H. Krollfeifer, Jr. 64 Director
Matthew Klapman 35 Director
Directors hold office until the election and qualification of their
successors at a meeting of the Company's stockholders. Officers hold
office, subject to removal at any time by the Board, until their
successors are appointed and qualified.
Background of Directors and Executive Officers:
Monte Ross founded the Company in 1986 and has served as its Chief
Executive Officer and Chairman since inception. He also served as
President until April 2001. For over 20 years prior to founding the
Company, Mr. Ross was employed by McDonnell Douglas Corporation (now
Boeing) 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 space laser
communication system and first space laser radar. Mr. Ross is a Fellow of
the Institute of Electrical and Electronic Engineers and the past
President of the International Laser Communication Society. Mr. Ross was
awarded a Master of Science degree in Electrical Engineering by
Northwestern University in 1962. He is the father-in-law of Mark L.
Peterson, the Company's Vice President-Engineering.
Ernest Clarke has been a Director of the Company since it was
founded in 1986. From August 1990 to June 1999 he served as Vice
President - Government Programs. He then served as Company's Vice
President - Controller from June of 1999 until April 2001. He was
elevated to President in April 2001. For over 20 years prior to joining
Ultradata, Mr. Clarke was employed by McDonnell Douglas Corporation (now
Boeing) 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.
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.
Donald Rattner joined the Company in 1999 to serve as a member of
the Board of Directors. Mr. Rattner is a member/partner in BrookWeiner,
LLC, a Chicago-based accounting firm, and a member of the American
Institute of Certified Public Accountants and the Illinois CPA Society.
He has served on the boards of several corporations.
H. Krollfeifer, Jr. joined the Company in 2000 to serve as a member
of the Board of Directors. Mr. Krollfeifer is retired after 35 years in
the equipment leasing and financing industry. He has worked closely with
The American Association of Equipment Lessors (AAEL), an industry trade
group for which he served as a speaker, lecturer, and teacher for various
educational programs starting in 1986. That organization evolved into The
Equipment Leasing Association of America (ELA), and Mr. Krollfeifer was
added to their training faculty in January 2000 where he continues to
serve on a part-time basis.
Matthew Klapman joined the Company in 2002 to serve as a member of
the Board of Directors. Mr. Klapman is the CEO of Future Vision
Technologies, Inc., which he co-founded 1990. He has maintained a strong
career in technological innovation, business strategy, negotiation, and
-11-
team management. He has invented and developed a myriad of products in
the video, 3-D graphics, and communication fields. As a Director at
Motorola, he developed the computer graphics and marketing strategy for
its corporate strategy office and broadband wireless communications
sector. In addition, as Director of Research and Development for
Motorola's Personal Communications Sector, he spearheaded the creation of
the new user interface platform that is the basis for all of Motorola's
cellular phones. He has developed products and designs that have earned
several industry awards. He received a B.S. in Computer Engineering and a
J.D. from the University of Illinois at Urbana. He holds 4 issued and 7
pending patents.
AUDIT COMMITTEE
The Board of Directors has appointed an Audit Committee of the
Board. The present members of the Audit Committee are Donald Rattner and
H. Krollfeifer, Jr. The Board of Directors has determined that Donald
Rattner is qualified to serve as an "audit committee financial expert", as
defined in the Regulations of the Securities and Exchange Commission. Mr.
Rattner is an "independent director", as defined in the Regulations of the
Securities and Exchange Commission.
CODE OF ETHICS
The Company has adopted a "Code of Business Ethics for Ultradata
Systems, Inc." The Code is applicable to all employees of the Company,
including its principal executive officer, principal financial officer,
principal accounting officer, or persons performing similar functions.
The Company will provide a copy of the Code of Ethics, without charge, to
any person who submits a request in writing to the President of the
Company.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
None of the directors, officers, or beneficial owners of more than
10% of Ultradata's common stock failed to file on a timely basis reports
required during 2004 by Section 16(a) of the Exchange Act.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned
by, or paid by Ultradata to executives for services rendered in all
capacities to Ultradata during each of the last three fiscal years. There
was no other executive officer whose total salary and bonus for the fiscal
year ended December 31, 2004 exceeded $100,000.
Annual Long-term Compensation
Compensation ------------------------
Name & Position Year Salary Bonus Other Options
------------------------------------------------------------------------------
Monte Ross, 2004 $ 167,880 $ - $ - (3)
Chief Executive Officer 2003 $ 157,367 $ - $ -
2002 $ 152,938 $ - $ - (1)
Ernest Clarke 2004 $ 111,040 $ - $ - (4)
President 2003 $ 103,695 $ - $ -
2002 $ 103,783 $ - $ - (2)
Mark Peterson 2004 $ 101,152 $ - $ - (6)
Vice President-Engineering 2003 $ 93,101 $ - $ -
2002 $ 97,877 $ - $ - (5)
-12-
(1) During 2002 the Board's Stock Option Committee awarded Mr. Ross
options to purchase 121,813 shares of Common Stock at an exercise price
of $.07.
(2) During 2002 the Board's Stock Option Committee awarded Mr. Clarke
options to purchase 66,423 shares of Common Stock at an exercise price
of $.07.
(3) During 2004 the Board's Stock Option Committee awarded Mr. Ross
options to purchase 25,000 shares of Common Stock at an exercise price
of $.72.
(4) During 2004 the Board's Stock Option Committee awarded Mr. Clarke
options to purchase 25,000 shares of Common Stock at an exercise price
of $.72.
(5) During 2002 the Board's Stock Option Committee awarded Mr. Peterson
options to purchase 87,511 shares of Common Stock at an exercise price
of $.07.
(6) During 2004 the Board's Stock Option Committee awarded Mr. Peterson
options to purchase 30,000 shares of Common Stock at an exercise price
of $.72.
Employment Agreements
Messrs. Ross, Peterson, and Clarke have individual employment
agreements with Ultradata beginning September 1, 1994. Except as noted
herein, the terms of the employment agreements are substantially
identical. The agreements were extended in 1997 by action of the Board of
Directors to October 31, 2000, again in 2000 to October 31, 2003, and
again in 2003 to October 1, 2005. The agreements provide for base
salaries, which are adjusted annually by the Board of Directors. If the
majority of the Board cannot agree as to a level of salary adjustment, the
salary will increase by 10% for Mr. Clarke and Mr. Peterson and 5% for Mr.
Ross. The employment agreements restrict each officer from competing with
Ultradata for one year after the termination of his employment unless that
employee establishes that his employment by a competitor will not involve
the use of any information considered confidential by Ultradata.
Stock Option Awards
The following tables set forth certain information regarding the
stock options acquired by the Company's Chief Executive Officer and Chief
Financial Officer during the year ended December 31, 2004 and those
options held by each of them on December 31, 2004.
Option Grants in the Last Fiscal Year
Percent
of total
Number of options
securities granted to
underlying employees Exercise
option in fiscal Price Expiration
Name granted year ($/share) Date
---------------------------------------------------------------------------
M. Ross 25,000 25 $.72 12/11/2014
E. Clarke 25,000 25 $.72 12/11/2014
Aggregated Fiscal Year-End Option Values
Number of securities underlying Value of
unexercised in-the-money unexercised options at
options at fiscal year-end ($) fiscal year-end (#)
Name (All exercisable) (All exercisable)
----------------------------------------------------------------------------
M. Ross 146,813 $43,853
E. Clarke 91,423 $23,912
Remuneration of Directors
Outside Directors receive $500 per meeting and are reimbursed for
out-of-pocket expenses incurred on the Company's behalf. From time to
time they are granted stock and options as recommended and approved by the
-13-
inside directors. During 2004, the outside directors each received 4,000
options for Ultradata common stock with a strike price of $.72 that are
exercisable within ten years.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to us with respect
to the beneficial ownership of our common stock by the following:
* each shareholder known by us to own beneficially more than 5% of
our common stock;
* Monte Ross and Ernest Clarke;
* each of our other directors; and
* all directors and executive officers as a group.
There are 6,410,187 shares of our common stock outstanding at March
4, 2005. Except as otherwise indicated, we believe that the beneficial
owners of the common stock listed below have sole voting power and
investment power with respect to their shares, subject to community
property laws where applicable. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. In
computing the number of shares beneficially owned by a person and the
percent ownership of that person, we include:
* shares of common stock subject to options or warrants held by
that person that are currently exercisable or will become
exercisable within 60 days, and
We do not, however, include these "issuable" shares in the outstanding
shares when we compute the percent ownership of any other person.
Name and Amount and
Address of Nature of Percentage
Beneficial Beneficial of Outstanding
Owner (1) Ownership Shares (12)
-----------------------------------------------------------
Monte Ross 485,813(2) 7.4%
Ernest Clarke 222,275(3) 3.4%
Mark Peterson 254,893(4) 3.9%
Donald Rattner 66,000(5) 1.1%
H. Krollfeifer, Jr. 32,000(6) 0.5%
Matthew Klapman 16,500(7) 0.3%
All officers and
directors as a
group (6 persons) 1,077,481(8) 15.9%
Harley Brixey 1,385,000(9) 21.6%
4389 Winding Oaks
Drive,
Mulberry, FL 33860
(1) Unless otherwise indicated, the address of each of these
shareholders is c/o Ultradata Systems, Incorporated, 1240 Dielman
Industrial Court, St. Louis, Missouri 63132
(2) Includes 100,000 shares owned by the Harriet Ross Revocable Trust,
and 174,000 shares owned by the Monte Ross Revocable Trust. Also
includes options to purchase 146,813 shares.
(3) All shares are owned jointly with Mr. Clarke's spouse. Also includes
options for 91,423 shares.
(4) Includes options for 62,000 shares.
-14-
(5) Includes options for 29,000 shares.
(6) Includes 24,000 shares owned by D&H Enterprises, Inc., of which Mr.
Krollfeifer is a principal. Also includes options for 4,000 shares.
(7) Includes options for 4,000 shares.
(8) Includes options for 371,747 shares.
(9) As reflected on a Form 144 filed on January 2, 2004.
Stock Option Plans
The information set forth in the table below regarding equity
compensation plans (which includes individual compensation arrangements)
was determined as of December 31, 2004.
Equity Compensation Plan Information
Number of Number of
securities Weighted securities
to be average remaining
issued upon exercise available
exercise of price of for future
outstanding outstanding issuance
options, options, under equity
warrants warrants compensation
and rights and rights plans
------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders............ 280,747 $.14 0
Equity compensation plans not
approved by security
holders............ 116,000* $.72 -
---------------------------------------------
Total..................... 427,663 $.17 0
* Represents non-qualified stock options given to the Company's
outside directors and employees in 2004. The options expire on
December 11, 2014.
We have two stock option plans: the 1994 Incentive Stock Option Plan
and the 1996 Incentive Stock Option Plan, both of which were approved by
our shareholders. The material terms of the Plans are identical. In
aggregate, the Plan authorize the issuance of options for 500,000 shares,
all of which have been issued. Of those, options have been exercised to
purchase 94,523 shares of common stock. These plans have now expired.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
Item 13. EXHIBITS, LIST, AND REPORTS
(a) Financial Statements
List of Financial Statements Under Item 7 of this Report:
Report of Independent Registered Public Accounting Firm
Balance Sheet as of December 31, 2004.
Statements of Operations for each year in the two-year period ended
December 31, 2004.
Statements of Stockholders' Equity for each year in the two-year
period ended December 31, 2004.
Statements of Cash Flows for each year in the two-year period ended
December 31, 2004.
-15-
Notes to Financial Statements for each year in the two-year period
ended December 31, 2004.
(b) Exhibits Index
Exhibit Number
3-a. Articles of Incorporation, and 1989 amendment. (1)
3-a(1) Amendment to Articles of Incorporation dated March 4, 1991,
March 22, 1994, and November 18, 1994. (1)
3-a(2) Certification of Correction of Articles of Incorporation. (1)
3-a(3) Amendment to Articles of Incorporation dated July 26, 1996 (2)
3-b. By-laws. (1)
4-a. Specimen of Common Stock Certificate. (1)
10-a. Lease dated May 23, 1990, as amended on November 31, 1993, for
premises at 9375 Dielman Industrial Drive, St. Louis, Missouri.(1)
10-a(1) Lease Addendum dated October 17, 1995, for premises at 9375 Dielman
Industrial Drive, St. Louis, Missouri.(1)
10-a(2) Lease Addendum dated October 5, 2001, for premises at 1240-1244
Dielman Industrial Court, St. Louis, Missouri - filed as an exhibit
to the Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 2002 and incorporated herein by reference.
10-b. 1994 Stock Option Plan.(1)
10-c Amended and Restated 1996 Stock Option Plan - filed as an Exhibit to
the Company's Registration Statement on Form S-8 (333-32098) and
incorporated herein by reference.
10-d. Employment Agreement with Monte Ross.(1)
10-d(1) Extended Employment Agreement between the Company and Monte Ross (2)
10-e. Employment Agreement with Mark L. Peterson.(1)
10-e(1) Extended Employment Agreement between the Company and Mark L.
Peterson (2)
10-f. Employment Agreement with Ernest Clarke.(1)
10-f(1) Extended Employment Agreement between the Company and Ernest Clarke (2)
10-g. Royalty Agreement dated September 14, 1989, between the Company and
Leonard Missler.(1)
10-g(1) Modification Agreement dated November 4, 1995, to Royalty Agreement
dated September 14, 1989, between the Company and Leonard Missler. (1)
10-h Option Agreement between the Company and Influence Incubator, L.L.C.
dated May 30, 2000 - filed as an exhibit to the Company's Current
Report on Form 8-K dated May 30, 2000 and incorporated herein by
reference.
10-i Securities Purchase Agreement dated February 14, 2005 between
Ultradata Systems and Golden Gate Investors, Inc. (3)
-16-
10-j 63/4% Convertible Debenture dated February 14, 2005 issued to Golden
Gate Investors, Inc. (3)
10-k Warrant to Purchase Common Stock dated February 14, 2005 issued to
Golden Gate Investors, Inc. (3)
10-l Addendum to Convertible Debenture and Securities Purchase Agreement (3)
21. Subsidiaries - None.
31. Rule 13a-14(a) Certification
32. Rule 13a-14(b) Certification
(1) Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (33-85218 C) and incorporated herein by
reference.
(2) Previously filed as an Exhibit to Form 10-KSB for the year ended
December 31, 1997, and incorporated herein by reference.
(3) Previously filed as an Exhibit to the Current Report on Form 8-K
dated February 17, 2005 and incorporated herein by reference.
Reports on Form 8-K:
None
Item 14. Principal Accountant Fees and Services
Audit Fees
Webb & Company, P.A. billed $15,117.00 to the Company for
professional services rendered for the audit of our 2004 financial
statements and review of the financial statements included in our 2004 10-
QSB filings. Webb & Company, P.A. billed $8,900.00 to the Company for
professional services rendered for the audit of our 2003 financial
statements and review of the financial statements included in our 3rd
quarter 10-QSB.
Audit-Related Fees
Webb & Company, P.A. billed $397.00 to the Company in 2004 for
assurance and related services that are reasonably related to the
performance of the 2004 audit or review of the quarterly financial
statements. Webb & Company, P.A. billed $0.00 to the Company in 2003 for
assurance and related services that are reasonably related to the
performance of the 2003 audit or review of the quarterly financial
statements.
Tax Fees
Webb & Company, P.A. billed $700.00 to the Company in 2004 for
professional services rendered for tax compliance, tax advice and tax
planning. Webb & Company, P.A. billed $0.00 to the Company in 2003 for
professional services rendered for tax compliance, tax advice and tax
planning.
All Other Fees
Webb & Company, P.A. billed $0.00 to the Company in 2003 for
services not described above.
It is the policy of the Company's Audit Committee that all services
other than audit, review or attest services, must be pre-approved by the
Audit Committee. All of the services described above were approved by the
Audit Committee.
-17-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of:
Ultradata Systems, Inc.
We have audited the accompanying balance sheet of Ultradata Systems,
Inc. as of December 31, 2004, and the related statements of operations,
changes in stockholders' equity (deficiency) and cash flows for the
years ended December 31, 2004 and 2003. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our 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, Inc. as of December 31, 2004 and the results of its operations
and its cash flows for the years ended December 31, 2004 and 2003 in
conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 13
to the financial statements, a major customer of the Company has
experienced deteriorating operations during 2004 and during the second
quarter ceased ordering products from the Company. This customer
accounted for 55.4% of sales during 2004. In addition the Company
terminated its agreements with AAA for the sale of its products using
the AAA logo to AAA retail locations. These factors raise substantial
doubt about its ability to continue as a going concern. Management's
plans concerning this matter are also described in Note 13. The
accompanying financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
WEBB & COMPANY, P.A.
Boynton Beach, Florida
March 5, 2005
ULTRADATA SYSTEMS, INCORPORATED
BALANCE SHEET
AS OF DECEMBER 31, 2004
ASSETS
CURRENT ASSETS
Cash $ 385,966
Trade accounts receivable,
net of allowance for doubtful accounts
of $179,575 38,459
Inventories, net 89,890
Prepaid expenses 41,515
--------
Total Current Assets 555,830
PROPERTY AND EQUIPMENT - NET 30,458
OTHER ASSETS 5,444
--------
TOTAL ASSETS $ 591,732
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 126,019
Accrued liabilities 55,967
--------
TOTAL CURRENT LIABILITIES 181,986
--------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value,
4,996,680 shares authorized,
none issued and outstanding -
Series A convertible preferred
stock, 3,320 shares authorized,
none issued and outstanding -
Common stock, $0.01 par value,
10,000,000 shares authorized,
6,410,187 issued and outstanding 64,102
Additional paid-in capital 9,121,022
Accumulated deficit (8,659,418)
Deferred stock compensation (115,960)
---------
TOTAL STOCKHOLDERS' EQUITY 409,746
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 591,732
=========
See accompanying notes to financial statements.
FS-2
ULTRADATA SYSTEMS, INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
----------- ------------
NET SALES $ 3,970,434 $ 2,863,258
COST OF SALES 2,026,756 1,486,542
--------- ---------
GROSS PROFIT 1,943,678 1,376,716
--------- ---------
OPERATING EXPENSES
Selling 329,137 253,564
General and administrative 1,151,439 876,528
Research and development 140,507 63,156
--------- ---------
Total Operating Expenses 1,621,083 1,193,248
--------- ---------
OPERATING INCOME 322,595 183,468
OTHER INCOME (EXPENSE)
Interest and dividend income 1,620 6,402
Interest expense (6,408) (155,801)
Loss on early retirement of note receivable - (57,813)
Settlement of legal dispute - 127,000
Other, net 15 6,439
--------- ---------
Total Other Income (Expense) (4,773) (73,773)
--------- ---------
INCOME BEFORE INCOME TAX EXPENSE 317,822 109,695
Income tax expense - -
--------- ---------
NET INCOME $ 317,822 $ 109,695
========= =========
INCOME PER SHARE
Net income $ 317,822 $ 109,695
Preferred stock dividends - (5,190)
--------- ---------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 317,822 $ 104,505
========= =========
Income per share - basic and diluted $ 0.05 $ 0.02
Weighted average shares outstanding - ========= =========
basic and diluted 6,225,304 4,872,026
========= =========
See accompanying notes to financial statements.
FS-3
ULTRADATA SYSTEMS, INCORPORATED
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Notes
Receivable Total
Additional for Deferred Stockholder'
Preferred Stock Common Stock Paid-in Common Treasury Stock Accumulated Stock Equity
Shares Amount Shares Amount Capital Stock Shares Amount Deficit Compensation (Deficiency)
----------------------------------------------------------------------------------------------------------------------------------
Balance at
December
31, 2002 16 $ 16,000 4,224,456 $42,244 $9,631,750 $(102,369) 326,171 $(942,311) $(9,086,935) $ - $ (441,621)
Conversion of
preferred
stock to note
payable (16) (16,000) (8,790) (24,790)
Conversion of
notes payable
to common
stock 1,372,555 13,726 141,494 155,220
Issuance of
common stock
to non-employee
for services
performed 30,000 300 4,200 4,500
Exercise of
employee stock
options 3,000 30 180 210
Stock issued as
part of short-
term loan
offering 480,000 4,800 86,900 91,700
Payments on notes
receivable to
purchase
common stock 102,369 102,369
Retirement of
treasure
shares (326,171) (3,262) (939,049) (326,171) 942,311 -
Net income, 2003 109,695 109,695
-----------------------------------------------------------------------------------------------------------
Balance at
December 31, 2003 - - 5,783,840 57,838 8,916,685 - - - (8,977,240) (2,717)
Conversion of
notes payable
to common
stock 273,906 2,739 24,861 27,600
Issuance of
common stock
to non-
employee for
services
performed 223,000 2,230 171,710 (115,960) 60,010
Exercise of
employee stock
options 100,441 1,005 6,026 7,031
Exercise of
director stock
options 29,000 290 1740 2,030
Net income, 2004 317,822 317,882
-----------------------------------------------------------------------------------------------------------
Balance at
December 31, 2004 - $ - 6,410,187 $64,102 $9,121,022 $ - - $ - $(8,659,418) $ (115,960) $ 409,746
===========================================================================================================
See accompanying notes to financial statements FS-4
ULTRADATA SYSTEMS, INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 317,822 $ 109,695
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 14,976 32,308
Write-down of inventory 30,457 17,673
Stock issued for services 57,980 4,500
Loss on early settlement of notes
receivable - 57,813
Provision for doubtful accounts 176,848 (693)
Non-cash accrued interest receivable - (12,397)
Changes in assets and liabilities:
Trade accounts receivable, net 412,182 (485,198)
Inventories (64,752) 29,219
Prepaid expenses and other assets (36,349) (604)
Accounts payable (334,682) 182,872
Accrued liabilities (34,826) (98,032)
Net Cash Provided By (Used In) --------- --------
Operating Activities 539,656 (162,844)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from early settlement of
notes receivable - 202,517
Capital expenditures (19,475) (12,834)
Net Cash (Used In) Provided By --------- --------
Investing Activities (19,475) 189,683
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercising stock options 9,061 -
Payments on notes payable (311,202) (338,844)
Dividends paid to preferred
stockholders - (8,790)
Proceeds from notes payable 165,000 91,600
Proceeds from sale of common stock - 91,910
Payments received on subscriptions, net - 102,369
--------- --------
Net Cash Used In Financing Activities (137,141) (61,755)
--------- --------
NET INCREASE (DECREASE) IN CASH 383,040 (34,916)
CASH - BEGINNING OF YEAR 2,926 37,842
--------- --------
CASH - END OF YEAR $ 385,966 $ 2,926
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH-FLOW
INFORMATION
Interest paid during the year $ 6,408 $ 48,204
FS-5
ULTRADATA SYSTEMS, INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 2004, a portion of the notes payable in the amount of $27,600 was
converted to 273,906 shares of common stock.
During 2003, a portion of the notes payable in the amount of $155,220 was
converted to 1,312,535 shares of common stock.
During 2003, the Company retired 326,171 shares of Treasury Stock with a
cost of $942,311.
FS-6
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Operations
Ultradata Systems, Incorporated (the "Company") was incorporated in the
State of Missouri in March 1986 under the name of Laser Data
Technology, Inc. The Company subsequently merged into its wholly owned
subsidiary, Ultradata Systems, Incorporated, incorporated in the State
of Delaware, and Laser Data was dissolved. The principal business
activity of the Company, located in St. Louis, is the design,
manufacture, and sale of hand-held electronic information products.
The Company sells the products in the United States through direct
marketing, independent sales representatives, mail order catalogs, and
mass market retailers.
(B) Use of Estimates
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America and, as such, include amounts based on informed estimates and
assumptions by management, with consideration given to materiality.
Actual results could vary from those estimates.
(C) Cash and Cash Equivalents
Cash includes deposits at financial institutions with maturities of
three months or less. The Company at times has cash in banks in excess
of FDIC insurance limits and places its temporary cash investments with
high credit quality financial institutions. At December 31, 2004, the
Company had approximately $285,800 in cash balances at financial
institutions which were in excess of the FDIC insured limits.
(D) 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.
(E) 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.
(F) Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. 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." Depreciation is
provided using 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 their
useful life. Expenditures for maintenance and repairs are charged to
expense as incurred. The Company continually reviews property and
equipment to determine that the carrying values are not impaired.
FS-7
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
(G) Long-Lived Assets
The Company accounts for long-lived assets under the Statements of
Financial Accounting Standards Nos. 142 and 144 "Accounting for
Goodwill and Other Intangible Assets" and "Accounting for Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 142 and 144"). In accordance
with SFAS No. 142 and 144, long-lived assets, goodwill 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,
goodwill and intangible assets, the recoverability test is performed
using undiscounted net cash flows related to the long-lived assets.
(H) 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.
Advertising expense totaled $95,664 and $60,950 for the years ended
December 31, 2004 and 2003, respectively.
(I) Reclassification
Certain amounts from prior periods have been reclassified to conform
to the current year presentation.
(J) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure About
Fair Value of Financial Instruments," requires certain disclosures
regarding the fair value of financial instruments. Trade 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.
(K) 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.
FS-8
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
(L) Royalty Expense
Royalty expense is recognized on a pro rata basis as units are sold
during the same period in which the related unit sales were recognized.
(M) Income Taxes
The Company accounts for income taxes under the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes",
("SFAS 109"). Under SFAS 109, 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. Under SFAS 109, 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.
(N) Income Per Share
Basic and diluted income per share is calculated by dividing net
income for the period (plus preferred stock dividends) by the weighted
average number of shares of common stock outstanding during the period.
The assumed exercise of stock options and warrants is only included in
the calculation of diluted earnings per share, if dilutive (see Note
10).
(O) Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards No.
123 (SFAS No. 123), the Company has elected to account for stock
options issued to employees under Accounting Principles Board Opinion
No. 25 ("APB Opinion No. 25") and related interpretations. The Company
accounts for stock options issued to consultants and for other services
in accordance with SFAS No. 123.
(P) New Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 151,
"Inventory Costs - an amendment of ARB No. 43, Chapter 4"" SFAS No.
152, "Accounting for Real Estate Time-Sharing Transactions - an
amendment of FASB Statements No. 66 and 67," SFAS No. 153, "Exchanges
of Non-monetary Assets - an amendment of APB Opinion No. 29," and SFAS
No. 123 (revised 2004), "Share-Based Payment," were recently issued.
SFAS No. 151, 152, 153 and 123 (revised 2004) have no current
applicability to the Company and have no effect on the financial
statements.
FS-9
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
(Q) Business Segments
The Company applies Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related
Information." The Company operates in one segment and therefore
segment information is not presented.
NOTE 2 INVENTORIES
Inventories (net) at December 31, 2004 consist of the following:
Raw materials $ 4,966
Finished goods 84,924
-------
$ 89,890
=======
At December 31, 2004, the Company has reserved $738,826 for obsolete
inventory. During 2004 and 2003, the Company recognized an
impairment of $30,456 and $17,673 respectively.
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 consist of the following:
Research and development equipment $ 39,997
Tooling and test equipment 86,112
Office furniture and equipment 219,025
Sales displays 52,101
Leasehold improvements 29,989
--------
427,224
Less accumulated depreciation and
amortization (396,766)
--------
$ 30,458
========
Depreciation and amortization expense for the years ended December 31,
2004 and 2003 totaled $14,976 and $32,308, respectively.
FS-10
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 4 ACCRUED LIABILITIES
Accrued liabilities at December 31, 2004 consist of the following:
Accrued payroll and related expenses $ 10,961
Accrued vacation 24,224
Accrued expenses 19,818
Other accrued liabilities 964
-------
$ 55,967
=======
NOTE 5 NOTES PAYABLE
On January 8, 2004, all remaining convertible debt was retired by
payment in full of the outstanding balance including all accrued
interest. Between January 1, 2004, and January 8, 2004, a portion of
the notes payable in the amount of $27,600 was converted to 273,906
shares of common stock. (See Note 8).
On January 7, 2004, the Company issued a nine-month note payable in the
amount of $150,000. The note earned interest at 12% APR and is
unsecured. The note was fully repaid during 2004.
During 2004, the Company received a loan of $15,000 from its Chief
Executive Officer to fund operations with no interest. The outstanding
balance of the loan was paid in full as of March 31, 2004.
Interest expense for the years ended December 31, 2004 and 2003 was
$6,408 and $155,801, respectively.
NOTE 6 COMMITMENTS AND CONTINGENCIES
(A) Operating Lease
The Company renewed its operating lease whereby it reduced the size
of its corporate facilities as of November 1, 2001. The lease is an
operating lease, which expires October 31, 2005. The Company pays
monthly rent of $3,779, plus 16% of all building expenses.
Future minimum lease payments under the operating lease at December
31, 2004, consist of the following:
Year Amount
------ --------
2005 $ 37,790
Rent expense totaled $45,500 and $47,299 for the years ended December 31,
2004 and 2003, respectively.
FS-11
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
(B) Royalty Agreements
On September 14, 1989, the Company entered into a twenty-year
royalty agreement relating to its ROAD WHIZ product. After the
sale of 20,000 ROAD WHIZ units, the agreement thereafter provides
for a 1% royalty payment on net sales of the ROAD WHIZ product and
0.5% on the Company's other products that incorporate the ROAD
WHIZ database. Royalty payments are made quarterly until September
13, 2009. During the years ended December 31, 2004 and 2003,
royalty expense totaled $35,799 and $26,693, respectively.
On September 15, 1998, the Company entered into a three-year royalty
agreement with AAA related to the AAA TripWizard. The terms are
automatically renewable for one year and amount to 10% of the wholesale
price on sales other than through AAA stores and $1.00 per unit on AAA
sales. This agreement recognizes the benefit of the AAA logo and data
and their promotion of the product through their travel stores. On July
1, 2002, the agreement was amended to provide a royalty of $1 per unit on
all sales of the unit.
In August of 2003, the Company entered into a royalty agreement with AAA
for use of the AAA brand on the Company's Talking Road Navigator. This
agreement is similar to the above agreement with regard to sales through
AAA stores and royalties for other sales. Prior review and approval by
AAA of the use of AAA brands in TV and other media are a part of the
agreement.
In January 2004, the Company reached an agreement with AAA National
to terminate the existing agreement for private branding of the AAA
Talking Road Navigator(tm) as of March 27, 2004. This termination occurred
at the request of AAA National for internal business reasons and not for
cause or non-performance by the Company, in accordance with the terms
for cancellation of the agreement by either party.
In May 2004, AAA notified the Company that it does not intend to renew
the marketing agreement on the AAA TripWizard. The Company, per terms
of the agreement, can continue to market the product and divest itself
of its inventory during 2005.
During the years ended December 31, 2004 and 2003, AAA royalty expense
for both products totaled $45,837 and $39,821, respectively.
On April 19, 2001, the Company entered into a three-year royalty
agreement with Rand McNally. The agreement renews automatically for one-
year periods up to a maximum of five additional years unless terminated
earlier. The agreement calls for the Company to pay a royalty of 10% of
net sales of the TripLink and Pocket TripLink devices that contain the
Rand McNally logo or $1.50 for each device sold, whichever is greater.
For the first year of the agreement, the Company guarantees a minimum
payment of $150,000, and must pay an additional $50,000 if 50,000 or more
devices are sold. The guaranteed annual minimum for each subsequent
FS-12
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
anniversary year increases to 115% of the amount of the royalties due
(inclusive of the guaranteed annual minimum) for the previous year. In
addition to the per unit royalty, the Company must pay (1) a royalty of
$.01 to $.02 for each route created by authorized users of the services
provided by the agreement, (2) a royalty of $0.48 to $0.62 for each
Pocket Road Atlas ordered from Rand McNally, and (3) a $0.12 license fee
for each Pocket Road Atlas shipped to customers.
On February 21, 2002, the royalty agreement with Rand McNally was
amended as follows: (1) beginning December 16, 2002, either party may
terminate the agreement with sixty days written notice, (2) the Company
may begin using the Rand McNally logo on additional products, (3)
beginning March 1, 2002, the Company shall pay twelve monthly
installments of $8,333 to the remaining balance of $100,000 owed to Rand
McNally for the first year minimum, and (4) the Company shall sell its
TripLink device to Rand McNally for $7.50 per unit below the normal
selling price, and this discount shall be used as a credit against the
monthly payment in (3) above.
In February 2003, the agreement with Rand McNally was further amended to
provide a new payment schedule and basis for the TripLink royalties.
The Company agreed to pay the remaining balance for the TripLink Program
in accordance with the following terms:
The beginning balance of $52,251 on January 1, 2003, shall bear
interest at the rate of 6% APR. The payment schedule shall consist of
$2,000 upon signing of the amendment and $2,000 on the 15th of each month
commencing March 15, 2003. On or before August 31, 2003, a final
balloon payment is required equal to the sum of the outstanding balance
and any accrued unpaid interest, less any credits resulting from
TripLink sales in the interim. The agreement was signed and the initial
payment of $2,000 was made in February 2003.
In 2003, the Company paid $20,000, including $2,341 in interest, to
Rand McNally and reduced the balance to $27,045 on December 31, 2003,
when credits are also taken into account. Since the Company was unable
to retire the balance by August 31, 2003 as planned, the Company
continued monthly payments and accrual of interest.
In 2004, the Company paid $510 in interest, accrued $855 in credits,
and retired the balance of $26,802 in May 2004.
During the years ended December 31, 2004 and 2003, royalty expense
totaled $8 and $138, respectively.
(D) Stanton Walker Consulting Agreement
In September 2004, the Company signed a business advisory and
consulting services agreement with New York-based Stanton Walker &
Company. Stanton Walker will assist in the development of certain
strategic initiatives of the Company. These initiatives include
opening discussions with several companies regarding licensing
arrangements, joint ventures or distribution arrangements. Stanton
FS-13
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
Walker's work will include due diligence, structuring transaction
terms and providing consulting services throughout the process.
Stanton Walker will also seek potential acquisition candidate
companies that fit Ultradata Systems' business objectives.
Stanton Walker & Company provides a full range of strategic
operational, marketing, financial advisory and M & A services to
public companies. While they provide assistance in a wide array of
industries, Stanton Walker is especially interested in working with
companies where their products and/or services appear to offer the
company's stakeholders an opportunity for a significant return.
Stanton Walker were issued 223,000 shares of Ultradata Common Stock
with a prevailing market value on the date of the agreement of
$173,940 in payment for their services. The Company is amortizing
the compensation expense over the 12-month life of the agreement.
As of December 31, 2004, the Company recognized $57,980 of the
consulting expense related to the agreement and recorded deferred
consulting fees of $115,960.
NOTE 7 STOCKHOLDERS' EQUITY (DEFICIENCY)
(A) Common Stock Issuances
During 2003, a portion of the notes payable in the amount of
$155,220 was converted to 1,372,555 shares of common stock. No gain
or loss was recognized on this transaction.
During 2003, an aggregate of 30,000 shares of common stock having a
fair value of $4,500 were issued to a consultant for services
rendered during the year. The shares were valued based on the
prevailing market price on the grant date.
During 2003, an aggregate of 480,000 shares of common stock were
issued for cash of $91,700 to holders of short-term notes.
During 2003, a director exercised 3,000 common stock options for
cash of $210.
During 2004, a portion of the notes payable in the amount of $27,600
was converted to 273,906 shares of common stock. No gain or loss
was recognized on this transaction.
During 2004, a director exercised 29,000 common stock options for
cash of $2,030.
During 2004, 223,000 shares were issued to a consultant for services
rendered (see Note 6).
During 2004, employees exercised 100,441 common stock options for
cash of $7,031.
(B) Convertible Preferred Stock
(i) Original Terms
FS-14
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
On May 16, 2000, the Company issued 16 Series A Convertible
Preferred Shares to a consultant as a commission. These shares
have no voting rights. The holder of the shares is not entitled
to any cash dividends. However, they accrue an additional 11.25%
per annum (or 22.5% if the Common Stock is de-listed by NASDAQ)
for purposes of conversion, redemption, and liquidation ($6,529
at December 31, 2002). The main points of the Preferred Shares
were as follows:
1. The Preferred Shares have a liquidation preference, upon the
liquidation of the Company or its bankruptcy or certain other
events, equal to their $1,000 face value plus an accrued
amount equal to 11.25% from the date of their issuance (22.5%
if the Common Stock is delisted by NASDAQ).
2. The Preferred Shares, combined with the additional 11.25% per
annum, may be converted into Common Stock at any time at the
option of the holders. If not previously converted, the
Preferred Shares will automatically convert into Common Stock
on May 15, 2003. The conversion rate will be the lower of
$3.50 or 75% of the 5-day average closing bid price, subject
to certain anti-dilution rights and to the Floor. The "Floor"
was originally $2.50 and applies only during the first 18
months after issuance of the Preferred Shares. Under the
terms of the Preferred Shares, the floor price was initially
adjusted to $2.00, then to $1.50. In March 2001, the floor
was eliminated.
In May of 2003, the Company and the shareholder reached a
mutually satisfactory agreement to convert the shares to a note
of $24,870 rather than converting in accordance with the formula
above. This note was paid off completely by September 30, 2003.
NOTE 8 STOCK OPTIONS AND WARRANTS
(A) Stock Options Issued Under Qualified Stock Option Plans
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 July 2000, the Company's
shareholders approved an extension of the 1996 Incentive Stock
Options plan to provide for 150,000 additional shares to be made
available for future grant. Under both plans, the exercise price of
each option equals or exceeds 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 the year ended December 31, 2004, the Company granted 112,000
stock options to certain employees and directors. The Company
FS-15
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
applies APB Opinion No. 25 and related interpretations in accounting
for stock options issued to employees. Accordingly, no compensation
cost has been recognized for options issued to employees. Had
compensation cost been determined based on the fair market value at
the grant date, consistent with SFAS 123, the Company's net income
would have changed to the pro-forma amounts indicated below.
2004 2003
Net income available to ---------- ----------
common shareholders
As Reported $ 317,822 $ 104,505
Pro Forma $ 239,552 $ 104,505
Basic and diluted income
per share
As Reported $ 0.05 $ 0.02
Pro Forma $ 0.04 $ 0.02
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 2004:
dividend yield of zero; expected volatility of 132%, risk-free
interest rate of 5.40%; 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, 2004 and 2003, and the changes during the years then
ended is presented below:
2004 2003
---------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
----------------------------- --------------------------------------------
Outstanding at beginning of
year 392,188 $0.14 392,188 $0.14
Cancelled - - - -
Granted - $ - - $ -
Forfeited - $ - - $ -
Expired (11,000) $2.00 - $ -
Exercised (100,414) $ .07 - $ -
------- ----- ------- -----
Outstanding at end of year 280,747 $0.10 392,188 $0.14
======== ===== ======= =====
Options exercisable at year end 282,405 399,785
======= =======
Weighted average fair value
of options granted to
employees during the year $ - $ -
======= =======
FS-16
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at December Contractual Exercise at December Exercise
Price 31, 2004 Life Price 31, 2004 Price
--------------------------------------------------------------------------------
$0.00 - 0.99 275,747 2.5 $0.07 275,747 $0.07
1.00 - 1.99 5,000 1.0 1.50 5,000 1.50
2.00 - 2.99 - - - - -
3.00 - 3.99 - - - - -
4.00 - 4.99 - - - - -
5.00 - 5.56 - - - 1,658 -
-----------------------------------------------------------
280,405 2.47 0.10 280,405 0.10
===========================================================
------------------------------------------------------ ----------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at December Contractual Exercise at December Exercise
Price 31, 2003 Life Price 31, 2003 Price
--------------------------------------------------------------------------------
$0.00 - 0.99 376,161 4.0 $ 0.07 376,161 $0.07
1.00 - 1.99 5,000 2.0 1.50 5,000 1.50
2.00 - 2.99 11,000 0.8 2.00 11,000 2.00
3.00 - 3.99 - - - - -
4.00 - 4.99 - - - - -
5.00 - 5.56 - - - - -
-----------------------------------------------------------
392,188 3.88 0.18 405,477 0.14
===========================================================
FS-17
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
(B) Non-Qualified Stock Options Issued and Outstanding
2004 2003
-------- --------
Stock options issued to a technical
consultant at various times in the past.
The term of the options is five years
expiring in 2005 and 2006. The options are
exercisable at an average price of $2.53 per
share. 6,818 6,818
Stock options issued to a former affiliate.
The term of the option is five years
expiring May 9, 2005. The options are
exercisable at $4.00 and $5.00 per share. 300,000 300,000
Stock options issued to directors for
services rendered. The term of the options
is five years expiring November 18, 2007.
The options are exercisable at $0.07 per
share. 4,000 33,000
Stock options issued to directors for
services rendered. The term of the options
is five years expiring December 11, 2009.
The options are exercisable at $0.72 per
share. 12,000 -
Stock options issued to employees. The term
of the options is ten years expiring
December 11, 2014. The options are
exercisable at $0.72 per share. 100,000 -
-------- --------
Total 422,818 339,818
======== ========
NOTE 9 INCOME PER SHARE
A reconciliation of the numerator and denominator of the income per
share calculations is provided for all periods presented. The
numerator and denominator for basic and diluted income per share for
the years ended December 31, 2004 and 2003, is as follows:
Basic and fully diluted 2004 2003
Numerator: --------- ---------
Net income $ 317,822 $ 109,695
Preferred Stock Dividends (a) - (5,190)
-------- --------
Numerator for basic and diluted income per
share $ 317,822 $ 104,505
Denominator:
Weighted average common shares 6,225,304 4,872,026
Denominator for basic and diluted income per
share 6,225,304 4,872,026
--------- ---------
Basic and diluted income per share $ 0.05 $ 0.02
========= =========
(a) See Note 7(B)
FS-18
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 10 INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2004
and 2003 consist of the following:
2004
Current Deferred Total
---------------------------------
Federal $ - $ - $ -
State - - -
------ ------ ------
$ - $ - $ -
====== ====== ======
2003
Current Deferred Total
---------------------------------
Federal $ - $ - $ -
State - - -
------ ------ ------
$ - $ - $ -
====== ====== ======
Income tax expense for the years ended December 31, 2004 and 2003
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:
2004 2003
-------------------------
Expected income tax (benefit) expense $ 108,059 $ 37,296
Increase (decrease) in income taxes
resulting from:
Valuation allowance decrease (106,804) (36,880)
Nondeductible expenses for federal
income tax purposes (1,256) (416)
-------- -------
Income tax expense (benefit) $ - $ -
======== =======
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at
December 31, 2004 and 2003 include the following:
2004 2003
Deferred tax assets: ----------- ----------
Net operating loss carryforward $ 3,347,346 $ 3,454,150
Note receivable reserved for financial
reporting Purposes - -
FS-19
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
Notes and accounts receivable reserves 5,475 5,475
Inventory reserves, principally due to
accruals for financial reporting
purposes and basis differences 277,491 277,491
Other - -
--------- ---------
Total deferred tax assets 3,630,312 3,989,776
--------- ---------
Deferred tax liabilities
Property, plant and equipment, principally
due to differences in depreciation basis (10,837) (12,385)
--------- ---------
Total deferred tax liabilities - (12,385)
--------- ---------
Gross deferred tax asset 3,619,475 3,977,391
Valuation allowance (3,619,475) (3,977,391)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
At December 31, 2004, the Company had net operating loss
carryforwards of $9,845,135 for income tax purposes, available to
offset future taxable income expiring on various dates through 2024.
The valuation allowance at December 31, 2003 was $10,159,265. The
net change in the valuation allowance during the year ended December
31, 2004 was a decrease of $314,130.
NOTE 11 CONCENTRATIONS OF CREDIT RISK
The Company relied on three customers for approximately 82% of sales
for the year ended December 31, 2004, and two customers for
approximately 70% of sales for the year ended December 31, 2003. At
December 31, 2004, accounts receivable, net, from those three
customers totaled $2,793.
NOTE 12 EMPLOYEE BENEFIT PLANS
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. Because of the Company's financial
condition, the Company contributions were suspended in late 2002 and
throughout 2003. Expense attributable to Company contributions
totaled $20,906 during the year ended December 31, 2004.
NOTE 13 GOING CONCERN
As reflected in the accompanying financial statements, a major
customer of the Company has experienced deteriorating operations
during 2004 and during the second quarter ceased ordering products
from the Company. This customer accounted 55.4% of sales during
FS-20
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
2004. In addition the Company terminated its agreements with AAA
for the sale of its products using the AAA logo to AAA retail
locations. Although Management has a plan in place to replace
these lost customers, it is not yet clear that the plan will be
successful. The ability of the Company to continue as a going
concern is dependent on the Company's ability to further implement
its business plan, raise capital and generate revenues. The
financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
The Company has continued its product design and development
efforts to introduce new products in 2005 and expects to introduce
its Road Genie(tm) in 2005. Based on the success of the Talking Road
Whiz with direct TV marketing, the Company is proceeding with plans
to market Road Genie(tm) by means of similar commercials, with the
Company marketing directly to consumers. This new product
represents an increase in technology compared to the Talking Road
Whiz and, in addition, can be enhanced to include a digital voice
recorder for additional value to the customer. The Company is also
opening a new source of revenue by developing the cell-phone Road
Whiz application. Thus, the Company has two different methods in
work to enhance sales revenue. In addition, the Company has
obtained a loan and a commitment for additional equity capital for
up to $3.3 million (see Note 14). Management believes that actions
presently taken to obtain additional funding provide the
opportunity for the Company to continue as a going concern.
NOTE 14 SUBSEQUENT EVENTS
Convertible Debenture Financing
On February 17, 2005 Ultradata entered into a Securities Purchase
Agreement dated February 14, 2005 with Golden Gate Investors, Inc.,
which was modified by an Addendum dated February 17, 2005.
Ultradata sold to Golden Gate a 43/4% Convertible Debenture and a
Warrant to Purchase Shares of Common Stock, all for a purchase price
of $300,000. The Company received proceeds of $100,000 of the
purchase price, except that $50,000 of that sum is being held in
escrow for payment of the costs of preparing and filing a
registration statement that will permit Golden Gate to make a public
resale of the shares into which the Debenture is convertible and for
which the Warrant is exercisable (the "Registration Statement'). As
a result of the warrants issued alongside the debenture, the Company
will record a discount on the debenture and amortize it over the
life of the debenture. The remainder of the purchase price is
payable when the Securities and Exchange Commission declares the
Registration Statement effective.
Interest that accrues on the Debenture, at 43/4% per annum, will be
payable monthly. The principal amount of the Debenture is payable
on February 14, 2007. However, the holder of the Debenture has
agreed that, in each month after the Securities and Exchange
Commission declares the Registration Statement effective, the holder
will convert at least 3% of the face amount of the debenture into
common stock. Similarly, the holder of the Warrant is required to
purchase at least 3% of the shares subject to the Warrant in each
month after the Securities and Exchange Commission declares the
Registration Statement effective.
FS-21
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
The conversion provisions of the Debenture and the exercise
provisions of the Warrant are correlated so that the Debenture will
be converted and the Warrant exercised in like proportions. The
result is that in any month in which the holder converts the 3%
minimum it will also exercise the 3% minimum under the Warrant,
which will result in it purchasing common stock for $99,000 ($90,000
paid in cash and $9,000 of the Debenture principal converted). The
number of shares that will be purchased will equal the purchase
price divided by the lesser of (a) $1.25 or (b) 80% of the average
of the three lowest volume weighted average prices during the twenty
trading days preceding conversion/exercise. In total, the
conversion of the Debenture and exercise of the Warrant will result
in Golden Gate purchasing Ultradata common stock for up to
$3,300,000 ($3,000,000 paid in cash and $300,000 of the Debenture
principal converted) during the period between the effective date of
the Registration Statement and February 14, 2007.
There are four conditions that may reduce the aggregate purchase
price paid by Golden Gate below $3,300,000:
1. If Golden Gate only converts the 3% minimum per month, the
February 14, 2007 payment date for the Debenture will occur before
full conversion and exercise have occurred.
2. The conversion and exercise provisions of the securities
provide that at no time may Golden Gate acquire ownership of more
that 9.9% of Ultradata's outstanding common stock.
3. If at the time of a conversion/exercise, the conversion
price would be less than $.40, then either (a) Ultradata may opt to
redeem the amount of principal that the holder presents for
conversion at 125% of face value, or (b) if the conversion/exercise
date is later than November 11, 2005, the holder may elect to convert
up to $100,000 of the Debenture without exercising the Warrant, either
of which events would reduce the aggregate purchases under the
Debenture and Warrant by 900% of the amount redeemed by Ultradata
or converted without exercise.
4. When the principal amount of the Debenture falls below
$100,000, Ultradata may redeem the remaining principal for its
face value. In that event, the aggregate purchase price paid by
Golden Gate for Ultradata common stock would be only $2,200,000.
FS-22
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, Chief Executive Officer
(Principal Executive Officer) and
Director
By: /s/ Ernest Clarke
-----------------------------------------
Ernest Clarke, President, Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer) and
Director
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.
June 22, 2005
/s/ Monte Ross
------------------------------------------------------------------
Monte Ross
Chief Executive Officer (Principal Executive Officer) and Director
June 22, 2005
/s/Ernest Clarke
-------------------------------------------------------------
Ernest Clarke,
President, Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer) and Director
June 22, 2005
/s/ Mark L. Peterson
---------------------------------------------------
Mark L. Peterson,
Vice President-Engineering, Secretary and Director
June 22, 2005
/s/ Donald Rattner
-------------------------------------------------
Donald Rattner
Director
June 22, 2005
/s/ H. Krollfeifer, Jr.
-------------------------------------------------
H. Krollfeifer, Jr.,
Director
June 22, 2005
/s/ Matthew Klapman
-------------------------------------------------
Matthew Klapman
Director