SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant
to Section 13 or 15(d) of
the Securities Exchange Act of 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2001
[ ] 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: $1,704,013
The aggregate market value at March 12, 2002 of the voting stock held by
non-affiliates, based on the closing price as reported by the National
Quotations Bureau, was approximately $472,105. The aggregate market value has
been computed by reference to a share price of $0.14 (The price at which
stock was sold, or the average bid or asked price of such stock on March
12, 2002). All directors and more than five percent of stockholders of the
Registrant have been deemed "affiliates" for the purpose of calculating such
aggregate market value.
The number of shares outstanding of the issuer's common stock, as of
March 12, 2002, was 3,372,179
Transitional Small Business Disclosure Format: Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE: None
YOU SHOULD NOT RELY ON FORWARD LOOKING STATEMENTS
This annual report contains a number of forward-looking statements
regarding our future prospects. Among the forward-looking statements are
descriptions of our plans to restructure the marketing program for the Road
Whiz(tm) line of products, to introduce Triplink(tm) and GPS products to the
market, and to develop products based on a GPS/Internet technology. These
forward-looking statements are a true statement of our present intentions, but
are neither predictions of the future nor assurances that any of our intentions
will be fulfilled. Many factors beyond our control could act against Ultradata
in its efforts to develop and market its products. Among these factors are:
* The fact that our limited financial resources may be insufficient to permit
us to develop products and introduce them to the market.
* The difficulty of attracting mass-market retailers to a seasonal product
like the Road Whiz(tm);
* The breadth and depth of competition in the GPS market, which will make
introduction of our product with a limited marketing budget difficult;
* The difficulty of attracting qualified engineering and marketing personnel
to our company.
There may also be factors that we have not foreseen which could interfere
with our plans. In addition, changing circumstances may cause us to determine
that a change in plans will be in the best interests of Ultradata. For this
reason, you should not place undue reliance on any of the forward-looking
statements in this report, as there is a significant risk that we will not be
able to fulfill our expectations for Ultradata.
PART I
ITEM 1. BUSINESS
Overview
Since 1987 we have been engaged in the business of manufacturing and
marketing handheld computers that provide travel information. The products
are based upon a data compression technology that we developed, portions
of which we have patented. Recent developments in communications
technology have opened up new opportunities for us to use our technology.
Therefore, we still sell our handheld computers, but over the past three
years we have been expanding the scope of our operations:
* In 1998 we acquired a minority interest in Talon Research & Development,
Ltd., which manufactured GPS (global positioning satellite) antennas that
can be combined with our database to create a variety of travel products.
In 2001, we liquidated our holding in Talon for cash and notes receivable,
realizing a gain of $265,131.
* In 1999 we helped to form a joint venture called Influence Data, LLC,
which provides travel services, including directions, over the Internet.
The "dot com" collapse in 2000 caused the entity to discontinue operations
because of lack of capital and lack of market.
* In 2001 we introduced, in joint venture with Rand McNally, the Rand McNally
Triplink(tm), a handheld computer that enables the user to download travel
information from the Rand McNally Website.
* During the first quarter of 2001 we shipped the first beta-test units of
our Travel*Star 24(tm), which combines our travel information with a GPS
antenna to enable a driver to obtain his location and directions to his
destination while he drives. The production release of this product is
scheduled for the second quarter 2002.
* We have completed development of the CarPad, which installs in the visor
over the driver's seat in an automobile and provides door-to-door
directions. The CarPad also contains organizer functions such as phone
numbers, addresses, appointments, and to do lists on a large-text display.
We intend to introduce CarPad to the market in 2002 at a retail price of
approximately $50.
Each of our consumer products is designed to allow the consumer to access
useful information stored in a convenient manner. Our handheld computers
generally sell at retail prices between $19.95 and $49.95 per unit. The
products are in the three largest retail mass-market chains in the country
plus many other locations. The new Travel*Star 24(tm) is offered at retail
for about $400, which should make it very competitive in the auto aftermarket.
Its portability and the fact that it requires no elaborate installation offer
advantages over the more expensive in-car systems.
Handheld Travel Computers
The Road Whiz(tm) Line of Products
Our core business is a line (currently 7 products) of hand-held computers
that utilize our proprietary data compression technology to provide a library
of information in a pocket-size box. Most of the products contain travel
information, customized to specific markets, and so the flagship products have
carried variations of the trademark "Road Whiz(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. 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.
Among the 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. Our products are designed to be marketed by mass
merchandise retailers. Ultra Road Whiz(tm) has similar capabilities, but is
designed primarily for sale on the television shopping channels and to
Wal-Mart.
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 sold
through RV magazines and Camping World stores.
AAA TripWizard(r) is the product of a joint effort between Ultradata and
the American Automobile Association (AAA). During 1998, we entered into an
agreement with AAA to develop an expanded database to include AAA's diamond-
rated restaurants and lodging facilities, AAA-approved auto repair, camp
grounds and attractions, as well as the AAA ratings, where available, for the
facilities in our proprietary Interstate database. This expanded database has
been incorporated into a hand-held travel computer called the TripWizard(r).
TripWizard(r) is being marketed to AAA's affiliates, consisting of 93 clubs,
1,100 offices and over 41 million members in the United States, as well as to
specialty retailers and Target.
Our New Marketing Strategy
After our initial public offering of securities in 1995, we were able to
commence widespread marketing of the handheld products. We priced them to
the upper range gift market ($49 to $129) and focused our marketing efforts
on direct sales through television and print ads, as well as through a sales
representative network. That strategy was successful in expanding our sales
for three years, while the products were new to the market. The expansion of
sales, however, did not bring with it a proportionate expansion of profits.
Too many of our marketing techniques were only marginally profitable, and as
our products lost some of their newness, marketing techniques such as direct
mailing produced diminishing returns. For that reason, beginning late in 1998
we revised our marketing strategy. The products now generally retail for
$19.95, and marketing is focused on mass market retailers and custom-branded
private label units. At this price point, we hope to gain sufficient volume
to achieve economies of scale with new low-cost manufacturing methods,
permitting us to operate profitably at a lower level of annual sales.
Distribution through mass merchandise channels accounted for over 87% of
our revenue in 2001. We expect that a small group of mass-market channels will
continue to dominate the market for our handheld computer products. The
following table identifies the customers to whom over 10% of our sales were
made in either of the past two years as well as other mass-market retailers
that carry our products. It is not known at this time the effect of Kmart's
bankruptcy on future sales to Kmart.
Channel of Distribution
2001 Sales % of Sales 2000 Sales % of Sales
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Wal-Mart $ 466,855 27.4% $ 16,375 0.2%
Target $ 380,532 22.3% $ 602,420 9.6%
Kmart $ 335,921 19.7% $ 454,270 7.2%
QVC $ 74,921 4.4% $ - -%
Media Syndication Global $ 8,960 0.5% $2,499,300 38.9%
Preferred Customer's
Guild $ 10,192 0.6% $2,111,625 33.5%
Central to the new marketing strategy is our effort to develop a variety
of distribution paths, so as to maximize our penetration of the potential
market for our products. To date, in addition to our sales to retailers, the
following types of distribution have been put in place:
* Private Branding. The leading example of the private label marketing
strategy was the introduction in 1998 of the AAA TripWizard(r) as a joint
venture with the American Automobile Association.
* Direct Response Marketing. Our largest customers during 2000 were Media
Syndication Global and Preferred Customer's Guild. These distributors
specialize in multi-media direct response marketing and have resources
and expertise that can achieve high sales effectiveness at relatively low
promotional cost. Their volume in 2001 was small due to over buying in
2000 and the downturn in the economy in 2001. We have received first-
quarter 2002 orders from Preferred Customer's Guild amounting to $780,000
to indicate this channel is still viable.
The objective of this new marketing strategy is an increase in sales
revenue with a significant reduction in selling and administrative expense, as
the costs attendant to direct retail marketing are reduced. Even though the
exponential growth rate that we achieved in 1996 and 1997 is unlikely to be
replicated, stabilization of our core business at even a modest level of
profitability would provide a foundation on which we could pursue dynamic
growth through our entry into the GPS and Internet markets.
Manufacturing
We do not manufacture any of our products. We retain assemblers to
manufacture the products. We procure the microprocessors and memory chips and
other unique items, and supply them to the assembler.
To date, there are two manufacturers to whom we have contracted most of our
assembly work. Once each year, these manufacturers quote prices to us based
upon estimated annual quantities. Then we place individual purchase orders for
production. Our arrangements with these manufacturers - up to the point of a
purchase order - are terminable at will by either party. If either or both
of the manufacturers became unavailable to us, alternate sources would be
readily available. Nevertheless, the sudden loss of one of the manufacturers
or unanticipated interruptions or delays from present manufacturers would
likely result in a temporary interruption to our planned operations.
Backlog
As of December 31, 2001 our total backlog was approximately $360,600,
compared to backlog of approximately $4,400 on December 31, 2000. The current
backlog is due to orders from Preferred Customer's Guild.
Patents
We own two patents that are utilized in our 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.
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.
* Our database is unique, and it would be time-consuming to replicate it.
* We have fourteen years of experience in developing this line of products,
which gives us insight into the needs and desires of the traveling
consumer.
* We have a simple, low-cost design for our products, which employs a
minimum of parts.
* We have developed low-cost, but high quality manufacturing sources.
* The devices that perform functions similar to those performed by our
handheld products are considerably more expensive, and often lack the
data quality of our products.
These several factors have, thus far, served as a barrier to any effective
competition with our handheld products.
GPS Products
Travel*Star 24(tm) GPS Auto Navigational System
Taking advantage of our access to the Talon GPS receiver/antenna, we have
developed a low cost, portable navigation unit for the automotive after-market,
which we will market as the "Travel*Star 24(tm)." The Travel*Star 24(tm)
utilizes the Talon GPS receiver and antenna to pinpoint the longitude and
latitude of the moving vehicle. The unit is capable of calculating a route,
displaying visual directions and distance as well as audible turn-by-turn
prompts and warnings when the driver strays from the route. The Travel*Star
24(tm) also includes an expanded version of the proprietary and unique Road
Whiz(tm) database, providing the driver directions to over 200,000 services
across the U.S.A. As the driver travels, the GPS signals are referenced to
the service database, so that the driver can instantly find businesses, hotels,
service stations, rest stops, restaurants, hospitals, tourist attractions,
airports, etc. in more than 250 metropolitan areas, as well as directions to
over 12,000 smaller cities and towns.
While there are a wealth of potential users for a GPS-based navigation
system, we intend to target the Travel*Star 24(tm) to the 12-volt automotive
after-market, which currently consists of over 150 million vehicles and grows
by 15 million vehicles annually.
Currently, between 600,000 and 1,000,000 GPS-based navigation systems are
sold annually. These include installed original equipment such as "Neverlost"
and "Visteon", which is generally priced in the $2,000 range; low-end hand-
held units of very limited capability (generally approximately $200); and
middle market units priced in the $600 to $1000 range. Examples across this
middle range can be found in the lines of Magellan, Garmin and Lowrance.
Travel*Star 24(tm) will compete in this range, as we expect it to have an
initial retail price under $400. But the Travel*Star 24(tm) should have several
competitive advantages over the middle market competitors:
* Travel*Star 24(tm) is easier to use than other GPS products for cars;
* Travel*Star 24(tm) provides audible prompts, whereas the competitors use
a "moving map" that requires the driver to take his eyes off the road;
* No other product in the middle price range can compute routes - the routes
must be entered by the user;
* Travel*Star 24(tm) can plan a route to 12,000 towns and cities;
* Under development is a low-cost ($49.95) regional cartridge that can be
added to Travel*Star 24(tm) to provide block-to-block navigation;
* Travel*Star 24(tm) incorporates Ultradata's proprietary data compression
technology to provide directions to over 200,000 services, a functionality
for which the competition offers nothing comparable; and
* Door-to-door, turn-by-turn directions from one address to another can be
downloaded from a website through a PC to the Travel*Star 24(tm) as an
added capability designed into the unit.
The Travel*Star 24(tm) can easily fit into a briefcase or purse; so it is
portable to any rental vehicle. Beta testing has been ongoing since December
2000, and we shipped the first production units in the first quarter of 2001.
At that time we determined that additional beta testing was required. Full
production and market introduction is planned for the second quarter of 2002.
Travel*Star 24(tm) has taken much longer to complete than originally
planned because the tasks and approach were much more difficult than
anticipated. Nonetheless, Management feels that the result is a product that
outstrips the competition in performance for the price. This assessment is
derived from discussions with contacts in the retail markets at trade shows
and elsewhere. We are, therefore, anticipating a positive reception when the
product finally reaches the market in 2002.
Patents
We hold two additional patents that have potential utility in the GPS
market. Patent 5,943,653 was awarded in August, 1999 and covers the delivery
of electronic coupons in a handheld computer for discounts of services. The
technology can be combined with the GPS locational function to cause time and
site-specific coupons to be delivered to the driver offering, for example, a
discount at the upcoming hotel. We would, of course, receive a fee for each
customer that the hotel gained in this fashion.
The other related patent, which was awarded in May of 1999, covers a method
of integrating a GPS receiver into a radar detection device. By use of this
patented technology, it becomes practical to eliminate many false radar
detection alarms, as well as to provide audible warnings of speed zones.
Internet-Based Navigation
The Rand McNally Triplink(tm)
In the latter half of 2001 we began marketing, in joint venture with Rand
McNally, an Internet appliance that provides textual driving directions
downloaded from the Rand McNally Website. Door-to-door driving directions to
and from a multitude of locations can be downloaded and stored in the handheld
unit, and later displayed by the unit one segment at a time, as needed. New
data can displace old data any time the unit is reconnected to the computer.
Thus, prior to each trip, the user can update his unit.
The premium unit in our TRIPLINK(tm) product line, the Rand McNally
TRIPLINK(tm), includes the ROAD WHIZ(tm) Interstate services database in pre-
programmed memory as well as the download capability. The other unit in this
line, the Rand McNally POCKET TRIPLINK(tm), is smaller and simpler, as it
contains only the driving directions. This product family provides a low-cost,
easy-to-use Internet appliance for Internet-connected computer users who
travel.
Sales of these products in 2001 fell far short of our expectations. After
discussions with Rand McNally, we determined that a price reduction was called
for. With TripLink now reduced in price to a point at which we can still
achieve good margins, sales are beginning to accelerate.
Initial pricing met with significant sales resistance. However, with
TripLink reduced in price, sales began to accelerate.
CarPad Product
This product combines the features of a TripLink with those of a personal
digital assistant (PDA). The unit is designed to be mounted on the driver's
visor and has a large-format display for easy reading at a glance. As with
TripLink, door-to-door directions can be downloaded from a PC into the unit
prior to departure. PDA organizer functions include addresses and phone
numbers, "to-do" lists, and appointments with reminder alarms. Development
of the product has been completed and market tests are being implemented in
various venues to assess its potential market performance before production
go-ahead. The product is expected to sell at approximately $50 retail.
GPS/Internet Auto Navigation and Tracking System
For some time we have been planning an effort to exploit the synergy
between the communications capabilities of the Internet and the locational
capabilities of a GPS antenna. If and when the capital resources become
available, we expect to commence development of a GPS/Internet auto navigation
and tracking system. The utility of the product will be to create a rich link
between the driver and a stationary source of communications, be it a family
member on a home PC or a hotel chain soliciting the driver's business.
We plan to modify the Travel*Star 24(tm) to incorporate a cellular
transceiver into the existing housing. Information in the vehicle would
originate in and be displayed on the Travel*Star 24(tm), which has a four-
line text display and a menu-driven "soft key" user interface. The
Travel*Star 24(tm) also has a built-in GPS receiver, and can generate the
necessary geo-coordinates to identify the vehicle's location. The vehicle's
identity, its geo-coordinates, and any outgoing messages would be passed to
the cellular transceiver for broadcast to the local phone cell, then
transferred via the Internet to the "Home Base" PC.
At the "Home Base", mapping software would be installed, which can
translate the geo-coordinates into a position display on a map. The person
at home could thus track the location and progress of the vehicle, using the
connectivity provided by the Internet. The same "Windows"-based software can
receive and display incoming messages, and generate pre-formatted outbound
messages and position queries. Similarly, pre-formatted messages can be sent
from the vehicle to the Internet site, where the messages are available to
friends and family.
The GPS/Internet System is in the planning stage only. There are a
number of technical tasks required to make the system operational, and we
have no certainty that we can accomplish these tasks. We will also require
additional capital resources or partners before we can undertake this project
in earnest.
Research and Development
Ultradata performs ongoing research and development, seeking to improve
existing products and to develop new products. These activities are primarily
conducted at our corporate headquarters, although we periodically engage
outside computer system design consultants to expedite the completion of the
development and test stages.
In 2001, the Company incurred $360,686 in research and development costs
compared to $371,554 in 2000. Research activities for 2001 were primarily
focused on continued development of Travel*Star 24(tm) and the CarPad products.
Employees
The Company currently has 9 full-time employees, including four officers,
all of whom are located at the Company's headquarters in St. Louis, Missouri.
The Company employs three people in sales, customer service and shipping, one
person in database research, three people in executive management and
administration, one person in product development, and one person in inventory
management. None of the Company's employees belong to a collective bargaining
union. In addition, a number of part-time consultants are retained for database
research, website development and maintenance, and software development. The
Company has not experienced a work stoppage and believes that its employee
relations are good.
Item 2. PROPERTIES
Our headquarters, principal administrative offices, and research and
development facilities are located in approximately 5,000 square feet of
leased office space in an industrial building located at 1240 Dielman
Industrial Court, St. Louis, Missouri. Approximately 2,000 square feet is
temporary warehouse space leased month to month. The Company reduced the
space occupied when its previous lease expired October 31, 2001 from 12,500
square feet to the 7,000 square feet identified above. The Company pays a
monthly rent plus 31% of all building expenses under a new lease that expires
October 31, 2003. The Company maintains no manufacturing operations on site
and employs outside contractors to perform all of its manufacturing
requirements.
Aggregate rental expense totaled $107,502 for 2001, compared to $109,678 in
2000. The Company believes that its facilities are adequate for the Company's
present and foreseeable requirements.
Item 3. LEGAL PROCEEDINGS
Legal proceedings have been filed by the Company against SmartTime to
recover funds loaned that SmartTime has refused to repay. These papers have
been served and court proceedings are pending to decide the outcome of the
dispute. SmartTime has filed a counter suit alleging breach of contract by
the Company. In addition, the Company has submitted for arbitration a
complaint of excessive fees charged by the previous auditors, BDO Seidman.
Also the Kmart bankruptcy has made it necessary to institute legal proceedings
to collect the $247,623 receivable now due as a result of sales to Kmart in
the fourth quarter of 2001 prior to its filing Chapter 11.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on November 7, 2001. At the
meeting, the shareholders elected the Board of Directors as follows:
Shares For Shares Against Abstentions
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Monte Ross 3,015,837 43,721 -
Ernest Clarke 3,017,914 41,644 -
Mark Peterson 3,017,914 41,644 -
Donald Rattner 3,017,914 41,644 -
H. Krollfeifer, Jr. 3,017,914 41,644 -
The Shareholders also ratified the appointment of Weinberg & Company, P.A.
as the Company's auditors by a vote of 3,041,227 shares for, 13,894 shares
against, and 3,385 abstentions.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The following table sets forth the prices for the Company's Common Stock
(OTC Bulletin Board: ULTR) for the eight quarters starting January 1, 2000
and ending December 31, 2001. Until June 27, 2001, the Company's stock was
listed on the NASDAQ SmallCap Market. From that date until August 28, 2001,
the stock was quoted on the Pink Sheets. Since August 29, 2001 the Common
Stock has been quoted on the OTC Bulletin Board.
Bid
High Low
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Quarter Ending
March 31, 2000 7.00 4.75
June 30, 2000 2.63 2.50
September 30, 2000 1.75 1.75
December 31, 2000 1.38 1.06
March 31, 2001 1.687 0.75
June 30, 2001 1.25 0.50
September 30, 2001 0.51 0.19
December 31, 2001 0.46 0.13
(b) Shareholders
At March 12, 2002, there were 109 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's
line of credit agreement precludes the payment of cash dividends. The
financing received from the sale of preferred stock in May of 2000 involved
the computation of imputed dividends provided in the form of warrants, options,
and stock as inducements associated with the preferred stock offering. These
dividends do not affect the earnings from operations of the Company but are
included in the earnings-per-share computation on the Income Statement. The
Company intends to retain any future earnings for the operation and expansion
of the business. Any decision as to future payment of dividends will depend
on the available earnings, the capital requirements of the Company, its general
financial condition, and other factors deemed pertinent by the Board of
Directors.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Overview
One factor has been dominant in causing our poor financial results over
the past two years: our inability to sustain the high level of sales of the
hand-held products at upscale retail prices that we realized in 1996 and 1997.
Beginning in 1998, we have been transforming our marketing efforts away from
a primary focus on the "upscale" market. Initially we devoted a large portion
of our effort to direct marketing through magazines, mailers and bill inserts,
as well as by televised appearances on the QVC Shopping Network. This
strategy generally proved to be a mistake, as the cost of the marketing effort
often exceeded the revenue we obtained from it.
In 1999, therefore, we again shifted our focus, this time to mass market
retailing, of the sort you associate with Kmart, Wal-Mart, and Target Stores,
to name three of our new mass market customers. The reduction of our prices
to mass market levels required major adjustments to our cost structure. So
during the second half of 1999 and into 2000 we made the cuts and performed
the streamlining. That effort, however, was frustrated, in part, by the
worldwide shortage in read-only memory (ROM) chips during 2000, the result of
which was a $767,400 increase in our payments for chips. Nevertheless, our
overall results for 2000 indicated that we were heading in the right direction,
as we significantly reduced operating loss despite the increased chip expense.
Our plan, therefore, was to continue to pursue mass market outlets for our
handheld travel computers, with the expectation the reorientation of our
marketing focus and the ancillary restructuring of our cost structure will
eventually stabilize our handheld travel computers as a profitable line of
business. Once we have re-established the handheld units as a stable
foundation for our business, we can then devote our financial resources to
our development projects without fear of being left without adequate resources
to sustain operations.
In 2001, however, sales in the poor economy became difficult. Our major
customer in 2000 had excess inventory that was not eliminated until the end
of 2001. Other customers were nervous about the holiday season and acquired
less product inventory than they would have otherwise. The failure to achieve
another successful product line besides the Road Whiz line also constrained
sales. Specifically, the delay of Travel*Star 24(tm) has been a serious issue
for the Company, as the development effort places demands on our financial and
managerial resources while not producing revenues. Completion of
Travel*Star 24(tm) and resultant sales along with Road Whiz product sales
should elevate sales over 2001 levels.
Results of Operations
Sales. Sales for 2001 decreased by $4,597,223, or 73.0%, to $1,704,013
from 6,301,236 in 2001. Over 87% of 2001 sales were attributable to mass-
market retailers, compared with 92% in 2000. However, the major customer in
2000 was a minor customer in 2001 due to excess inventory procured in 2000.
This fact, together with the lack of sales from any new product line due to
the delay in Travel*Star 24(tm) development, led to significantly lower sales.
Our plan is to continue to pursue mass-market outlets for both our traditional
products as well as new products just reaching market in 2002, and so grow
sales in this fashion. To this end, as of April 2001 our customer list
encompassed 5,000 stores carrying the Ultradata products. Sales in 2002
should also be aided by our Triplink(tm) joint venture with Rand McNally,
Travel*Star 24(tm), and CarPad products. On the other hand, the fact that a
small number of customers accounts for nearly all of our sales puts us at the
risk that loss of a customer could reduce or reverse sales growth.
Gross Profit. In spite of improvements in the efficiency of manufacturing
operations, our gross margin in 2001 fell to $113,833, or 6.7% of sales,
compared to $1,784,266, or 28.3% of sales in 2000, resulting in a $1,670,433
reduction in gross profit. The reasons for the low margins were:
* Materials costs were still at 54% of sales, compared to 64% in 2000,
partially due to the residual effects of the worldwide shortage of read-
only memory (ROM) chips that affected gross margin significantly in 2000.
Parts inventories acquired at the higher prices in 2000 were still being
used in products sold in 2001.
* The write-off of $446,110 in obsolete inventory, primarily in the third
quarter, over and above our allocation of $11,000 per month. Most of this
write-down consists of GPS engines. In addition, obsolete Ultrafinder
units and Road Whiz units of an earlier design, as well as parts no longer
used, were included in the write-off.
Chip prices for 2002 are expected to return to 1999 levels and no more
significant obsolescence write-off is expected in 2002. Had material costs
been 40% of sales and write-off levels been limited to the $11,000-per-month
allocation, gross margin would have been a respectable 44%. Therefore, we
expect a gross margin approaching 40% to be achievable in 2002.
Selling Expenses. During 2001, we incurred $534,593, or 31.3% of sales,
in advertising, promotion, and marketing program expenses, as compared to
$612,428, or 9.7% of sales, in 2000. The result was an overall reduction of
about $200,000 in selling expense, but an increase in the percentage because
of the low sales on the year and the fixed marketing costs. Our 2002 plan is
geared to achieve selling costs of 10%-13% through cost control and increased
base.
Research and Development Expenses. Our research and development expense
in 2001 was not significantly different than in 2000. We began the
amortization of the Travel*Star 24(tm) software development tools in March of
2001 which somewhat offset the effect of R&D staff reductions.
General and Administrative Expenses. Our G&A expenses in 2001 were not
significantly different than in 2000. Legal and auditing expenses were up
due to the extraordinary costs arising from the withdrawal of our original
auditors after performing most of the audit work for 2001. Salaries and other
compensation were reduced due to the personnel reductions in September.
Other Expense. During 2001, the Company's 22.6% interest in Talon
Research and Development Company, Ltd. ("Talon") was sold. The net gain on
the investment was valued at $265,131. The entire $930,000 in cash proceeds
from the sale went to reduce our long-term debt arising from the conversion
of our outstanding preferred shares into convertible notes. The advertising
credits purchased in 1999 were written off because the company holding them
has filed for bankruptcy. We also wrote down the SmartTime debt pending the
outcome of legal proceedings against SmartTime. These transactions coupled
with other pluses and minuses of interest earned on our cash and interest
paid on our debt netted out to ($184,138) in other expense.
Net Loss. Our net loss for 2001 was ($3,573,337), or ($1.10) per basic
and diluted share when $261,325 of preferred stock imputed dividends are taken
into account, compared with ($3,169,128), or (1.00) per basic and diluted
share in 2000 including $1,456,625 of imputed dividends.
LIQUIDITY AND CAPITAL RESOURCES
Our operating losses over the past three years have had an adverse effect
on our working capital. Nevertheless, at December 31, 2001 we had over $1.4
million in working capital and have improved that figure with sales in early
2002. Management feels that the Company has sufficient working capital to
sustain our operations and introduce our new products, provided that we can
realize our sales projections in our handheld business through our strategy
of developing mass-market customers and opening new distribution channels.
Our long-term liabilities were increased during 2001 due to the conversion
of most of our preferred shares to convertible debt. The principal amount of
the debt was then reduced as a result of the sale of the Company's interest
in Talon, such that at year's end the long-term debt was $616,007.
Because the Company has stabilized the cash requirements of our handheld
business, its working capital and cash reserves appear to be sufficient to
sustain over the coming year the level of business during 2001. In July 2001,
Management obtained a $500,000 credit facility with KBK Financial, an asset-
based lender, to finance production for purchase orders expected for the
fourth quarter. The facility was not utilized in 2001. Liquidity requirements
to fund the late-quarter production in 2002 are expected to be met by the
credit facility from KBK Financial, if necessary.
Impact of Accounting Pronouncements
The Financial Accounting Standards Board has recently issued several new
Statements of Financial Accounting Standards. SFAS No. 141, "Business
Combinations" supersedes APB Opinion No. 16 and various related pronouncements.
Pursuant to the new guidance in SFAS No. 141, all business combinations must
be accounted for under the purchase method of accounting; the pooling-of-
interests method is no longer permitted. SFAS No. 141 also establishes new
rules concerning the recognition of goodwill and other intangible assets
arising in a purchase business combination and requires disclosure of more
information concerning a business combination in the period in which it is
completed. This statement is generally effective for business combinations
initiated on or after July 1, 2001.
SFAS No. 142, "Goodwill and Other Intangible Assets" supercedes APB
Opinion No. 17 and related interpretations. SFAS No. 142 establishes new rules
on accounting for the acquisition of intangible assets not acquired in a
business combination and the manner in which goodwill and all other intangibles
should be accounted for subsequent to their initial recognition in a business
combination accounted for under SFAS No. 141. Under SFAS No. 142, intangible
assets should be recorded at fair value. Intangible assets with finite useful
lives should be amortized over such period and those with indefinite lives
should not be amortized. All intangible assets being amortized as well as
those that are not, are both subject to review for potential impairment under
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. " SFAS No. 142 also requires that
goodwill arising in a business combination should not be amortized but is
subject to impairment testing at the reporting unit level to which the goodwill
was assigned to at the date of the business combination.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001 and must be applied as of the beginning of such year to all goodwill and
other intangible assets that have already been recorded in the balance sheet
as of the first day in which SFAS No. 142 is initially applied, regardless of
when such assets were acquired. Goodwill acquired in a business combination
whose acquisition date is on or after July 1, 2001, should not be amortized,
but should be reviewed for impairment pursuant to SFAS No. 121, even though
SFAS No. 142 has not yet been adopted. However, previously acquired goodwill
should continue to be amortized until SFAS No. 142 is first adopted.
SFAS No. 143 "Accounting for Asset Retirement Obligations" establishes
standards for the initial measurement and subsequent accounting for obligations
associated with the sale, abandonment, or other type of disposal of long-lived
tangible assets arising from the acquisition, construction, or development
and/or normal operation of such assets. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002, with earlier application encouraged.
The adoption of these pronouncements will not have a material effect on
the Company's financial position or results of operations.
Item 7. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Item 8. FINANCIAL STATEMENTS
The financial statements of Ultradata Systems, Incorporated, together
with notes and the Report of Independent Certified Public Accountants, are
set forth immediately following Item 13 of this Form 10-KSB.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table lists certain information regarding the officers and
directors of the Company as of March 28, 2002:
NAME AGE POSITION
-------------------------------------------------------------------------------
Monte Ross 69 Chief Executive Officer, Director
Ernest Clarke 62 President & Chief Financial Officer, Director
Mark L. Peterson 45 Vice President-Engineering, Secretary,
Director
Duane Crofts 64 Vice President-Sales & Advanced Products
Donald Rattner 68 Director
H. Krollfeifer, Jr. 61 Director
Directors hold office until the annual meeting of the Company's
stockholders and the election and qualification of their successors. Officers
hold office, subject to removal at any time by the Board, until the meeting of
directors immediately following the annual meeting of stockholders and until
their successors are appointed and qualified.
Background of Directors and Executive Officers:
Monte Ross founded the Company in 1986 and has served as its Chief
Executive Officer and Chairman since inception. He also served as President
until April 2001. For over 20 years prior to founding the Company, Mr. Ross
was employed by McDonnell Douglas Corporation (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.
Duane Crofts joined the Company as Vice President - Advanced Products in
1994. Prior to joining the Company, Mr. Crofts served for over five years as
a Program Director with McDonnell Douglas Corporation. In that role he was
responsible for engineering management, production management, subcontract
management, and program management. Mr. Crofts most recently was manager of
a multi-million dollar electro-optic development program. Mr. Crofts was
awarded a Bachelor of Science degree in Mechanical Engineering by the
University of Missouri at Rolla.
Donald Rattner joined the Company in 1999 to serve as a member of the
Board of Directors. Mr. Rattner is a member/partner in BrookWeiner, LLC, a
Chicago-based accounting firm, and a member of the American Institute of
Certified Public Accountants and the Illinois CPA Society. He has served on
the boards of several corporations.
H. Krollfeifer, Jr. joined the Company in 2000 to serve as a member of
the Board of Directors. Mr. Krollfeifer is retired after 35 years in the
equipment leasing and financing industry. He has worked closely with The
American Association of Equipment Lessors (AAEL), an industry trade group for
which he served as a speaker, lecturer, and teacher for various educational
programs starting in 1986. That organization evolved into The Equipment
Leasing Association of America (ELA), and Mr. Krollfeifer was added to their
training faculty in January 2000 where he continues to serve on a part-time
basis.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
None of the directors, officers, or beneficial owners of more than 10%
of Ultradata's common stock failed to file on a timely basis reports required
during 2000 by Section 16(a) of the Exchange Act.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by,
or paid by Ultradata to 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, 2001 exceeded $100,000.
Annual Long-term
Compensation Compensation
Name & Position Year Salary Bonus Other (1) Options
Monte Ross, 2001 $156,578 $ - $ -
Chief Executive Officer 2000 $156,278 $ - $ 6,000 (2)
1999 $142,588 $ - $ 6,000 (3)
Ernest Clarke 2001 $107,691 $ - $ -
President 2000 $102,275
1999 $ 87,888
Mark Peterson 2001 $100,601 $ - $ -
Vice President-Eng'g 2000 $103,009
1999 $ 83,381
(1) Included premium payments for a life insurance policy on Mr. Ross,
with his estate as beneficiary, discontinued in 2001.
(2) During 2000 the Board's Stock Option Committee awarded Mr. Ross options
to purchase an additional 7,000 shares of Common Stock at an exercise
price of $1.50.
(3) During 1999 the Board's Stock Option Committee awarded Mr. Ross options
to purchase an additional 10,000 shares of Common Stock at an exercise
price of $2.00.
Employment Agreements; Royalty Agreement
Messrs. Ross, Peterson, and Clarke have individual employment agreements
with Ultradata beginning September 1, 1994. Except as noted herein, the terms
of the employment agreements are substantially identical. The agreements were
extended in 1997 by action of the Board of Directors to October 31, 2000, and
again in 2000 to October 31, 2003. The agreements provide for base salaries,
which are adjusted annually by the Board of Directors. If the majority of the
Board cannot agree as to a level of salary adjustment, the salary will increase
by 10% for Mr. Clarke and Mr. Peterson and 5% for Mr. Ross. The employment
agreements restrict each officer from competing with Ultradata for one year
after the termination of his employment unless that employee establishes that
his employment by a competitor will not involve the use of any information
considered confidential by Ultradata.
Leonard Missler, who was Vice President - Software Development until
August 2001, has a Royalty Agreement with Ultradata dated September 14, 1989.
The Agreement terminates on September 13, 2009. Mr. Missler specifies in the
Agreement that he will keep confidential all of Ultradata's information
regarding its technology and products. In exchange, the Agreement provides
that Ultradata will pay Mr. Missler a royalty equal to 1% of net sales of
Ultradata's ROAD WHIZ( products and 0.5% of net sales of other products
incorporating the ROAD WHIZ( database. During the two years ended December
31, 2001 and 2000, royalty expense totaling $15,121 and $60,645, respectively,
was recognized.
STOCK OPTION AWARDS
The following table sets forth certain information regarding the stock
options held by the Company's Chief Executive Officer on December 31, 2001.
No options were granted during the year ended December 31, 2001:
AGGREGATED FISCAL YEAR OPTION VALUES
Number of securities
underlying Value of unexercised
Unexercised options at in-the-money Options at
fiscal Year-end (#)(All fiscal year end
Name Exercisable) (all exercisable)
-------------------------------------------------------------------------------
Monte Ross 80,500 $ -
Stock Option Plans
We have two stock option plans: the 1994 Incentive Stock Option Plan and
the 1996 Incentive Stock Option Plan. The material terms of the Plans are
identical. Our shareholders have approved the issuance of options for
500,000 shares under the Plans. So far, options for 348,548 shares have been
issued under the Plans, not including options that were issued and then
terminated when the employees left Ultradata. Of the 348,548, options have
been exercised to purchase 105,123 shares of common stock. Options to
purchase 243,425 remain outstanding.
The Plans give the Board of Directors the authority to grant stock
options. All of our employees, as well as our Directors and consultants who
perform services for us are eligible to receive options. Some of these options
may qualify under Section 422 of the Internal Revenue Code, which gives tax
advantages to options that meet the qualifications. Stock options designed
to qualify under Section 422 are referred to as "incentive stock options.
" All other stock options are referred to as "non-qualified stock options."
The most important provisions of the Plans are the following:
* The Board of Directors will determine the number of shares that an
employee may purchase and all other terms and conditions of each option.
* No option will have a term of more than 10 years.
* Every incentive stock option granted to a shareholder who owns 10% or
more of the voting power in Ultradata, will expire not later than five
years after the grant.
* The employee who holds an option may not transfer it, except by will or
through the laws of inheritance.
* The Plan limits the Board's authority to grant incentive stock options to
a single individual by requiring that the aggregate exercise price of all
stock options, incentive and otherwise, vesting in one employee in any
single calendar year may not exceed $100,000.
* There is no limit on vesting of non-qualified stock options.
* The exercise price for non-qualified stock options may not be less than
eighty-five percent (85%) of the fair market value of the shares on the
date of grant.
* The exercise price of an incentive stock option must be at least 100% of
the market price of a common share on the date the stock option is granted.
* The exercise price of an incentive stock option granted to an employee
who owns 10% or more of the voting power in Ultradata may not be less
than 110% of the market price of a common share on the date the stock
option is granted.
* The Board may permit an employee to exercise an option and make payment
by giving a personal note.
During 2001 the Company issued no additional incentive stock options.
The following officers have received a cumulative total number of options
shown below since the inception of the plans at the weighted-average exercise
price given:
Number of Average
Name Shares Exercise Price
---------------------------------------------------------------------------
Monte Ross 80,500 $ 3.46
Mark L. Peterson 62,000 $ 3.13
Ernest Clarke 38,500 $ 3.32
Duane Crofts 30,000 $ 3.28
REMUNERATION OF DIRECTORS
Outside Directors receive $500 per meeting and are reimbursed for out-of-
pocket expenses incurred on the Company's behalf.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to us with respect to
the beneficial ownership of our common stock by the following:
* each shareholder known by us to own beneficially more than 5% of our
common stock;
* Monte Ross;
* each of our directors; and
* all directors and executive officers as a group.
There are 3,372,179 shares of our common stock outstanding. Except as
otherwise indicated, we believe that the beneficial owners of the common stock
listed below have sole voting power and investment power with respect to their
shares, subject to community property laws where applicable. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. In computing the number of shares beneficially owned by
a person and the percent ownership of that person, we include:
* shares of common stock subject to options or warrants held by that person
that are currently exercisable or will become exercisable within 60 days,
and
* shares of common stock that would be issued today if the Senior
Subordinated Convertible Notes were converted today.
We do not, however, include these "issuable" shares in the outstanding
shares when we compute the percent ownership of any other person.
Name and Amount and
Address of Nature of Percentage
Beneficial Beneficial of Outstanding
Owner (1) Ownership Shares (8)
----------------------------------------------------------------
Monte Ross 409,500(2) 11.86%
Mark L. Peterson 162,282(3) 4.73%
Ernest Clarke 169,352(4) 4.97%
Donald Rattner 29,000 0.86%
H. Krollfeifer, Jr. 10,000 0.30%
All officers and
directors as a
group (6 persons) 819,373(5) 22.87%
BH Capital
Investments, L.P. 268,564(6) 7.38%
175 Bloor St. East,
7th Floor
Toronto, Ontario
Canada M4W3R8
Excalibur Limited
Partnership 268,564(6) 7.38%
33 Prince Arthur Avenue
Toronto, Ontario
Canada M5R1B2
Influence Incubator,
LLC 300,000(7) 8.53%
9666 Olive Street Road
St. Louis, Missouri 63132
(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 199,000 shares owned by Monte Ross, 100,000 shares owned by
Harriet Ross, and 30,000 shares owned by the Monte Ross and Harriet J.
Ross Living Trust. Mr. Ross and his wife share investment control over
the trust; they may revoke it or amend it at will; and they receive all
income from the trust during the life of either of them. Also includes
options to purchase 80,500 shares.
(3) Includes 91,964 shares owned by the Mark L. Peterson and Ryia Peterson
Living Trust and 8,318 owned by Ryia Peterson. Mr. Peterson and his wife
share investment control over the trust; they may revoke it or amend it
at will; and they receive all income from the trust during the life of
either of them. Also includes options for 62,000 shares.
(4) Includes options for 38,500 shares.
(5) Includes options for 211,000 shares.
(6) Represents for each shareholder: (a) 29,311 shares of Common Stock which
could have been acquired on March 28, 2002 on conversion of Senior
Subordinated Convertible Notes (conversion being limited to 28% of the
trading volume for the 66 trading days preceding conversion), plus (b)
warrants to purchase 239,253 shares.
(7) Represents options to purchase 300,000 shares.
(8) In determining the percentage of outstanding shares, all presently
exercisable options owned by the shareholder or the group are treated as
having been exercised.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
Item 13. EXHIBITS, LIST, AND REPORTS
(a) Financial Statements
List of Financial Statements Under Item 7 of this Report:
Report of Independent Certified Public Accountants
Balance Sheet as of December 31, 2001.
Statements of Operations for each year in the two-year period ended
December 31, 2001.
Statements of Stockholders' Equity for each year in the two-year
period ended December 31, 2001.
Statements of Cash Flows for each year in the two-year period ended
December 31, 2001.
Notes to Financial Statements for each year in the two-year period
ended December 31, 2001.
(b) Exhibits Index
Exhibit Number
3-a. Articles of Incorporation, and 1989 amendment. (1)
3-a(1) Amendment to Articles of Incorporation dated March 4, 1991,
March 22, 1994, and November 18, 1994. (1)
3-a(2) Certification of Correction of Articles of Incorporation. (1)
3-a(3) Amendment to Articles of Incorporation dated July 26, 1996 (2)
3-b. By-laws. (1)
4-a. Specimen of Common Stock Certificate. (1)
10-a. Lease dated May 23, 1990, as amended on November 31, 1993, for
premises at 9375 Dielman Industrial Drive, St. Louis, Missouri.(1)
10-a(1) Lease Addendum dated October 17, 1995, for premises at 9375 Dielman
Industrial Drive, St. Louis, Missouri.(1)
10-b. 1994 Stock Option Plan.(1)
10-c Amended and Restated 1996 Stock Option Plan - filed as an Exhibit to
the Company's Registration Statement on Form S-8 (333-32098) and
incorporated herein by reference.
10-d. Employment Agreement with Monte Ross.(1)
10-d(1) Extended Employment Agreement between the Company and Monte Ross (2)
10-e. Employment Agreement with Mark L. Peterson.(1)
10-e(1) Extended Employment Agreement between the Company and Mark L.
Peterson (2)
10-f. Employment Agreement with Ernest Clarke.(1)
10-f(1) Extended Employment Agreement between the Company and Ernest Clarke (2)
10-g. Royalty Agreement dated September 14, 1989, between the Company and
Leonard Missler.(1)
10-g(1) Modification Agreement dated November 4, 1995, to Royalty Agreement
dated September 14, 1989, between the Company and Leonard Missler. (1)
10-h 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 Exchange Agreement dated August 6, 2001 relating to the exchange of
Preferred Stock for Convertible Notes - filed as an exhibit to the
Company's Current Report on Form 8-K dated August 13, 2001 and
incorporated herein by reference.
21. Subsidiaries - None.
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 (33-85218 C) and incorporated herein by reference.
(2) Previously filed as an Exhibit to Form 10-KSB for the year ended December
31, 1997, and incorporated herein by reference.
(3) Previously filed as an Exhibit to Form 10-QSB for the quarter ended March
31, 2000, and incorporated herein by reference.
(4) Filed herewith.
(c) Reports on Form 8-K
Report dated December 20, 2001 concerning the sale of the Company's
interest in Talon
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of:
Ultradata Systems, Incorporated
We have audited the accompanying balance sheet of Ultradata Systems,
Incorporated as of December 31, 2001 and the related statements of operations
and comprehensive loss, stockholders' equity and cash flows for the years
ended December 31, 2001 and 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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,
Incorporated as of December 31, 2001 and the results of its operations and
its cash flows for the years ended December 31, 2001 and 2000 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 20 to the
financial statements, the Company has had recurring losses and a loss from
current operations of $3,312,012 and a negative cash flow from operations of
$2,147,625. These matters raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
February 19, 2002
ULTRADATA SYSTEMS, INCORPORATED
BALANCE SHEET
DECEMBER 31, 2001
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 164,682
Trade accounts receivable, net of
allowance for doubtful accounts
of $365,287 376,429
Inventories, net 1,346,492
Prepaid expenses and other current assets 11,649
----------
Total Current Assets 1,899,252
PROPERTY AND EQUIPMENT - NET 413,270
---------
OTHER ASSETS
Notes receivable - long term 225,394
Other assets 5,444
---------
Total Other Assets 230,838
---------
TOTAL ASSETS $ 2,543,360
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 96,133
Accrued expenses and other liabilities 272,146
Notes payable - current 110,991
---------
Total Current Liabilities 479,270
---------
LONG TERM LIABILITIES
Notes payable - long term 616,007
---------
TOTAL LIABILITIES 1,095,277
---------
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, 16 shares
outstanding with a stated value of $1,000 16,000
Common stock, $0.01 par value, 10,000,000
shares authorized, 3,698,350 issued
and outstanding 36,983
Additional paid-in capital 9,573,281
Accumulated deficit (7,049,202)
Treasury stock (326,171 shares at cost) (942,311)
Notes receivable issued for purchase of
common stock (186,668)
---------
TOTAL STOCKHOLDERS' EQUITY 1,448,083
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,543,360
=========
See accompanying notes to financial statements.
ULTRADATA SYSTEMS, INCORPORATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
AS OF DECEMBER 31, 2001 AND 2000
2001 2000
------------ ------------
NET SALES $ 1,704,013 $ 6,301,236
COST OF SALES 1,590,180 4,516,970
--------- ---------
GROSS PROFIT 113,833 1,784,266
--------- ---------
OPERATING EXPENSES
Selling 534,593 612,428
General and administrative 2,346,428 2,280,439
Research and development 360,686 371,554
--------- ---------
Total Operating Expenses 3,241,707 3,264,421
--------- ---------
OPERATING LOSS (3,127,874) (1,480,155)
--------- ---------
OTHER INCOME (EXPENSE)
Interest and dividend income 63,928 179,941
Interest expense (104,699) -
Equity in gains (losses) of
unconsolidated affiliates (651) (240,337)
Gain on sale of investment 281,871 -
Impairment of investment - (225,039)
Impairment of advance to affiliate (135,480) -
Impairment of advertising credits (249,685) -
Loss on disposal of fixed assets (18,754) (8,695)
Realized gain (loss) on sale of securities (20,668) 10,601
Other, net - 51,181
--------- ---------
Total Other Income (Expense) (184,138) (232,348)
--------- ---------
LOSS BEFORE INCOME TAX EXPENSE (3,312,012) (1,712,503)
Income tax expense - -
--------- ---------
NET LOSS (3,312,012) (1,712,503)
--------- ---------
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain (loss) 48,420 (48,420)
Unrealized gain (loss) on deferred
compensation investments 13,045 (50,874)
--------- ---------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX 61,465 (99,294)
--------- ---------
COMPREHENSIVE LOSS $ (3,250,547) $ (1,811,797)
========= =========
LOSS PER SHARE
Net loss $ (3,312,012) $ (1,712,503)
Preferred stock dividends (261,325) (1,456,625)
---------- ---------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (3,573,337) $ (3,169,128)
========= =========
Loss per share - basic and diluted $ (1.10) $ (1.00)
========= =========
Weighted average shares outstanding -
basic and diluted 3,248,125 3,168,186
========= =========
See accompanying notes to financial statements.
ULTRADATA SYSTEMS, INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Notes
Receivable Other
Additional For Comprehensive
Preferred Stock Common Stock Paid-In Common Treasury Stock Income Accumulated
Shares Amount Shares Amount Capital Stock Shares Amount (Loss) Deficit Total
----------------------------------------------------------------------------------------------------------------------------------
Balance,
December
31, 1999 - $ - 3,410,000 $34,100 $9,851,894 $(197,117) 326,171 $(942,311) $ 37,829 $(2,024,687) $ 6,759,708
Exercise of
94,523 employee
stock options - - 94,523 945 313,680 - - - - - 314,625
Issuance of
common stock
for services - - 5,500 55 11,633 - - - - - 11,688
Issuance of
stock options
for Investment
in Influence
Data, LLC - - - - 55,981 - - - - - 55,981
Accrued interest
on notes
receivable issued
for purchase
of common stock - - - - - (8,702) - - - - (8,702)
Issuance of
preferred stock
net of direct
offering
costs 1,600 1,600,000 - - (359,625) - - - - - 1,240,375
Issuance of
stock options
to non-employee
for services
performed - - - - 4,503 - - - - - 4,503
Issuance of
common stock
in connection
with preferred
stock offering - - 9,563 96 (96) - - - - - -
Issuance of
preferred stock
in connection
with preferred
stock offering 16 16,000 - - (16,000) - - - - - -
Other comprehensive
loss - - - - - - - - (99,294) - (99,294)
Net loss, 2000 - - - - - - - - - (1,712,503) (1,712,503)
--------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2000 1,616 $1,616,000 3,519,586 $ 35,196 $9,861,970 $(205,819) 326,171 $(942,311) $(61,465) $(3,737,190) $ 6,566,381
Conversion of
preferred
stock to
common stock (28) (28,000) 56,118 561 27,439 - - - - - -
Redemption of
preferred
stock (164) (164,000) - - (30,950) - - - - - (194,950)
Conversion of
preferred
stock to
notes
payable (1,408)(1,408,000) - - (340,120) - - - - - (1,748,120)
Conversion of
notes payable
to common stock - - 122,646 1,226 14,869 - - - - - 16,095
Issuance of
stock options
to non-employee
for services
performed - - - - 2,544 - - - - - 2,544
Repricing of
warrants - - - - 37,529 - - - - - 37,529
Change in
notes receivable
issued to
purchase common
stock, net of
(interest) and
cash payments - - - - - 19,151 - - - - 19,151
Other comprehensive
gain - - - - - - - - 61,465 - 61,465
Net loss, 2001 - - - - - - - - - (3,312,012) (3,312,012)
--------------------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31,
2001 16 $ 16,000 3,698,350 $ 36,983 $9,573,281 $(186,668) 326,171 $(942,311) $ - $(7,049,202) $ 1,448,083
====================================================================================================================
See accompanying notes to financial statements.
ULTRADATA SYSTEMS INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,312,012) $ (1,712,503)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 235,890 226,083
Inventory reserve for obsolescence - 26,414
Equity in losses of unconsolidated
affiliates 651 240,337
Realized (gain) loss on investments (271,547) (10,601)
Non-cash compensation expense - 16,191
Bad debt expense on advances to affiliates - 122,683
Loss on impairment of advertising credits 249,685 -
Loss on impairment of loan 135,480 -
Loss on disposal of property and equipment 18,754 8,695
Provision for doubtful accounts 271,500 121,001
Loss on investment impairment - 225,039
Write-down of inventory 734,385 -
Repricing of warrants 37,530 -
Changes in assets and liabilities:
Trade accounts receivable, net 25,546 687,791
Inventories (300,622) (151,246)
Prepaid expenses and other current assets 33,874 84,053
Accounts payable (53,669) 8,106
Accrued expenses and other liabilities 53,150 (43,467)
Deferred rent (6,220) (7,464)
Deferred compensation trust liability - (29,393)
--------- ---------
Net Cash Used In Operating Activities (2,147,625) (188,281)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in affiliated company 930,000 (200,000)
Deferred compensation trust investments - (19,045)
Capital expenditures (47,574) (168,638)
Restricted cash 767,724 (356,836)
--------- ---------
Net Cash Provided By (Used In) Investing
Activities 1,650,150 (744,519)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable
preferred stock and common stock warrants - 1,240,375
Exercise of employee stock options - 315,274
Payments to preferred stockholders (164,000) -
Payments on notes payable (1,005,027) -
Dividends paid to preferred stockholders (30,950) -
Payments received on subscriptions, net 19,151 -
--------- ---------
Net Cash (Used In) Provided By Financing
Activities (1,180,826) 1,555,649
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,678,301) 622,849
CASH AND CASH EQUIVALENTS-BEGINNING OF YEAR 1,842,983 1,220,134
--------- ---------
CASH AND CASH EQUIVALENTS-END OF YEAR $ 164,682 $ 1,842,983
========= =========
Interest paid during the year $ 65,492 $ -
========= =========
Taxes paid during the year $ - $ -
========= =========
See accompanying notes to financial statements.
SUPPLEMENTAL DISCLOSURE OF NON-CASH AND FINANCING ACTIVITIES:
During 2001, the Company issued to a consultant options with a fair value of
$2,544 to purchase up to 2,575 shares of common stock.
During 2001, the Company received $300,000 of long-term notes receivable,
having a net present value of $225,394, as part of the sale of the Company's
investment in Talon.
During 2001, 28 shares of preferred stock, having a stated value of $28,000,
were converted to 56,118 shares of common stock.
During 2001, 1,408 shares of preferred stock, having a stated value of
$1,408,000, were converted to notes payable. Additionally, for the preferred
stock converted to notes payable, an aggregate amount of $340,120 of accrued
dividends from 2001 and 2000 were converted to notes payable.
During 2001, a portion of the notes payable in the amount of $16,095 was
converted to 122,646 shares of common stock.
During 2001, the Rabbi trust that maintained deferred compensation investment
funds was liquidated and the proceeds of $76,982 were distributed directly to
the beneficiary.
During 2001, accounts payable was reduced by $14,520 with a corresponding
reduction in advances to affiliates.
During 2000, the Company issued 300,000 common stock options to Influence
Data, LLC with an aggregate fair value of $55,982.
ULTRADATA SYSTEMS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Operations
Ultradata Systems, Inc, (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, Inc., 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 and through independent sales representatives, mail order catalogs
and mass market retailers.
(B) Basis of Presentation
The financial statements include the equity in earnings of unconsolidated
affiliates Talon Research & Development Co., Ltd. (Talon) of Auckland, New
Zealand, and Influence Data, LLC. The investments in Talon and Influence
Data, LLC are accounted for using the equity method. The Company had a 33.3%
interest in Influence Data, LLC and a 22.6% interest in Talon (See Note 6).
(C) 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 adjustments by management,
with consideration given to materiality. Actual results could vary from those
estimates.
(D) Cash and Cash Equivalents
For financial statement presentation purposes, cash and cash equivalents
include deposits with initial maturities of less than three months, including
money market accounts with investments in marketable securities.
(E) Revenue Recognition
Net sales are recognized when products are shipped. The Company has established
programs, which, under specified conditions, enable customers to return
product. The Company establishes liabilities for estimated returns at time of
shipment. In addition, accruals for customer discounts and rebates are recorded
when revenues are recognized.
(F) Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Provision for potentially obsolete
or slow moving inventory is made based on management's analysis of inventory
levels and future sales forecasts.
(G) Property and Equipment
Property and equipment are stated at cost. Maintenance and repairs are
expensed as incurred. Major improvements, which materially extend useful
lives, are capitalized. The Company capitalizes certain software development
costs in accordance with the American Institute of Certified Public Accountants
Statement of Position No. 98-1, "Accounting for the Costs of Software Developed
or Obtained for Internal Use." Costs incurred for the Company's own personnel
who are directly associated with software development are capitalized.
Capitalized software costs will be amortized over an estimated useful life of
five years. Depreciation is provided on the straight-line basis over the
estimated useful lives of the assets, generally five years. Leasehold
improvements are amortized over the shorter of the term of the related lease
or their useful life. The Company continually reviews property and equipment
to determine that the carrying values are not impaired.
(H) Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" long-lived assets and certain identifiable intangible assets
held and used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For purposes of evaluating the recoverability of long-lived
assets, the recoverability test is performed using undiscounted net cash flows
related to the long-lived assets. The Company reviews long-lived assets to
determine that carrying values are not impaired. During 2000, the Company
recognized an impairment loss of $225,039 on its investment in Influence Data,
LLC. During 2001, the Company recognized an impairment on advertising credits
(See (J) below).
(I) Operating Lease
Lease expense on the corporate facilities is recognized on a straight-line
basis over the primary term of the lease. The current lease does not provide
for accelerating rent over the lease term. Accordingly, no deferred rent has
been recorded in the Company's balance sheet.
(J) Advertising
The Company expenses the production costs of advertising the first time
advertising takes place, except for direct response advertising, which is
capitalized and amortized over its expected period of future benefits. The
Company accounts for barter transactions under Accounting Principles Board No.
29 "Accounting for Nonmonetary Transactions." During 1999, the Company
exchanged slow moving inventory having a fair value of $249,685 after a write-
down for obsolescence, for advertising credits. The Company did not use any
of these advertising credits and as such has not recorded any advertising
expenses related to these credits during the year ended December 31, 2001 and
2000. During 2001, the entity that offered the advertising credits filed for
bankruptcy. Thus, the Company recognized an impairment loss on the unused
advertising credits which had been included in prepaid expenses ($187,264) and
other non current assets ($62,421) for an aggregate loss of $249,685.
Advertising expense totaled $161,341 and $202,705 for the year ended December
31, 2001 and 2000, respectively.
(K) Goodwill
The excess of the purchase price of net assets acquired in equity investments
over their fair value is being amortized on a straight-line basis not to
exceed 10 years.
(L) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments," requires certain disclosures regarding the
fair value of financial instruments. Cash and cash equivalents, 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. Long-term notes receivable that do not bear interest are
discounted by an interest rate commensurate to the Company's estimated
incremental borrowing rate.
(M) Research and Development Costs
Research and development costs consist primarily of expenditures incurred
bringing a new product to market or significantly enhancing existing products.
The Company expenses all research and development costs as they are incurred
unless they are associated with the development of tools or processes for
production used in-house rather than for product delivered to a customer.
(N) Deferred Compensation Trust Investments
Investments are stated at the estimated fair value in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Available-for-sale securities, which include any security for which the
beneficiary has no immediate plan to sell but which may be sold in the future,
are valued at fair value. Realized gains and losses, based on the amortized
cost of the specific security, are included in other income as investment gains
(losses). Unrealized gains and losses are recorded, net of related income
tax effects, as a separate component of equity.
The deferred compensation trust represents contributions made by the Company
to a Rabbi trust. The Company maintained investments in U.S. government
agency securities or corporate stocks. The amounts are restricted from use
for operational purposes, and investment decisions are made by the trust
beneficiary (See Note 9).
(O) 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.
(P) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
(Q) Loss Per Share
Basic loss per share is calculated by dividing net loss for the period (less
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 included in the calculation of diluted earnings per share, if
dilutive.
(R) 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.
(S) New Accounting Pronouncements
The Financial Accounting Standards Board has recently issued several new
Statements of Financial Accounting Standards. SFAS No. 141, "Business
Combinations" supersedes APB Opinion No. 16 and various related pronouncements.
Pursuant to the new guidance in SFAS No. 141, all business combinations must
be accounted for under the purchase method of accounting; the pooling-of-
interests method is no longer permitted. SFAS No. 141 also establishes new
rules concerning the recognition of goodwill and other intangible assets
arising in a purchase business combination and requires disclosure of more
information concerning a business combination in the period in which it is
completed. This statement is generally effective for business combinations
initiated on or after July 1, 2001.
SFAS No. 142, "Goodwill and Other Intangible Assets" supercedes APB Opinion
No. 17 and related interpretations. SFAS No. 142 establishes new rules on
accounting for the acquisition of intangible assets not acquired in a business
combination and the manner in which goodwill and all other intangibles should
be accounted for subsequent to their initial recognition in a business
combination accounted for under SFAS No. 141. Under SFAS No. 142, intangible
assets should be recorded at fair value. Intangible assets with finite useful
lives should be amortized over such period and those with indefinite lives
should not be amortized. All intangible assets being amortized as well as
those that are not, are both subject to review for potential impairment under
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. " SFAS No. 142 also requires that
goodwill arising in a business combination should not be amortized but is
subject to impairment testing at the reporting unit level to which the goodwill
was assigned to at the date of the business combination.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001
and must be applied as of the beginning of such year to all goodwill and other
intangible assets that have already been recorded in the balance sheet as of
the first day in which SFAS No. 142 is initially applied, regardless of when
such assets were acquired. Goodwill acquired in a business combination whose
acquisition date is on or after July 1, 2001, should not be amortized, but
should be reviewed for impairment pursuant to SFAS No. 121, even though SFAS
No. 142 has not yet been adopted. However, previously acquired goodwill
should continue to be amortized until SFAS No. 142 is first adopted.
SFAS No. 143 "Accounting for Asset Retirement Obligations" establishes
standards for the initial measurement and subsequent accounting for
obligations associated with the sale, abandonment, or other type of disposal
of long-lived tangible assets arising from the acquisition, construction, or
development and/or normal operation of such assets. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002, with earlier application
encouraged.
The adoption of these pronouncements will not have a material effect on the
Company's financial position or results of operations.
(T) Cash Deposits in Excess of Federally Insured Limits
The Company maintains its cash balances at one financial institution. The
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. At December 31, 2001, the Company's uninsured cash balances were
approximately $74,000.
(U) 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.
(V) Interest On Impaired Loans
The Company does not accrue additional interest on loans once the loans have
been deemed impaired.
NOTE 2 INVENTORIES
Inventories (net) at December 31, 2001 consist of the following:
Raw materials $ 831,318
Work in process -
Finished goods 515,174
--------
$ 1,346,492
=========
At December 31, 2001, the Company has reserved $449,487 for obsolete inventory.
NOTE 3 PROPERTY AND EQUIPMENT
Property, plant and equipment at December 31, 2001 consist of the following:
Research and development equipment $ 39,997
Tooling and test equipment 637,072
Office furniture and equipment 318,584
Sales displays 52,101
Leasehold improvements 29,989
Construction in progress - software 314,113
---------
1,391,856
Less accumulated depreciation and amortization 978,586
---------
$ 413,270
=========
Depreciation and amortization expense for the years ended December 31, 2001
and 2000 totaled $235,890 and $226,083, respectively. During 2001, the
Company began amortizing the capitalized costs of the TRAVEL*STAR 24 when
shipments to customers commenced.
During 2001, sales of the TRAVEL*STAR 24 were suspended when it was discovered
that the units contained errors that required additional work to correct. The
costs incurred to correct the errors are being expensed as incurred. The
Company plans to reintroduce the TRAVEL*STAR 24 in the market during the
second quarter of 2002.
NOTE 4 ADVANCES TO AFFILIATES
On July 1, 1998, the Company entered into a joint development and marketing
agreement with a privately held company based in McLean, Virginia. The
Company transferred certain software and documentation of its service software
in exchange for a $400,000 promissory note bearing interest at the Federal
prime rate. In addition, the Company leased computer equipment to the
affiliate at favorable rates. The Company advanced $50,000 in a promissory
note, due June 30, 2000 with interest at 6.36% to expand equipment capabilities
to support the proposed network. The agreement also includes a provision for
the Company to advance to the affiliate up to $400,000 in additional funds to
complete network development, of which $200,000 was advanced as of December
31, 2000. These advances were incorporated in a promissory note due January
1, 2002, which provides for the Company to be entitled to 50% of the operating
revenue of Sci-Com (formerly SmartTime Networks) (excluding only non-
reoccurring engineering services provided by the affiliate). The agreement
also provides for the optional conversion of the loan into a 10% equity
interest in the privately held company, at the Company's sole discretion.
The Company is currently pursuing legal actions to collect on the aggregate
amount of $744,950 (including interest of $94,950) due from Sci-Com and has
reserved the entire amount at December 31, 2001. An impairment loss of
$135,480 and a reduction in the account payable of $14,520 due to Sci-Com
with a corresponding increase of $150,000 in the reserve account was
recognized during 2001.
NOTE 5 NOTES RECEIVABLE
A $150,000 face value promissory note was received from each of two principals
of Talon for aggregate notes receivable of $300,000. Since the notes do not
bear interest for the first three years, the notes were discounted by 10% per
year for three years to an aggregate net present value of $225,394. During
years four and five, the notes bear 5% simple interest per year. The notes
are payable on the earlier of (1) December 11, 2006, at which date $330,000
would be payable or (2) the date on which a signer sells 20% of his Talon
interest or (3) the date on which Talon is acquired by or merged into another
entity or (4) the date on which Talon sells equity to the public (See Note
6(C)).
NOTE 6 INVESTMENT IN AFFILIATES
(A) Investment in Influence Data, LLC
In May 1999, the Company formed a joint venture with Influence Content, LLC,
a website developer, to form Influence Data, LLC. The Company issued 80,000
shares of common stock (at quoted market price) from the treasury and options
(valued at market upon the Black-Scholes method) to purchase 160,000 shares of
common stock for a one-third interest in Influence Data, LLC. The original
value of the investment, based on the consideration given to form the joint
venture was $327,200.
On May 30, 2000 the Company entered into a new agreement with Influence
Content, LLC, to cancel the option agreement dated May 4, 1999, which issued
options for 160,000 common shares, and issue new options for 300,000 common
shares of the Company. In addition, the Company was required to pay $200,000
as additional capital contributions in connection with this agreement. The
additional capital contribution contained the following provisions: the capital
contribution shall not increase the Company capital account in Influence Data,
LLC, nor be included for purposes of maintenance of the capital account.
Furthermore, such capital contribution shall not serve to relieve or reduce
the capital contribution obligations, if any, of the Company under the terms
of the Influence Data, LLC, Operating Agreement. The Company has recorded an
additional amount of $255,982 in goodwill in addition to the original $327,000
investment value recorded by the Company during the year ended December 31,
1999. The $255,982 is comprised of the $200,000 in cash paid by the Company
and $55,982 additional cost value of the options issued as a result of the May
30, 2000 agreement. The fair value of the common stock options are estimated
on the date of the grant using the Black Scholes option model with the
following weighted average assumptions: dividend yield of zero, expected
volatility of 40.0%, risk-free interest rate of 5.74%, and an expected life
of five years.
The Company's one-third interest in Influence Data, LLC is accounted for using
the equity method of accounting and is stated at amortized cost plus equity
in undistributed earnings since acquisition. The equity in earnings of
Influence Data, LLC is adjusted for the annual amortization of the difference
between the acquisition cost and the Company's proportionate share of Influence
Data, LLC's members' equity net assets. Amortization is computed on a
straight-line basis over ten years. During 2000, the Company's proportionate
share of losses through September 30, 2000 was $227,226. During the fourth
quarter 2000, the Company was notified that Influence Data, LLC was having
funding problems and ceasing operations. The Company also recognized an
impairment loss on its investment of $225,039.
(B) Investment in Talon Research & Development Co., Ltd.
On March 23, 1998, the Company acquired an 18.9% interest in Talon for
$282,500. In August 1998, the Company acquired an option to purchase
additional shares in Talon for $312,147. During 1999, the option to purchase
additional shares was amended, and the above amount was utilized to purchase
an additional 6% interest in Talon. Legal and consulting costs associated
with the acquisition and option to purchase additional shares are capitalized
as part of the cost of the investment, and totaled $124,108 for the year ended
December 31, 1999. During 2000, the Company's interest decreased from 24.9%
to 22.6% based on a 10% increase in Talon's outstanding shares due to
incorporation of an employee stock option plan for Talon employees.
The Company's interest in Talon is accounted for using the equity method of
accounting and is stated at amortized cost plus equity in undistributed
earnings since acquisition. The equity in earnings of Talon is adjusted for
the annual amortization of the difference between acquisition cost and the
Company's proportionate share of Talons' net assets. Amortization is computed
on a straight-line basis over nine years. The unamortized difference between
the investment cost and the Company's proportionate share of Talon is $428,592
and $487,458 at November 30, 2001 (prior to the Company's sale of its interest)
and December 31, 2000, respectively. The Company's share of the earnings for
2001 and 2000 were $58,212 and $173,383 after accounting for the differences
between New Zealand GAAP and US GAAP. As discussed above, the earnings were
further reduced by amortization of $58,865 (through November 30, 2001) and
$90,488 during 2000 and a write-down of the investment of $32,794 associated
with the change in ownership during 2000 (See Note 10).
(C) Gain on Sale of Investment in Talon
In December 2001, the Company sold its 22.6% interest in Talon. As of
November 30, 2001, the investment in Talon had a balance of $873,523, which
was comprised of the amortized cost plus equity in undistributed earnings
since acquisition. The proceeds received consisted of $930,000, which was
paid directly to preferred stockholders (See Note 8), $300,000 of notes
receivable (having a net present value of $225,394) from two of Talon's
stockholders (See Note 5), for an aggregate amount of $1,155,394. The
resulting gain of $281,871 was recognized as other income in the financial
statements herein.
In addition to the above transactions, the Company supplied Talon with
components for assembly. Talon charged the Company a total of $138,656 for
the assembly of various products, which were then sold by the Company and the
related liability was fully paid. A net balance of $0 and $70,144 was
receivable from Talon by the Company at December 31, 2001 and 2000,
respectively, and was included in trade accounts receivable.
NOTE 7 ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities at December 31, 2001 consist of the
following:
Accrued sales commissions and royalties $ 141,811
Accrued payroll 23,655
Accrued vacation 45,406
Other 61,274
-------
$ 272,146
=======
NOTE 8 NOTES PAYABLE
On August 13, 2001, the Company entered into an exchange agreement whereby
1,408 of the remaining Preferred Shares (all but 16 of the Preferred Shares)
were exchanged for two identical (except for the holder) 11.25% senior secured
convertible promissory notes whose principal amount equals the sum of (1) the
stated value of the Preferred Shares ($1,408,000), (2) cumulative dividends
since issuance ($199,320), and (3) a premium (deemed an additional dividend)
equal to 10% of the stated value of the Preferred Shares ($140,800) for an
aggregate amount of $1,748,120. Each of the two notes called for three
monthly payments of $35,000 followed by monthly payments of $45,000 thereafter
until the notes were satisfied. Under the payment terms, the Company made
payments totaling $140,000 in September, but suspended payments due to limited
cash flow pending a resolution of the negotiations regarding the sale of its
investment in Talon. The agreement also provided for a 10% interest accrual
on any principal outstanding on June 1, 2002. The conversion cap of the
Preferred Shares was also amended to limit the number of common shares into
which the Preferred Shares could be converted during 2001 to 20% of the
cumulative trading volume for the 66 trading days preceding conversion. In
the same transaction, the exercise price of the warrants was reduced from
$5.00 to $1.50 per share (See Note 13(C)).
On December 11, 2001, the Company amended its agreement with the note holders.
The amendment provided that the Company would instruct the buyer of its
investment in Talon (See Note 6(C)) to wire the $930,000 proceeds directly to
the note holders in order to reduce the Company's liability under the notes.
The amendment also (1) reduced the aggregate monthly obligation under the notes
from $90,000 to $15,000 per month, (2) eliminated the 10% interest accrual
that had been scheduled for June 1, 2002, (3) eliminated the Company's
obligation to register with the SEC the shares underlying the notes, and (4)
raised the conversion cap of the notes to 28% of the cumulative trading
volume for the 66 trading days preceding conversion. Finally, the exercise
price of the warrants held by the note holders was reduced from $1.50 to $.50
(See Note 13(C)).
Notes payable at December 31, 2001 consist of the following:
Notes payable in monthly installments of
$15,000, including interest at 11.25%,
secured by substantially all of the Company's assets $ 726,998
Less: current portion (110,991)
-------
$ 616,007
=======
Required principal payments (including current maturities) on notes payable
at December 31, 2001 are as follows:
Year Amount
---- ----------
2002 $ 110,991
2003 116,589
2004 130,403
2005 145,855
2006 163,136
Thereafter 60,024
--------
$ 726,998
========
Interest expense for the years ended December 31, 2001 and 2000 was $104,699
and $0, respectively. Of the interest recognized in 2001, $37,529 relates
to the repricing of warrants (See Note 13(C)).
NOTE 9 DEFERRED COMPENSATION
Deferred compensation represents the market value of investments made by the
Company in conjunction with a deferred compensation arrangement with the
Company's former President for services provided prior to 1991. Five annual
payments of $12,800 were paid through December 31, 1995 to a Rabbi trust for
the benefit of the Company's CEO. A distribution to the beneficiary of
$36,850 was made during 1999. During 2001, the trust account was closed after
the investments were sold and a final distribution was made to the beneficiary.
Accordingly, a net loss of $10,324 was recognized during 2001.
NOTE 10 LINE OF CREDIT
In April 1999, the Company negotiated a lending agreement with Southwest Bank
of St. Louis that provided a credit facility of $1 million, secured by the
Company's accounts receivable and inventories, which expired on July 1, 2001.
The Bank reserved against this line of credit a $400,000 Standby Letter of
Credit related to the guarantee of Talon's line of credit discussed below.
During 2000, the Company renewed and increased its agreement to be guarantor
on a line of credit from the original amount of $400,000 to $765,000 issued
to Talon GPS, LLC, by a commercial bank in Hong Kong. The new amount
guaranteed was $765,000, in accordance with an agreement whereby the Company
was required to be a guarantor of Talon's line of credit in proportion to the
Company's ownership share in Talon. The agreement also stated that should
the Company elect not to renew the Standby Letter of Credit, Talon would have
the right to repurchase its shares or any portion thereof from the Company at
the fair market value determined by an appropriate expert.
In connection with the Company's guarantee agreement with Talon, the Company
was contingently liable for an irrevocable letter of credit in favor of a Hong
Kong bank for an aggregate amount not to exceed $765,000. This letter of
credit expired on August 31, 2001. Although the Company did not sell its
interest in Talon until December 2001, (See Note 6(C)) the Company negotiated
with Talon, the bank where the Company had secured a line of credit, and the
preferred stockholders to allow the Standby Letter of Credit to expire and
remove the restriction on the Company's money market funds provided the
Company sold its interest in Talon. Prior to the expiration of the letter of
credit, the funds were classified as restricted cash. After the expiration
of the letter of credit, the funds were unrestricted and used in the operations
of the Company.
NOTE 11 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, 2003. The Company pays monthly rent of $3,779, plus
22% of all building expenses. The Company also occupies adjoining warehouse
space on a month-to-month basis at a rate of $1,275 per month.
Future minimum lease payments under the operating lease at December 31 consist
of the following:
Year Amount
---- --------
2002 $ 45,351
2003 37,793
-------
$ 83,144
=======
Rent expense totaled $107,502 and $109,678 for the years ended December 31,
2001 and 2000, respectively.
(B) Royalty Agreements
On September 14, 1989, the Company entered into a twenty-year royalty
agreement relating to its ROAD WHIZ product. After 20,000 ROAD WHIZ had been
sold, 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, 2001 and 2000,
royalty expense totaled $15,121 and $60,645, respectively.
On December 29, 1998, the Company entered into a three-year royalty agreement
with a consultant with regard to the AAA TripWizard for 1% of sales to
customers other than their own, for which they earn their normal independent
sales representative commissions. During the years ended December 31, 2001
and 2000, royalty expense totaled $5,075 and $10,958, respectively. This
agreement expired December 28, 2001 and was not renewed.
On September 15, 1998, the Company entered into a three-year royalty agreement
with AAA related to the AAA TripWizard. The terms are automatically renewable
for one year and amount to 10% of the wholesale price on sales other than
through AAA stores and $1.00 per unit on AAA sales. This agreement recognizes
the benefit of the AAA logo and data and their promotion of the product
through their travel stores. During the years ended December 31, 2001 and
2000, royalty expense totaled $44,844 and $55,320, respectively. On September
15, 2001, this agreement automatically renewed for an additional year.
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 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 $.48 to $.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. During the years ended December
31, 2001 and 2000, royalty expense totaled $145,421 and $0, respectively.
The agreement was modified in February 2002 (See Note 21).
(C) Factoring Agreement
On July 3, 2001, the Company entered into a one-year accounts receivable
factoring agreement with KBK Financial, Inc. for a maximum facility of
$500,000. Under the agreement, the factor will advance 80% of the face value
of accounts receivable from certain customers of the Company. The Company is
charged a fixed and variable percentage fee based upon the length of the
collection period. All of the Company's accounts receivable, contracts,
inventories and intangibles are pledged as collateral under this agreement.
Under the terms of the agreement, the Company must pay a minimum of $1,500
in fixed discount costs each month. In November 2001, the agreement was
amended whereby the minimum fixed discount costs were reduced to $400 each
month. The Company has not utilized this factoring agreement as of December
31, 2001.
NOTE 12 STOCKHOLDERS' EQUITY
(A) Authorized Common and Preferred Stock
On August 5, 1996, the Company amended its certificate of incorporation to
5,000,000 authorized shares of $.01 par value preferred stock and 10,000,000
authorized shares of $.01 par value common stock.
(B) Convertible Preferred Stock
(i) Original Terms
On May 16, 2000, the Company received from two investors gross proceeds of
$1,600,000 for 1,600 Series A Convertible Preferred Shares (the "Preferred
Shares") and 478,506 Common Stock Purchase Warrants ("Warrants") (See Note
13(C)). An additional 16 Preferred Shares were issued to a consultant as a
commission. The Preferred Shares have no voting rights, except as to matters
which directly affect the rights of holders of Preferred Shares. The holders
of Preferred Shares are not entitled to any cash dividends. However, they
accrue an additional 11.25% per annum (or 22.5% if the Common Stock is de-
listed by NASDAQ) for purposes of conversion, redemption, and liquidation
($2,929 and $113,625 at December 31, 2001 and 2000). 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. The intrinsic value of this
beneficial conversion feature has resulted in deemed dividends of
$811,189.
3. At the time the shares were issued, the Company undertook to obtain
shareholder approval of the conversion of the new securities and to
register the underlying common stock for public resale. If the Company
had not satisfied those conditions, the Investors had a right to require
the Company to repurchase any Preferred Shares that could not be converted
into free-trading common stock due to that limitation. The redemption
price would have been the greater of (a) 130% of face value plus 11.25% of
face value from date of issuance or (b) the difference between the
conversion price of the unconvertible share and the 5-day average closing
asked price. The conditions were satisfied in July 2000 and August 2000,
respectively, and the Preferred Shares were no longer redeemable by the
preferred stock holders.
4. The Warrants will permit each of the two investors to purchase up to
239,253 shares of Common Stock (a total of 478,506 shares) at an exercise
price of $5.00 per share until May 15, 2003. The Company has recorded
the estimated fair value of the Warrants, $284,089, as additional paid-in
capital and included as a dividend to preferred stockholders.
5. The placement was arranged by a consultant. In compensation for services
rendered, the Company paid $202,000 to the consultant, at 12% of the gross
proceeds of the placement, and issued to the consultant (a) an option to
purchase, on the same terms as the Investors, 160 Preferred Shares, equal
to ten percent of those sold to the Investors, and (b) an option to
purchase 128,000 common shares. The value of the options was credited to
additional paid-in capital. The Company also paid another consultant in
connection with the placement a fee of 9,570 shares of the Company's common
stock with an estimated fair value of $31,868 and included as a dividend
to preferred stockholders.
6. The fair value of the warrants and common stock options was estimated on
the day of the grant using the Black-Scholes option model with the
following weighted-average assumptions: dividend yield of zero, expected
volatility of 40.0%, risk-free interest rate of 5.4%, and expected lives
of between 2.5 and 3.0 years.
(ii) Preferred Stock Dividends
Preferred stock dividends during 2001 and 2000 were comprised of the following:
2001 2000
--------- ---------
Value of common shares issued $ 951 $ 31,868
Cash payments 19,214 -
Notes payable issued (a) 239,360 -
Preferred stock dividend
accumulated during year 1,800 113,625
Value of warrants issued - 284,089
Value of options issued - 215,854
Beneficial conversion feature of
preferred stock - 811,189
------- ---------
Total $ 261,325 $ 1,456,625
======= =========
(a) See below regarding the exchange of 1,408 shares of series A
Preferred Stock for Convertible Promissory Notes.
(iii) Amendments to Preferred Stock
On March 9, 2001, the conversion cap of the Preferred Shares was amended to
limit the number of common shares into which the Preferred Shares could be
converted during 2001 to 10% of the cumulative trading volume for the 22
trading days preceding conversion. Further, that portion of the conversion
cap not utilized during any 30-day period shall not be carried forward to any
subsequent periods. In exchange for this concession by the preferred
stockholders, the Company agreed to waive the temporary 18-month floor on the
conversion price. This amendment was scheduled to expire December 31, 2001.
From the date of this amendment through May 11, 2001, the preferred
stockholders converted 28 shares of preferred stock into 56,118 shares of
common stock. No gain or loss was recognized for the conversions.
Shortly after the March 9, 2001 amendment, the Company commenced negotiations
to revise the terms of the Preferred Shares to reduce further the threat of
dilution after 2001 that the conversion feature posed to the common
stockholders. During negotiations, the Company redeemed (during the period
from May 2, 2001 through July 1, 2001) 164 shares of preferred stock for
$194,950 in cash consisting of $164,000 of face value, $11,736 of dividends
for 2000 and $19,214 of dividends for 2001. Of the shares redeemed, 114
shares included a 10% premium (deemed a dividend) that had been agreed to by
the parties.
On August 13, 2001, the Company entered into an exchange agreement whereby
1,408 of the remaining Preferred Shares (all but 16 of the Preferred Shares)
were exchanged for 11.25% senior secured convertible promissory notes (See
Note 8).
NOTE 13 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
100,000 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.
At December 31, 2001, the Company had two fixed stock option plans. The
Company applies APB No. 25 and related interpretations in accounting for
stock options issued to employees. There were no stock options issued to
employees during 2001.
2001 2000
-------- --------
Net loss available to common
shareholders
As Reported $ (3,392,857) $ (3,169,128)
Pro Forma $ (3,392,857) $ (3,192,372)
Basic and diluted loss per share
As Reported $ (1.04) $ (1.00)
Pro Forma $ (1.04) $ (1.01)
During 2001, the Company cancelled incentive stock options to purchase 89,600
shares of common stock at exercise prices ranging from $1.50 to $7.39 per
share.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2001 and 2000, respectively: dividend yield of
zero for all years; expected volatility of 86.52% and 77.25%; risk-free
interest rates of 5.40% and 5.79%; 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, 2001 and 2000, and the changes during the years then ended is
presented below:
2001 2000
---------------------------- -------------------------
Weighted Weighted
Average Average
Fixed Options Shares Exercise Price Shares Exercise Price
-------------------------------------------------------------------------------
Outstanding at
beginning of year 330,450 $ 3.69 412,430 $ 3.70
Granted (includes
re-priced options
in 2000) 2,575 $ 1.50 36,403 $ 3.73
Forfeited (79,600) $ 3.21 (23,860) $ 3.39
Expired (10,000) $ 7.39 - -
Exercised - $ - (94,523) $ 3.33
-------------------------------------------------
Outstanding at end of
year 243,425 $ 3.29 330,450 $ 3.69
==================================================
Options exercisable at
year end 243,425 330,450
======= =======
Weighted average fair
value of options
granted to employees
during the year $ 1.50 $ 1.00
======= =======
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 2001 Life Price 2001 Price
------------------------------------------------------------------------------
$1.00 - 1.99 26,360 4.0 $ 1.51 26,360 $ 1.51
2.00 - 2.99 45,465 3.0 2.01 45,465 2.01
3.00 - 3.99 19,250 1.9 3.00 19,250 3.00
4.00 - 4.99 150,692 1.3 4.00 150,692 4.00
5.00 - 5.56 1,658 3.3 5.56 1,658 5.56
--------------------------------------------------------------
243,425 1.94 3.29 243,425 3.29
(B) Non-Qualified Stock Options Issued to Non-Employees
2001 2000
---------- ----------
Beginning balance 428,000 -
Stock options issued to a consultant that
arranged the placement of preferred stock
(See Note 12(B)(i) (5)). The term of the
option is three years expiring May 16, 2003.
The options are exercisable at $2.50 per share. - 128,000
Stock options issued to an affiliate
(See Note 6(A)). 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
------- -------
Total 428,000 428,000
======= =======
(C) Stock Warrants
In conjunction with the issuance of preferred stock on May 16, 2000, the
Company issued warrants to purchase an aggregate of 478,506 shares of the
Company's common stock at an exercise price of $5.00 per share. The warrants
are exercisable immediately until expiration on May 16, 2003. In an exchange
agreement effective August 13, 2001, the exercise price of the warrants was
reduced from $5.00 to $1.50 per share. In an amendment to the exchange
agreement effective December 11, 2001, the exercise price of the warrants was
further reduced from $1.50 to $0.50 per share. An additional $37,529 of
expense was recognized due to the re-pricing of the warrants during 2001.
As of December 31, 2001, none of the warrants had been exercised.
NOTE 14 NOTES RECEIVABLE ISSUED FOR PURCHASE OF COMMON STOCK
Notes receivable issued for the purchase of common stock represent unsecured
advances made by the Company to various employees for stock acquired upon the
exercise of stock options. The notes bear interest at 6% per annum and are
due, together with accrued interest, on demand on either the termination of
employment or the sale of underlying stock, whichever comes first. During
2001, the notes earned $9,352 in interest and $28,504 of payments were
received reducing the balance at December 31, 2001 to $186,668.
NOTE 15 LOSS PER SHARE
A reconciliation of the numerator and denominator of the loss per share
calculations is provided for all periods presented. The numerator and
denominator for basic and diluted loss per share for the years ended December
31, 2001 and 2000, is as follows:
2001 2000
---------- ----------
Numerator:
Net loss $ (3,312,012) $ (1,712,503)
Preferred Stock Dividends (a) (261,325) (1,456,625)
Numerator for basic and diluted loss
per share --------- ---------
$ (3,573,337) $ (3,169,128)
========= =========
Denominator:
Weighted average common shares 3,248,125 3,168,186
Common stock equivalents (b) - -
--------- ---------
Denominator for basic and diluted loss per share 3,248,125 3,168,186
========= =========
Basic and diluted loss per share $ (1.04) $ (1.00)
========= =========
(a) See Note 12(B)(ii)
(b) Conversion of the preferred stock was not included in the denominator
of the diluted loss per share during 2001 and 2000 because the effect
of the preferred stock conversion was anti-dilutive. Options to
purchase 671,425 shares of common stock at prices between $1.50 and
$5.56 per share were outstanding at December 31, 2001, but were not
included in the computation of diluted loss per share because they
are anti-dilutive. Options to purchase 758,450 shares of common
stock at prices between $1.50 and $7.39 per share were outstanding at
December 31, 2000, but were not included in the computation of diluted
loss per share because they were anti-dilutive.
NOTE 16 INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2001 and 2000
consist of the following:
2001
Current Deferred Total
------------------------------
Federal $ - $ - $ -
State - - -
-----------------------------
$ - $ - $ -
=============================
Income tax expense for the years ended December 31, 2001 and 2000 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:
2001 2000
------------ -----------
Expected income tax (benefit) expense $(1,064,721) $ (581,908)
Increase (decrease) in income taxes
resulting from:
Valuation allowance increase 1,098,289 311,772
State income taxes, net of federal
expense (benefit) - (16,884)
Nondeductible expenses for federal
income tax purposes (33,568) 1,204
Foreign operations - 106,813
Other, net - 179,003
--------- ----------
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, 2001 and 2000
include the following:
2001 2000
---------- -----------
Deferred tax assets:
Net operating loss carryforward $ 2,960,053 $ 1,895,332
Note receivable reserved for
financial reporting purposes 202,283 202,283
Notes and accounts receivable reserves 124,197 72,050
Inventory reserves, principally due to
accruals for financial reporting
purposes and basis differences 142,625 190,658
Other 15,438 24,925
--------- ---------
Total deferred tax assets 3,444,596 2,385,248
--------- ---------
Deferred tax liabilities
Prepaid advertising - (4,747)
Property, plant and equipment,
principally due to differences in
depreciation basis (3,387) (34,133)
Unrealized gain on deferred compensation
trust investments - (3,448)
--------- ---------
Total deferred tax liabilities (3,387) (42,328)
--------- ---------
Gross deferred tax asset 3,441,209 2,342,920
Valuation allowance (3,441,209) (2,342,920)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
At December 31, 2001, the Company had net operating loss carryforwards of
$8,706,039 for income tax purposes, available to offset future taxable income
expiring on various dates through 2021. The valuation allowance at December
31, 2001 was $2,342,920. The net change in the valuation allowance during
the year ended December 31, 2001 was an increase of $1,098,289.
NOTE 17 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. Expense attributable to Company
contributions totaled $33,857 and $40,586 during the years ended December 31,
2001 and 2000, respectively.
NOTE 18 CONCENTRATIONS OF CREDIT RISK
The Company relied on three and four customers for approximately 79% and 93%
of sales for the years ended December 31, 2001 and 2000, respectively. At
December 31, 2001, accounts receivable from those customers totaled $595,556,
of which $247,632 has been reserved due to the Kmart bankruptcy (See Note 21).
NOTE 19 SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 2001, the Company recorded significant adjustments
that increased the net loss by approximately $664,000. These adjustments
included $244,000 related to reserving accounts receivable from a customer,
$75,000 related to discounting long-term notes receivable to net present value,
$95,000 related to accrual of additional royalty expense and $250,000 related
to the write-off of advertising credits.
In the fourth quarter of 2000, the Company recorded significant adjustments
that increased the net loss by approximately $466,500. These adjustments
included $225,000 related to the write-off of Influence Data, LLC, $138,500
for an increase in the inventory reserve for obsolescence and write-off of a
bad debt from a customer, and $103,000 of other various expenses related to
overseas manufacture and import.
NOTE 20 GOING CONCERN
As shown in the accompanying financial statements, the Company incurred a net
loss of $3,312,012 for the year ended December 31, 2001 and a negative cash
flow from operations of $2,147,625. These factors raise substantial doubt
about the Company's ability to continue as a going concern.
The Company has continued its product design and development efforts to
introduce new products during 2002. The Company also continues its efforts
to expand into mass-market retailers. In addition, the Company has secured
an agreement to factor its accounts receivable. The Company has not used this
financing arrangement as of December 31, 2001. Management believes that
actions presently taken to obtain additional funding provide the opportunity
for the Company to continue as a going concern.
NOTE 21 SUBSEQUENT EVENTS
On January 22, 2002, Kmart Corporation filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. During 2001,
Kmart accounted for approximately 28% of the Company's sales.
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.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Ultradata Systems, Incorporated
By:
/s/ Monte Ross
--------------------
Monte Ross, Chairman
In accordance with the Exchange Act, this report has been signed below
by the following persons, on behalf of the registrant and in the capacities
and on the dates indicated.
March 29, 2002
/s/ Monte Ross
-------------------------------------------------
Monte Ross
Chief Executive Officer and Chairman of the Board
March 29, 2002
/s/ Ernest Clarke
-------------------------------------------------
Ernest Clarke
Chief Financial and Accounting Officer, Director
March 29, 2002
/s/ Mark L. Peterson
--------------------
Mark L. Peterson
Director
March 29, 2002
/s/ Donald Rattner
------------------
Donald Rattner
Director
March 29, 2002
/s/ H. Krollfeifer, Jr.
-----------------------
H. Krollfeifer, Jr.
Director