SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2005
[ ] 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
(Title of Class)
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [ ]
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]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the issuer's revenues for its most recent fiscal year: $781,220
The aggregate market value at April 3, 2006 of the voting stock held
by non-affiliates, based on the closing price as reported by the OTC
Bulletin Board, was approximately $381,944. The aggregate market value has
been computed by reference to a share price of $0.04 (the price at which
stock was sold, or the average bid or asked price of such stock on April 3,
2006). All directors, officers, and stockholders owning more than five
percent of the outstanding common stock of the Registrant have been deemed
"affiliates" for the purpose of calculating such aggregate market value.
The number of shares outstanding of the issuer's common stock, as of
April 4, 2006, was 12,682,238
Transitional Small Business Disclosure Format: Yes [ ] No [ ]
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 introduce new products to the market, to
expand our customer base, to develop products for ease of travel, and to
return our company to profitability. These forward-looking statements are
a true statement of our present intentions, but are neither predictions of
the future nor assurances that any of our intentions will be fulfilled.
Many factors beyond our control could act against Ultradata in its efforts
to develop and market its products. Among these factors are:
* The fact that our financial resources are minimal and will not
sustain us through this year unless we have a dramatic increase in
sales volume;
* The fact that our lack of capital severely limits our ability to
market our products. As a result, the loss of a significant
customer could imperil the marketing of an entire product line;
* The difficulty of attracting mass-market retailers to a seasonal
product like the Talking Road Whiz(tm).
There may also be factors that we have not foreseen which could
interfere with our plans. In addition, changing circumstances may cause us
to determine that a change in plans will be in the best interests of
Ultradata. For this reason, you should not place undue reliance on any of
the forward-looking statements in this report, as there is a significant
risk that we will not be able to fulfill our expectations for Ultradata.
PART I
ITEM 1. BUSINESS
Overview
The Company mission is to aid the road traveler with useful
information with products easy to use and affordable in price. Since 1987
we have been engaged in the business of manufacturing and marketing
handheld computers that provide travel information. The products are based
upon a data compression technology that we developed, portions of which we
have patented. Recent developments in communications and speech technology
have opened up new opportunities for us to integrate our technology and
create new products merging these technologies with our own. These new
products are consistent with our goal of improved ease of use by the
consumer. In 2005, development of the Road Genie Audio Navigation System
was accomplished and represents a quantum jump in user convenience. We
also have developed a low-cost voice-controlled audio recorder for
automobile use using the same voice-recognition technology. Production of
this unit will be performed in the first quarter of 2006 and should be
available for sale in the second quarter.
The Company has sold over 3 million of its low-cost handheld travel
computers, demonstrating that there is a market for travel information
products. To re-awaken that market with an improved product that speaks,
the Company has developed a Talking Road WhizTM. Significant deliveries of
this product began in September of 2003 and, the Company received
significant revenue in the last four months of 2003 from sales of this new
addition to its product line. Company earnings in the fourth quarter of
2003 were sufficient to offset losses in the first three quarters of 2003.
This success continued in the first two quarters of 2004, which have
traditionally been weak quarters for Ultradata. Our growth was stalled,
however, in the second half of 2004, when our primary distributor and one
significant customer both ceased placing orders. We engaged in efforts to
replace those sales lost in 2005 but without success.
The Company is completing development of a Cellular Road Whiz
application using our proprietary database. This product will provide the
user access to our database via a cell phone rather through separate
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hardware. Users who subscribe to our service can get not only information
about services along their route with directions and distance from their
location but, in addition, can obtain fuel prices in real time and select
their stop on that basis. We expect full-scale tests of the system to
start in the second quarter of 2006.
Each of our consumer products is designed to allow the consumer to
access useful information stored in a convenient manner. Our handheld
computers generally sell at retail prices between $19.95 and $59.95 per
unit. The products have been available in retail mass-market chains,
catalogs, credit-card inserts, and other channels.
The goals of the Company's research and development investments are
targeted at attaining the right product at the right price. There are over
125 million drivers in the U. S., and there is a great demand for useful,
easy-to-access information for convenience and safety on the road. Low-
cost products that achieve these benefits have a significant niche in the
marketplace. Thus far, Management feels the Company has barely penetrated
this huge, largely untapped market. The Company expects to continue to
exploit this niche over the next few years by bringing the results of
merged technologies to bear on the goals stated above with significant
impact on Company sales and profits. Ease of use and low cost are major
considerations. With the new voice-recognition unit, we believe we are
close to tapping this large market. The introduction of expensive GPS
navigation systems has brought more awareness to this category. However,
most consumers do not wish to pay over $200 or monthly fees for directions.
Our low-cost user-friendly products offer an affordable alternative.
Handheld Travel Computers
The Road Whiz(tm) Line of Products
Our core business is a line (currently 6 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 infor-
mation regarding over 100,000 services and amenities along the U.S. Inter-
state Highway System and directions on how to reach the service or amenity of
choice. Some versions of the Road Whiz(tm) also contain information about
services and attractions within the cities linked by the Interstate Highway
System, and some versions include U.S. highways as well as Interstates.
The products also provide distances between major U. S. cities, with over
100,000 pre-calculated routes. The service information provided by a Road
Whiz(tm) product includes directions and mileage to gas stations, hotels,
motels, hospitals, and 24-hour restaurants, as well as highway patrol
emergency numbers. We sell our handheld products through independent sales
representatives, mass merchandise retailers, catalog companies, department
stores, office supply stores, direct mail promotions, luggage stores and
selected television shopping channels.
We have achieved a significant advance in the technology in our
product with the introduction of the Talking Road WhizTM. The unit speaks
in a clear, loud, real voice appropriate prompts for the user's next action
as well as the information presented on the display. This technological
improvement makes the unit easier to use and more attractive to buy, and
paves the way for other applications of this new technology such as the new
Road Genie(r) Audio Navigation System. This new product enables the user to
operate the unit hands-free with eyes on the road. It will recognize voice
commands and respond with appropriate recorded voice responses - not
computer-generated voice.
Among the other hand-held products we currently offer are the
following:
Road Whiz(tm) Plus provides complete routing information for over 90
cities, giving driving distances, driving time and detailed directions. A
similar product made by Ultradata is sold by one of our major distributors
under the name Auto Pilot(tm). Our products are designed to be marketed by
mass merchandise retailers.
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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. It contains over
60,000 services and stored routes between 250 cities.
Our Marketing Strategy
After our initial public offering of securities in 1995, we were able
to commence widespread marketing of the handheld products. We priced them
to the upper range gift market ($49 to $129) and focused our marketing
efforts on direct sales through television and print ads, as well as
through a sales representative network. That strategy was successful in
expanding our sales for three years, while the products were new to the
market. The expansion of sales, however, did not bring with it a
proportionate expansion of profits. Too many of our marketing techniques
were only marginally profitable, and as our products lost some of their
newness, marketing techniques such as direct mailing produced diminishing
returns. For that reason, beginning late in 1998 we revised our marketing
strategy. Products without the voice feature now generally retail for
$19.95 to $29.95. At this price point, we expected to gain sufficient
volume to achieve economies of scale with new low-cost manufacturing
methods, permitting us to operate profitably at a lower level of annual
sales. We have been successful in reducing the cost of marketing as well
as other operating costs. In addition, we successfully increased the
volume of sales in 2003 and reached profitability.
In 2004, we expected to have the entire year for Talking Road Whiz(tm)
sales as compared with only the last four months of 2003. However, market
forces and business problems for some of our biggest customers truncated
Talking Road Whiz(tm) sales to those customers in the latter half of the year.
Consequently, we attempted to broaden the markets for our products in 2005
and took on the tasks of promoting the products that traditionally have
been performed by our customers. This development added significantly to
our marketing costs in 2005.
The following table identifies the most significant customers on the
basis of sales in the past two years as well as other mass-market retailers
that carry our products. The table shows the effect of losing MSS and
Office Max as customers in 2005 and the need to replace them or reengage
them in 2006.
Channel of Distribution 2005 Sales % of Sales 2004 Sales % of Sales
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QVC $ 152,509 19.5% $ 484,219 12.2%
Kohl's Department Stores $ 144,144 18.4% $ - 0.0%
United Marketing Group $ 44,266 5.7% $ - 0.0%
AAA Clubs $ 42,282 5.4% $ 162,220 4.1%
Media Solutions Services $ - 0.0% $ 2,200,642 55.4%
Office Max $ - 0.0% $ 560,352 14.1%
Central to the marketing strategy is our effort to develop a variety
of distribution paths, so as to maximize our penetration of the potential
market for our products. However, channels where the product can be
demonstrated, such as QVC, are most successful and are critical to sales.
Success in mass-market retail chains depends on product placement and
promotional efforts in the stores.
Manufacturing
We do not manufacture any of our products. We retain assemblers to
manufacture the products. At present, there is one manufacturer to whom we
contracted all of our assembly work in 2005. Each year, the manufacturer
quotes prices to us based upon estimated annual quantities. Exact pricing
is usually good for 90 days. Significant changes in chip prices result in
similar changes from our manufacturer. Then we place individual purchase
orders for production. Our arrangements with this manufacturer - up to the
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point of a purchase order - are terminable at will by either party. If the
manufacturer becomes unavailable to us, alternate sources would be readily
available. Nevertheless, the sudden loss of our manufacturer or
unanticipated interruptions or delays from our present manufacturer would
likely result in a temporary interruption to our planned operations.
Backlog
As of March 4, 2006 our total backlog was $85,085, as compared to our
backlog on March 4, 2005 of $68,147.
Patents
We own four patents - two that are utilized in our present Road Whiz(tm)
products. They provide us a technological advantage which, to date, has
prevented any similar product from appearing. One patent covers our method
of compressing data relating to travel information. This compression
technology permits our travel products to store more data on smaller and
less expensive memory devices. The second patent covers the methodology
that enables our travel devices to account for changes that occur when the
traveler crosses a state border. We have another patent involving
electronic coupons while traveling that we believe would be valuable for
future use in up-scale travel information products.
We hold two additional patents that have potential utility in the
road navigation market. Patent 5,943,653 was awarded in August, 1999 and
covers the delivery of electronic coupons in a handheld computer for
discounts of services. The technology can be combined with a location
function to cause time and site-specific coupons to be delivered to the
driver offering, for example, a discount at the upcoming hotel. We would,
of course, receive a fee for each customer that the hotel gained in this
fashion.
The other related patent, which was awarded in May of 1999, covers a
method of integrating a GPS receiver into a radar detection device. By use
of this patented technology, it becomes practical to eliminate many false
radar detection alarms, as well as to provide audible warnings of speed
zones.
Database Research
A broad and accurate database is essential to the success of our
products. For this reason, we have developed a systematic approach to
updating our ROAD WHIZ(tm) database. A significant part of the ROAD WHIZ(tm)
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.
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* We have a simple, low-cost design for our products, which employs
a minimum of parts.
* We have developed low-cost, but high quality manufacturing sources.
* The devices that perform functions similar to those performed by
our handheld products are considerably more expensive, and often lack
the data quality of our products.
These several factors have, thus far, served as a barrier to any
effective competition with our handheld products.
Research and Development
Ultradata performs ongoing research and development, seeking to
improve existing products and to develop new products. These activities
are primarily conducted at our corporate headquarters, although we
periodically engage outside computer system design consultants to expedite
the completion of the development and test stages. The success of the
Talking Road Whiz(tm) came directly from our R&D efforts, and we plan to carry
the product line to the next level of voice recognition. This feature
promises to further simplify product use and attract a wider market by
requiring less of the user to access valuable information.
In 2005, the Company incurred $278,241 in research and development
costs compared to $140,507 in 2004. Research activities for 2004 were
primarily focused on continued development of the Talking Road Whiz(tm)
products and the Road Genie(tm) Audio Navigation System. In 2005, we
developed a digital voice recorder feature as a stand-alone product which
can be added to the Road Genie as an augmentation downstream. Further, we
have been developing a cell-phone application that would make our software
and database available to a cell-phone user who opts to subscribe to this
service thought his service provider. We see this channel as a new
opportunity for revenue from our patents. Thus, three different paths to
enhance profitability will be advanced in 2006: the voice-activated Road
Genie(tm) as part of the Road Whiz family of products, a digital voice
recorder for use in the automobile, and the cell-phone Road Whiz
application, which is solely software to run on a cell phone and on a
server accessible through the phone.
Employees
The Company currently has 8 full-time employees, including three
officers, all of whom are located at the Company's headquarters in St.
Louis, Missouri. The Company employs two people in sales, customer service
and shipping, two people in executive management and administration, two
people in product development, and two people in inventory management and
accounting. None of the Company's employees belongs to a collective
bargaining union. In addition, a number of part-time consultants are
retained for database research, website development and maintenance, and
software development. The Company has not experienced a work stoppage and
believes that its employee relations are good.
Item 2. PROPERTIES
Our headquarters, principal administrative offices, and research and
development facilities are located in approximately 5,000 square feet of
leased office space in an industrial building located at 1240 Dielman
Industrial Court, St. Louis, Missouri. The Company pays a monthly rent
plus 16% of all building expenses under a new lease that expires May
1,2006. The Company maintains no manufacturing operations on site and
employs outside contractors to perform all of its manufacturing
requirements.
Aggregate rental expense totaled $44,387 for 2005, compared to $45,500
in 2004. The Company believes that its facilities are adequate for the
Company's present and foreseeable requirements.
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Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In April 2006 the Company submitted for stockholder approval an
amendment to the certificate of incorporation that increased the authorized
common stock from 10,000,000 shares to 50,000,000 shares in order to permit
the Company to enter into the convertible-debenture financing arrangement
with Golden Gate Investors, Inc. The measure was approved by a vote of
over 90% of the voting stock.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS,
AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Information
The following table sets forth the prices for the Company's Common
Stock (OTC Bulletin Board: UDTA) for the eight quarters starting January 1,
2004 and ending December 31, 2005. Since August 29, 2001 the Common Stock
has been quoted on the OTC Bulletin Board. The bid prices quoted reflect
inter-dealer prices without retail mark-up, mark-down or commission, and
may not represent actual transactions.
Bid
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Quarter Ending High Low
March 31, 2005 0.45 0.37
June 30, 2005 0.245 0.245
September 30, 2005 0.95 0.95
December 31, 2005 0.40 0.35
March 31, 2004 1.52 0.15
June 30, 2004 2.09 1.47
September 30, 2004 1.50 0.57
December 31, 2004 0.91 0.41
(b) Shareholders
At March 16, 2006, there were 116 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 2,000.
(c) Dividends
The Company has never paid or declared any cash dividends on its
Common Stock and does not foresee doing so in the foreseeable future. The
Company intends to retain any future earnings for the operation and
expansion of the business. Any decision as to future payment of dividends
will depend on the available earnings, the capital requirements of the
Company, its general financial condition, and other factors deemed
pertinent by the Board of Directors.
(d) Sale of Unregistered Securities
In a series of transactions taking place between August 17, 2005 and
December 31, 2005, Ultradata sold a total of 1,925,156 shares of common
stock to Golden Gate Investors, Inc. The shares were sold for a total of
$116,500, consisting of (a) conversion of $21,500 in principal amount of a
convertible debenture that Ultradata sold to Golden Gate in February 2005
and (b) payment of $95,000 upon exercise of a warrant that Ultradata issued
to Golden Gate in February 2005. The sales were exempt pursuant to Section
4(2) of the Act since the sales were not made in a public offering and were
made to an entity whose principals had access to detailed information about
the Company and which was acquiring the shares for its own accounts. There
were no underwriters.
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(e) Repurchase of Equity Securities
The Company did not repurchase any of its equity securities that were
registered under Section 12 of the Securities Act during the 4th quarter of
2005.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Overview
The downward sales trend was reversed in 2003 due to the successful
introduction of the Talking Road Whiz(tm) in the third quarter of 2003. The
success of this new product enabled the Company to overcome losses in the
first three quarters of the year with a superb fourth quarter and be
profitable for the year. In 2004, this trend continued through the first
two quarters of the year. In the second half of the year, sale declined
due to internal problems at two of our major customers. We worked to
rectify that situation in 2005 by expanding our channels of distribution
and introducing new attractive products. Because of our present lean
operation, profitability can take place at a lower level of sales than in
previous years. Our efforts to reach that level in 2005, however, were
unsuccessful.
Results of Operations
Sales. Sales for 2005 dropped to $781,220 from $3,970,434 in 2004
due to the continuation of the sales decrease that started in 2004 with the
loss of a major customer. A somewhat mitigating factor was our success in
royalty sales that will be discussed below, but our efforts to pursue mass-
market outlets for both our traditional products as well as new products
was not able to offset the loss of sales.
Gross Profit. Our gross profit in 2005 was $358,859, or 45.9% of
sales, compared to $1,943,678, or 49.0% of sales, in 2004. The lower
margin in 2005 was due to a different mix of types of sales in the two
years compared.
Selling Expenses. During 2005, we incurred $314,101, or 40.2% of
sales, in advertising, promotion, and marketing program expenses, as
compared to $329,137, or 8.3% of sales, in 2004. The increased percentage
is primarily due to the decrease in sales base. In addition, we made an
attempt to sell through TV advertising that did not produce sales
commensurate with the added expense.
Research and Development Expenses. Our research and development
expenses in 2005 were $278,241 as compared with $140,507 in 2004, an
increase of $137,734, or 98.0%. In 2005 we developed the AutoVoice
recorder and cell-phone Road Whiz which we expect to bring to market in
2006.
General and Administrative Expenses. Our G&A expenses were $812,733
in 2005 as compared to $1,151,439 in 2004, representing a decrease of
$338,706, or 29.4%. This decrease is primarily due to the recovery of a
bad-debt expense of $170,000 that was written off in 2004. A large part
of the G&A expense in 2005 is made up of professional services due to the
financing transaction completed in 2005.
Other Income (Expense). During 2005, other expense was ($4,825,603)
compared to ($4,773) in 2004. The primary difference between the two years
was the non-cash Warrant Value Expense of $4,824,878 in 2005 due to the
Golden Gate Investors financing arrangement (see Note 5). These costs are
dictated by EITF 0019.
Furthermore, the situation in the two years was also different in that
in 2005 the Company realized $136,478 in royalty income through the volume
sale of its products by third parties at wholesale prices. The 2005
numbers were also affected by recording a gain of $13,844 on settlement of
an account receivable that was written off as uncollectible in 2004.
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Net Income. As a result of the foregoing, net loss for 2005 was
($5,871,819), or ($0.86) per share, as compared to net income for 2004 was
$317,822, or $0.05 per share.
Liquidity and Capital Resources
The Company cash position experienced significant erosion during 2005
by virtue of its losses. Cash used in operations was $627,935 as compared
to cash provided by operations of $539,656 in 2004. Our cash at the end of
the year stood at $133,524. Because sales in the first quarter of 2006
have been minimal, our cash position has been further eroded since year-
end.
The cash provided by our financing arrangement in 2005 was vital to
our surviving to this point. The sale of stock to Golden Gate Investors
provided $395,000 of working capital in 2005. Due to the low price of our
common stock, however, we do not expect to receive additional financing
from that source. The debenture issued to Golden Gate Investors has been
reduced to $200,000 through conversions, and we expect that further
conversions will substantially dilute our outstanding shares.
At the present time we lack sufficient working capital to fund our
business at its current operating level. As a result of our current situation,
our recent net losses and our negative cash flow, our auditor has expressed
substantial doubt in its opinion regarding our ability to continue as a
going concern. In order to conserve cash, we have reduced the working
hours of our employees. This reduction, however, reduces our productivity
and exacerbates our primary problem - that our sales are insufficient to
cover our costs. Unless sales increase significantly in the coming months
or we receive additional capital, it appears doubtful that our business
will continue for the next twelve months.
Impact of Accounting Pronouncements
Critical Accounting Policies and Estimates
In preparing our financial statements we are required to formulate
working policies regarding valuation of our assets and liabilities and to
develop estimates of those values. In our preparation of the financial
statements for 2005, there were estimates made which were (a) subject to a
high degree of uncertainty and (b) material to our results. Those were
Estimating returns and allowances
Estimating allowance for doubtful accounts
Estimating reserve for excess and obsolete inventory
Estimating a tax asset valuation allowance
Estimating returns and allowances
Net revenue consists of product revenue reduced by estimated sales
returns and allowances. To estimate sales returns and allowances, we
analyze, both when we initially establish the reserve, and then each
quarter when we review the adequacy of the reserve, the following factors:
historical returns, current economic trends, levels of inventories of our
products held by our customers, and changes in customer demand and
acceptance of our products. This reserve represents a reserve of the gross
margin on estimated future returns and is reflected as a reduction to
accounts receivable in the accompanying consolidated balance sheet.
Increases to the reserve are recorded as a reduction to net revenue equal
to the expected customer credit memo and a corresponding credit is made to
cost of sales equal to the estimated cost of the returned product. The net
difference, or gross margin, is recorded as an addition to the reserve.
Because the reserve for sales returns and allowances is based on our
judgments and estimates, particularly as to future customer demand and
acceptance of our products, our reserves may not be adequate to cover
actual sales returns and other allowances. If our reserves are not
adequate, our future net revenues could be adversely affected.
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Estimating allowance for doubtful accounts
As needed based on specific customers' circumstances affecting their
probability of payment, we reserve an allowance for losses we may incur as
a result of our customers' inability to make required payments. Any
increase in the allowance results in a corresponding increase in our
general and administrative expenses. In establishing this allowance, and
then evaluating the adequacy of the allowance for doubtful accounts each
quarter, we analyze historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer
payment terms. If the financial condition of one or more of our customers
deteriorates, resulting in their inability to make payments, or if we
otherwise underestimate the losses we incur as a result of our customers'
inability to pay us, we could be required to increase our allowance for
doubtful accounts which could adversely affect our operating results. We
have a case whereby the aging of the receivable from a company undergoing
some business problems has led us to be in significant doubt as to its
collectibility and has caused us to institute legal proceedings for
collection. This situation has caused the allowance to be unusually large
in the present financial statements.
Estimating reserve for excess and obsolete inventory
We identify excess and obsolete products and analyze historical
usage, forecasted production based on demand forecasts, current economic
trends, and historical write-offs when evaluating the adequacy of the
reserve for excess and obsolete inventory. This reserve is reflected as a
reduction to inventory in the accompanying consolidated balance sheet, and
an increase in cost of revenues. If actual market conditions are less
favorable than our assumptions, we may be required to take additional
reserves, which could adversely impact our cost of revenues and operating
results.
Estimating a tax asset valuation allowance
Note 10 to the Financial Statements details our determination that we
should record a valuation allowance for the full value of the deferred tax
asset created by our net operating loss carryforward. The primary reason
for the determination was our lack of certainty as to whether Ultradata
would carry on profitable operations in the future.
We made no material changes to our critical accounting policies in
connection with the preparation of financial statements for 2005.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial
condition or results of operations.
Recent Accounting Pronouncements
There were no recent accounting pronouncements that have had or are
likely to have a material effect on the Company's financial position or
results of operations.
Item 7. FINANCIAL STATEMENTS
The financial statements of Ultradata Systems, Incorporated, together
with notes and the Report of Independent Certified Public Accountants, are
set forth immediately following Item 14 of this Form 10-KSB.
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Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not applicable.
Item 8A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: As of December 31,
2005, the Company's management carried out an evaluation, under the
supervision of the Company's Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's system of disclosure controls and procedures pursuant to the
Securities and Exchange Act (Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls
and procedures were effective, as of the date of their evaluation, for the
purposes of recording, processing, summarizing and timely reporting
material information required to be disclosed in reports filed by the
Company under the Securities Exchange Act of 1934.
Changes in Internal Controls. There were no changes in internal
controls over financial reporting, known to the Chief Executive Officer or
Chief Financial Officer, which occurred during the period covered by this
report that has materially affected, or is likely to materially affect, the
Company's internal control over financial reporting.
Item 8B. Other Information
None.
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists certain information regarding the officers
and directors of the Company as of April 4, 2006:
NAME AGE POSITION
--------------------------------------------------------------------------
Monte Ross 73 Chief Executive Officer, Director
Ernest Clarke 66 President & Chief Financial Officer,
Director
Mark L. Peterson 49 Vice President-Engineering, Secretary,
Director
Donald Rattner 73 Director
Matthew Klapman 36 Director
Directors hold office until the election and qualification of their
successors at a meeting of the Company's stockholders. Officers hold
office, subject to removal at any time by the Board, until their successors
are appointed and qualified.
Background of Directors and Executive Officers:
Monte Ross founded the Company in 1986 and has served as its Chief
Executive Officer and Chairman since inception. He also served as
President until April 2001. For over 20 years prior to founding the
Company, Mr. Ross was employed by McDonnell Douglas Corporation (now
Boeing) in a variety of positions. When he left McDonnell Douglas, Mr.
Ross was Director of Laser Systems, responsible for the group of
approximately 400 employees, which developed the first space laser
communication system and first space laser radar. Mr. Ross is a Fellow of
-11-
the Institute of Electrical and Electronic Engineers and the past President
of the International Laser Communication Society. Mr. Ross was awarded a
Master of Science degree in Electrical Engineering by Northwestern
University in 1962. He is the father-in-law of Mark L. Peterson, the
Company's Vice President-Engineering.
Ernest Clarke has been a Director of the Company since it was founded
in 1986. From August 1990 to June 1999 he served as Vice President -
Government Programs. He then served as Company's Vice President -
Controller from June of 1999 until April 2001. He was elevated to
President in April 2001. For over 20 years prior to joining Ultradata, Mr.
Clarke was employed by McDonnell Douglas Corporation (now Boeing) in a
variety of positions. When he left McDonnell Douglas, Mr. Clarke was its
Laser Product Development Manager with responsibility to supervise over 40
engineers. Mr. Clarke was awarded a Master of Science degree in Electrical
Engineering by Stanford University in 1966.
Mark L. Peterson has been a Director of the Company since it was
founded in 1986. He has served as the Company's Vice President of
Engineering since 1988. He is responsible for the design of the Company's
hand-held products. During the four years prior to joining the Company,
Mr. Peterson was employed by McDonnell Douglas Corporation as an
electronics engineer for fiber optic products and satellite laser cross-
link programs. Mr. Peterson was awarded a Master of Science degree in
Electrical Engineering by Washington University in 1980. He is the son-in-
law of Monte Ross.
Donald Rattner joined the Company in 1999 to serve as a member of the
Board of Directors. Mr. Rattner is a member/partner in BrookWeiner, LLC, a
Chicago-based accounting firm, and a member of the American Institute of
Certified Public Accountants and the Illinois CPA Society. He has served
on the boards of several corporations.
Matthew Klapman joined the Company in 2002 to serve as a member of
the Board of Directors. Mr. Klapman is the CEO of Future Vision
Technologies, Inc., which he co-founded in 1990. He has maintained a strong
career in technological innovation, business strategy, negotiation, and
team management. He has invented and developed a myriad of products in the
video, 3-D graphics, and communication fields. As a Director at Motorola,
he developed the computer graphics and marketing strategy for its corporate
strategy office and broadband wireless communications sector. In addition,
as Director of Research and Development for Motorola's Personal
Communications Sector, he spearheaded the creation of the new user
interface platform that is the basis for all of Motorola's cellular phones.
He has developed products and designs that have earned several industry
awards. He received a B.S. in Computer Engineering and a J.D. from the
University of Illinois at Urbana. He holds 4 issued and 7 pending patents.
AUDIT COMMITTEE
The Board of Directors has appointed an Audit Committee of the Board.
The present members of the Audit Committee are Donald Rattner and Matthew
Klapman. The Board of Directors has determined that Donald Rattner is
qualified to serve as an "audit committee financial expert", as defined in
the Regulations of the Securities and Exchange Commission. Mr. Rattner is
an "independent director", as defined in the Regulations of the Securities
and Exchange Commission.
-12-
CODE OF ETHICS
The Company has adopted a "Code of Business Ethics for Ultradata
Systems, Inc." The Code is applicable to all employees of the Company,
including its principal executive officer, principal financial officer,
principal accounting officer, or persons performing similar functions. The
Company will provide a copy of the Code of Ethics, without charge, to any
person who submits a request in writing to the President of the Company.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
None of the directors, officers, or beneficial owners of more than
10% of Ultradata's common stock failed to file on a timely basis reports
required during 2004 by Section 16(a) of the Exchange Act.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned
by, or paid by Ultradata to executives for services rendered in all
capacities to Ultradata during each of the last three fiscal years. There
was no other executive officer whose total salary and bonus for the fiscal
year ended December 31, 2005 exceeded $100,000. In 2005, in order to
preserve cash reserves, the three principals below deferred a significant
portion of their salaries, as shown in the notes below. The Company
records this liability in its accrued expenses.
NONE
Annual Long-term
Compensation Compensation
Name & Position Year Salary Bonus Other Options
----------------------------------------------------------------------------
Monte Ross, 2005 $ 145,310 (1) $ - $ -
Chief Executive Officer 2004 $ 167,880 $ - $ - (2)
2003 $ 157,367 $ - $ -
Ernest Clarke 2005 $ 101,673 (3) $ - $ -
President 2004 $ 111,040 $ - $ - (4)
2003 $ 103,695 $ - $ -
Mark Peterson 2005 $ 89,824 (5) $ - $ -
Vice President -
Engineering 2004 $ 101,152 $ - $ - (6)
2003 $ 93,101 $ - $ -
(1) Includes $92,100 in cash and $53,210 deferred.
(2) During 2004 the Board's Stock Option Committee awarded Mr. Ross
options to purchase 25,000 shares of Common Stock at an exercise price
of $.72.
(3) Includes $65,706 paid in cash and $35,967 deferred.
(4) During 2004 the Board's Stock Option Committee awarded Mr. Clarke
options to purchase 25,000 shares of Common Stock at an exercise price
of $.72.
(5) Includes $58,899 paid in cash and $30,925 deferred.
(6) During 2004 the Board's Stock Option Committee awarded Mr. Peterson
options to purchase 30,000 shares of Common Stock at an exercise price
of $.72.
Employment Agreements
Messrs. Ross, Peterson, and Clarke have individual employment
agreements with Ultradata beginning September 1, 1994. Except as noted
herein, the terms of the employment agreements are substantially identical.
The agreements were extended in 1997 by action of the Board of Directors to
October 31, 2000, again in 2000 to October 31, 2003, again in 2003 to
October 1, 2005, and again in 2005 to October 1, 2006. The agreements
provide for base salaries, which are adjusted annually by the Board of
Directors. If the majority of the Board cannot agree as to a level of
salary adjustment, the salary will increase by 10% for Mr. Clarke and Mr.
Peterson and 5% for Mr. Ross. The employment agreements restrict each
officer from competing with Ultradata for one year after the termination of
his employment unless that employee establishes that his employment by a
competitor will not involve the use of any information considered
confidential by Ultradata.
-13-
Stock Option Awards
The following tables set forth certain information regarding the
stock options acquired by the Company's Chief Executive Officer and Chief
Financial Officer during the year ended December 31, 2005 and those options
held by each of them on December 31, 2005.
Option Grants in the Last Fiscal Year
Percent
of total
Number of options
securities granted to
underlying employees Exercise
option in fiscal Price Expiration
Name granted year ($/share) Date
------------------------------------------------------------------------------
M. Ross NONE - N/A N/A
E. Clarke NONE - N/A N/A
Aggregated Fiscal Year-End Option Values
Number of securities underlying Value of unexercised in-the-money
unexercised options at fiscal options at fiscal year-end ($)
Name year-end (#) (All exercisable) (All exercisable)
-------------------------------------------------------------------------------
M. Ross 146,813 $43,853
E. Clarke 91,423 $23,912
Remuneration of Directors
Outside Directors receive $500 per meeting and are reimbursed for
out-of-pocket expenses incurred on the Company's behalf. From time to time
they are granted stock and options as recommended and approved by the
inside directors. During 2005, the outside directors each received 2,000
shares of Ultradata common stock.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to us with respect
to the beneficial ownership of our common stock by the following:
* each shareholder known by us to own beneficially more than 5% of
our common stock;
* Monte Ross and Ernest Clarke;
* each of our other directors; and
* all directors and executive officers as a group.
There are 12,682,238 shares of our common stock outstanding at April
5, 2006. 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
-14-
We do not, however, include these "issuable" shares in the outstanding
shares when we compute the percent ownership of any other person.
Name and Amount and
Address of Nature of Percentage
Beneficial Beneficial of Outstanding
Owner (1) Ownership Shares
---------------------------------------------------------------
Monte Ross 306,813(2) 2.4%
Ernest Clarke 252,275(3) 2.0%
Mark Peterson 308,893(4) 2.4%
Donald Rattner 50,352(5) 0.4%
Matthew Klapman 8,000(6) 0.1%
All officers and
directors as a
group (5 persons) 926,333(7) 7.1%
(1) Unless otherwise indicated, the address of each of these shareholders
is c/o Ultradata Systems, Incorporated, 1240 Dielman Industrial Court,
St. Louis, Missouri 63132
(2) Includes 100,000 shares owned by the Harriet Ross Revocable Trust,
and 60,000 shares owned by the Monte Ross Revocable Trust. Also includes
options to purchase 146,813 shares.
(3) All shares are owned jointly with Mr. Clarke's spouse. Also includes
options for 91,423 shares.
(4) Includes options for 117,511 shares.
(5) Includes options for 4,000 shares.
(6) Includes options for 4,000 shares.
(7) Includes options for 371,747 shares.
Stock Option Plans
The information set forth in the table below regarding equity
compensation plans (which includes individual compensation arrangements)
was determined as of December 31, 2005.
Equity Compensation Plan Information
Number of Number of
securities Weighted securities
to be average remaining
issued upon exercise available
exercise of price of for future
outstanding outstanding issuance
options, options, under equity
warrants warrants compensation
and rights and rights plans
------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders............ 280,747 $.14 0
Equity compensation plans not
approved by security
holders............ 116,000* $.72 -
---------------------------------------------
Total..................... 427,663 $.17 0
* Represents non-qualified stock options given to the Company's outside
directors and employees in 2004. The options expire on December 11,
2014.
-15-
We have two stock option plans: the 1994 Incentive Stock Option Plan
and the 1996 Incentive Stock Option Plan, both of which were approved by
our shareholders. The material terms of the Plans are identical. In
aggregate, the Plan authorize the issuance of options for 500,000 shares,
all of which have been issued. Of those, options have been exercised to
purchase 94,523 shares of common stock. These plans have now expired.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
Item 13. EXHIBITS, LIST, AND REPORTS
(a) Financial Statements
List of Financial Statements Under Item 7 of this Report:
Report of Independent Registered Public Accounting Firm
Balance Sheet as of December 31, 2005.
Statements of Operations for each year in the two-year period
ended December 31, 2005.
Statements of Stockholders' Equity for each year in the two-year
period ended December 31, 2005.
Statements of Cash Flows for each year in the two-year period ended
December 31, 2005.
Notes to Financial Statements for each year in the two-year period
ended December 31, 2005.
(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-a(4) Amendment to Articles of Incorporation dated June 15, 2005 (4)
3-b. By-laws. (1)
4-a. Specimen of Common Stock Certificate. (1)
10-a. Lease dated May 23, 1990, as amended on November 31, 1993, for
premises at 9375 Dielman Industrial Drive, St. Louis, Missouri.(1)
10-a(1) Lease Addendum dated October 17, 1995, for premises at 9375 Dielman
Industrial Drive, St. Louis, Missouri.(1)
10-a(2) Lease Addendum dated October 5, 2001, for premises at 1240-1244
Dielman Industrial Court, St. Louis, Missouri - filed as an exhibit
to the Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 2002 and incorporated herein by reference.
10-b. Employment Agreement with Monte Ross.(1)
10-b(1) Extended Employment Agreement between the Company and Monte Ross (2)
10-c. Employment Agreement with Mark L. Peterson.(1)
-16-
10-c(1) Extended Employment Agreement between the Company and Mark L.
Peterson (2)
10-d. Employment Agreement with Ernest Clarke.(1)
10-d(1) Extended Employment Agreement between the Company and Ernest Clarke
(2)
10-e. Royalty Agreement dated September 14, 1989, between the Company and
Leonard Missler.(1)
10-e(1) Modification Agreement dated November 4, 1995, to Royalty Agreement
dated September 14, 1989, between the Company and Leonard Missler. (1)
10-f Securities Purchase Agreement dated February 14, 2005 between
Ultradata Systems and Golden Gate Investors, Inc. (3)
10-g 63/4% Convertible Debenture dated February 14, 2005 issued to Golden
Gate Investors, Inc. (3)
10-h Warrant to Purchase Common Stock dated February 14, 2005 issued to
Golden Gate Investors, Inc. (3)
10-i Addendum to Convertible Debenture and Securities Purchase Agreement (3)
21. Subsidiaries - None.
31. Rule 13a-14(a) Certification
32. Rule 13a-14(b) Certification
(1) Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (33-85218 C) and incorporated herein by
reference.
(2) Previously filed as an Exhibit to Form 10-KSB for the year ended
December 31, 1997, and incorporated herein by reference.
(3) Previously filed as an Exhibit to the Current Report on Form 8-K
dated February 17, 2005 and incorporated herein by reference.
(4) Previously filed as an Exhibit to the Company's Registration
Statement on Form SB-2 (333-123764) and incorporated herein by
reference.
Reports on Form 8-K:
None
Item 14. Principal Accountant Fees and Services
Audit Fees
Webb & Company, P.A. billed $16,318 to the Company for professional
services rendered for the audit of our 2005 financial statements and review
of the financial statements included in our 2005 10-QSB filings. Webb &
Company, P.A. billed $15,117 to the Company for professional services
rendered for the audit of our 2004 financial statements and review of the
financial statements.
Audit-Related Fees
Webb & Company, P.A. billed $1,675 to the Company in 2005 for
assurance and related services that are reasonably related to the
performance of the 2005 audit or review of the quarterly financial
statements. Webb & Company, P.A. billed $397 to the Company in 2004 for
assurance and related services that are reasonably related to the
performance of the 2004 audit or review of the quarterly financial
statements.
-17-
Tax Fees
Webb & Company, P.A. billed $700 to the Company in 2005 for
professional services rendered for tax compliance, tax advice and tax
planning. Webb & Company, P.A. billed $700 to the Company in 2004 for
professional services rendered for tax compliance, tax advice and tax
planning.
All Other Fees
Webb & Company, P.A. billed $0.00 to the Company in 2005 and 2004 for
services not described above.
It is the policy of the Company's Audit Committee that all services
by our principal accountant must be pre-approved by the Audit Committee.
All of the services described above were approved by the Audit Committee.
-18-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of:
Ultradata Systems, Inc.
We have audited the accompanying balance sheet of Ultradata Systems, Inc.
as of December 31, 2005, and the related statements of operations, changes
in stockholders' equity (deficiency) and cash flows for the years ended
December 31, 2005 and 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly
in all material respects, the financial position of Ultradata Systems, Inc.
as of December 31, 2005 and the results of its operations and its cash
flows for the years ended December 31, 2005 and 2004 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company has a net loss of $5,871,819, a negative
cash flow from operations of $627,935, a working capital deficiency of
$21,967, and a stockholders' deficiency of $4,919,458. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans concerning these matters are also described in
Note 13. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
WEBB & COMPANY, P.A.
Boynton Beach, Florida
March 21, 2006
F-1
ULTRADATA SYSTEMS, INCORPORATED
BALANCE SHEET
AS OF DECEMBER 31, 2005
ASSETS
CURRENT ASSETS
Cash $ 133,524
Trade accounts receivable, net of allowance
for doubtful accounts of $100 96,910
Inventories, net 86,314
Prepaid expenses 39,144
----------
Total Current Assets 355,892
PROPERTY AND EQUIPMENT - NET 33,251
OTHER ASSETS 5,444
----------
TOTAL ASSETS $ 394,587
==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 200,172
Accrued liabilities 177,687
----------
Total Current Liabilities 377,859
----------
LONG-TERM LIABILITIES
Notes payable - long term 119,993
Derivative and warrant liability 4,816,193
----------
TOTAL LIABILITIES 5,314,045
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' DEFICIENCY
Preferred stock, $0.01 par value, 4,996,680
shares authorized, none issued and
outstanding -
Series A convertible preferred stock, 3,320
shares authorized, none issued and
outstanding -
Common stock, $0.01 par value, 50,000,000
shares authorized, 8,341,343 issued and
outstanding 83,413
Additional paid-in capital 9,528,366
Accumulated deficit (14,531,237)
----------
TOTAL STOCKHOLDERS' DEFICIENCY (4,919,458)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 394,587
==========
See accompanying notes to financial statements.
F-2
ULTRADATA SYSTEMS, INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
----------- -----------
NET SALES $ 781,220 $ 3,970,434
COST OF SALES 422,361 2,026,756
---------- ---------
GROSS PROFIT 358,859 1,943,678
---------- ---------
OPERATING EXPENSES
Selling 314,101 329,137
General and administrative 812,733 1,151,439
Research and development 278,241 140,507
---------- ---------
Total Operating Expenses 1,405,075 1,621,083
---------- ---------
OPERATING (LOSS) INCOME (1,046,216) 322,595
---------- ---------
OTHER INCOME (EXPENSE)
Interest and dividend income 684 1,620
Interest expense (151,801) (6,408)
Warrant fair-value expense (4,824,878) -
Royalty income 136,478 -
Settlement of legal dispute 13,845 -
Miscellaneous income 69 15
---------- ---------
Total Other Income (Expense) (4,825,603) (4,773)
---------- ---------
(LOSS) INCOME BEFORE INCOME TAX EXPENSE (5,871,819) 317,822
Income tax expense - -
---------- ---------
NET (LOSS) INCOME $(5,871,819) $ 317,822
========== =========
NET (LOSS) INCOME PER SHARE
(Loss) income per share - basic and diluted $ (0.86) $ 0.05
========== =========
Weighted average shares outstanding -
basic and diluted 6,811,257 6,225,304
========== =========
See accompanying notes to financial statements.
F-3
ULTRADATA SYSTEMS, INCORPORATED
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Notes
Receivable Total
Additional for Deferred Stockholder'
Preferred Stock Common Stock Paid-in Common Treasury Stock Accumulated Stock Equity
Shares Amount Shares Amount Capital Stock Shares Amount Deficit Compensation (Deficiency)
----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2003 - - 5,783,840 57,838 8,916,685 - - - (8,977,240) (2,717)
Conversion of
notes payable
to common
stock 273,906 2,739 24,861 27,600
Issuance of
common stock
to non-
employee for
services
performed 223,000 2,230 171,710 (115,960) 60,010
Exercise of
employee stock
options 100,441 1,005 6,026 7,031
Exercise of
director stock
options 29,000 290 1740 2,030
Net income, 2004 317,822 317,882
-----------------------------------------------------------------------------------------------------------
Balance at
December 31, 2004 - $ - 6,410,187 $64,102 $9,121,022 $ - - $ - $(8,659,418) $ (115,960) $ 409,746
Conversion of
debentures to
common stock - - 1,915,656 19,156 311,029 - - - - - 330,185
Purchase and
conversion of
warrants to
common stock - - 9,500 95 94,905 - - - - - 95,000
Issuance of
common stock
to non-
employee for
services
performed - - 6,000 60 1,410 - - - - 115,960 117,430
Net loss, 2005 - - - - - - - - (5,871,819) - (5,871,819)
---------------------------------------------------------------------------------------------------------------
Balance at
December 31,2005 - $ - 8,341,343 $83,413 $9,528,366 $ - - $ -$(14,531,237) $ -$(4,919,458)
===============================================================================================================
F-4
See accompanying notes to financial statements.
ULTRADATA SYSTEMS, INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (5,871,819) $ 317,822
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 16,714 14,976
Write-down of inventory 18,166 30,457
Stock issued for services 117,430 57,980
Provision for doubtful accounts (174,246) 176,848
Derivative liability 4,824,878 -
Amortization of note-payable discount 141,493 -
Changes in assets and liabilities:
Trade accounts receivable, net 115,796 412,182
Inventories (14,590) (64,752)
Prepaid expenses and other assets 2,370 (36,349)
Accounts payable 74,153 (334,682)
Accrued liabilities 121,720 (34,826)
--------- --------
Net Cash (Used In) Provided By Operating Activities (627,935) 539,656
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (19,507) (19,475)
--------- --------
Net Cash (Used In) Provided By Investing Activities (19,507) (19,475)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercising stock options - 9,061
Payments on notes payable - (311,202)
Proceeds from sale of warrants 95,000 -
Proceeds from notes payable - 165,000
Proceeds from sale of convertible debentures 300,000 -
Payments received on subscriptions, net - -
--------- --------
Net Cash Provided By (Used In) Financing Activities 395,000 (137,141)
--------- --------
NET (DECREASE) INCREASE IN CASH (252,442) 383,040
CASH - BEGINNING OF YEAR 385,966 2,926
--------- --------
CASH - END OF YEAR $ 133,524 $ 385,966
========= ========
See accompanying notes to financial statements.
F-5
ULTRADATA SYSTEMS, INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
Interest paid during the year $ 151,801 $ 6,408
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 2005, Golden Gate Capital, Inc. converted $21,500 of the debenture
into 1,925,156 shares of Ultradata common stock in accordance with the
convertible note agreement.
During 2004, a portion of the notes payable in the amount of $27,600 was
converted to 273,906 shares of common stock.
F-6
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Operations
Ultradata Systems, Incorporated (the "Company") was incorporated in
the State of Missouri in March 1986 under the name of Laser Data
Technology, Inc. The Company subsequently merged into its wholly
owned subsidiary, Ultradata Systems, Incorporated, incorporated in the
State of Delaware, and Laser Data was dissolved. The principal
business activity of the Company, located in St. Louis, is the design,
manufacture, and sale of hand-held electronic information products.
The Company sells the products in the United States through direct
marketing, independent sales representatives, mail order catalogs, and
mass market retailers.
(B) Use of Estimates
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America and, as such, include amounts based on informed estimates and
assumptions by management, with consideration given to materiality.
Actual results could vary from those estimates.
(C) Cash and Cash Equivalents
Cash includes deposits at financial institutions with maturities of
three months or less. The Company at times has cash in banks in
excess of FDIC insurance limits and places its temporary cash
investments with high credit quality financial institutions. At
December 31, 2004, the Company had approximately $285,800 in cash
balances at financial institutions which were in excess of the FDIC
insured limits. At December 31, 2005, the Company had approximately
$33,534 in cash balances at financial institutions which were in
excess of the FDIC insured limits.
(D) Revenue Recognition
Net sales are recognized when products are shipped. The Company has
established programs, which, under specified conditions, enable
customers to return product. The Company establishes liabilities for
estimated returns at time of shipment. In addition, accruals for
customer discounts and rebates are recorded when revenues are
recognized.
(E) Inventories
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Provision for
potentially obsolete or slow moving inventory is made based on
management's analysis of inventory levels and future sales forecasts.
(F) Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. The Company capitalizes certain software development
F-7
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
costs in accordance with the American Institute of Certified Public
Accountants Statement of Position No. 98-1, "Accounting for the Costs
of Software Developed or Obtained for Internal Use." Depreciation is
provided using the straight-line basis over the estimated useful lives
of the assets, generally five years. Leasehold improvements are
amortized over the shorter of the term of the related lease or their
useful life. Expenditures for maintenance and repairs are charged to
expense as incurred. The Company continually reviews property and
equipment to determine that the carrying values are not impaired.
(G) Long-Lived Assets
The Company accounts for long-lived assets under the Statements of
Financial Accounting Standards Nos. 142 and 144 "Accounting for
Goodwill and Other Intangible Assets" and "Accounting for Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 142 and 144"). In accordance
with SFAS No. 142 and 144, long-lived assets, goodwill and certain
identifiable intangible assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
For purposes of evaluating the recoverability of long-lived assets,
goodwill and intangible assets, the recoverability test is performed
using undiscounted net cash flows related to the long-lived assets.
(H) Advertising
The Company expenses the production costs of advertising the first
time advertising takes place. Advertising expense totaled $204,123 and
$95,664 for the years ended December 31, 2005 and 2004, respectively.
(I) Reclassification
Certain amounts from prior periods have been reclassified to conform
to the current year presentation.
(J) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure About
Fair Value of Financial Instruments," requires certain disclosures
regarding the fair value of financial instruments. Trade accounts
receivable, accounts payable, and accrued liabilities are reflected in
the financial statements at fair value because of the short-term
maturity of the instruments.
F-8
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
(K) Research and Development Costs
Research and development costs consist primarily of expenditures
incurred bringing a new product to market or significantly enhancing
existing products. The Company expenses all research and development
costs as they are incurred unless they are associated with the
development of tools or processes for production used in-house rather
than for product delivered to a customer.
(L) Royalty Expense
Royalty expense is recognized on a pro rata basis as units are sold
during the same period in which the related unit sales were
recognized.
(M) Income Taxes
The Company accounts for income taxes under the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", ("SFAS
109"). Under SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and
tax credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(N) Income (Loss) Per Share
Basic and diluted income (loss) per share is calculated by dividing
net income (loss) for the period by the weighted average number of
shares of common stock outstanding during the period. The assumed
exercise of stock options and warrants is only included in the
calculation of diluted earnings per share, if dilutive (see Note 10).
(O) Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards No. 123
(SFAS No. 123), the Company has elected to account for stock options
issued to employees under Accounting Principles Board Opinion No. 25
("APB Opinion No. 25") and related interpretations. The Company
accounts for stock options issued to consultants and for other
services in accordance with SFAS No. 123.
(P) New Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 151,
"Inventory Costs - an amendment of ARB No. 43, Chapter 4"" SFAS No.
152, "Accounting for Real Estate Time-Sharing Transactions - an
amendment of FASB Statements No. 66 and 67," SFAS No. 153, "Exchanges
F-9
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
of Non-monetary Assets - an amendment of APB Opinion No. 29," and SFAS
No. 123 (revised 2004), "Share-Based Payment," were recently issued.
SFAS No. 151, 152, 153 and 123 (revised 2004) have no current
applicability to the Company and have no effect on the financial
statements.
(Q) Business Segments
The Company applies Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related
Information." The Company operates in one segment and therefore
segment information is not presented.
NOTE 2 INVENTORIES
Inventories (net) at December 31, 2005 consist of the following:
Raw materials $ 9,665
Finished goods 76,649
------
$86,314
======
At December 31, 2005, the Company has reserved $712,062 for obsolete
inventory. During 2005 and 2004, the Company recognized an impairment
of $14,590 and $30,456 respectively.
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2005 consist of the following:
Research and development equipment $ 17,151
Tooling and test equipment 21,614
Office furniture and equipment 238,533
Sales displays 52,101
Leasehold improvements 29,989
--------
359,388
Less accumulated depreciation and
amortization (326,137)
--------
$ 33,251
========
Depreciation and amortization expense for the years ended December 31,
2005 and 2004 totaled $16,714 and $14,976, respectively.
F-10
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
NOTE 4 ACCRUED LIABILITIES
Accrued liabilities at December 31, 2005 consist of the following:
Accrued payroll and related expenses $ 130,981
Accrued vacation 20,797
Accrued expenses 15,889
Other accrued liabilities 10,020
--------
$ 177,687
========
NOTE 5 CONVERTIBLE DEBENTURE
To obtain funding for ongoing operations, the Company entered into a
Securities Purchase Agreement (the SPA) and various amendments to the SPA
with Golden Gate Investors, Inc. (GGI) on February 14, 2005 for the sale of
(i) $300,000 in unsecured convertible debentures (the Notes) and (ii)
warrants to purchase 300,000 shares of the Company's common stock.
The Notes bear interest at 4.75% per annum, mature three years from the
date of issuance and are convertible into the number of shares of the
Company's common stock equal to the dollar amount of the Notes being
converted multiplied by 11, less the product of the conversion formula
multiplied by 10 times the dollar amount of the Notes being converted,
which is divided by the conversion formula. The conversion formula is the
lesser of (a) $1.25, (b) eighty percent of the average of the three lowest
volume weighted average prices during the twenty trading days prior to the
conversion. Accordingly, there is no limit on the number of shares into
which the Notes may be converted. The Company has agreed to register the
shares that may be issued upon conversion of the Notes and exercise of the
related warrants.
Beginning in the first full calendar month after the registration statement
is declared effective, GGI has agreed to convert at least 3%, but no more
than 10% of the face value of the Notes into shares of the Company's common
stock. If GGI converts more than 3% of the Notes in any calendar month, the
excess over 3% shall be credited against the subsequent month's minimum
conversion amount. If GGI fails to convert at least 3% of the face amount
of the Notes in any given calendar month, GGI will not be entitled to
collect interest on the Notes for that month. If the volume weighted
average price of the Company's common stock is below $0.50, the Company
shall have the right to prepay that portion of the Notes that GGI is
required to convert, plus any accrued but unpaid interest at 125% of such
amount. If at any time during the calendar month, the volume weighted
average price is below $0.20, GGI shall not be obligated to convert any
portion of the Notes during that month.
The Notes include certain features that are considered embedded derivative
financial instruments, such as the conversion feature, events of default
and a variable liquidated damages clause. These features are described
below, as follows:
F-11
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
- The Notes' conversion feature is identified as an embedded derivative
and has been bifurcated and recorded on the Company's balance sheet
at its fair value;
- The SPA includes a penalty provision based on any failure to meet
registration requirements for shares issuable under the conversion of
the Notes or exercise of the warrants, which represents an embedded
derivative, but such derivative has a de minimus value and has not
been recorded in the accompanying financial statements; and
- The SPA contains certain events of default including not having
adequate shares registered to effectuate allowable conversions; in
that event, the Company is required to pay a conversion default
payment at 125% of the then outstanding principal balance on the
Notes, which is identified as an embedded derivative, but such
derivative has a de minimus value and has not been recorded in the
accompanying consolidated financial statements.
In conjunction with the Notes, the Company issued warrants to purchase
300,000 shares of common stock. The accounting treatment of the derivatives
and warrants requires that the Company record the warrants at their fair
values as of the inception date of the agreement, which totaled $600.
The initial fair value assigned to the embedded derivatives and warrants
was $5,957,188. The Company recorded the first $300,000 of fair value of
the derivatives and warrants to debt discount which will be amortized to
interest expense over the term of the Notes. The Company recorded an
amortization expense for the year ended December 31, 2005 of $141,493.
The market price of the Company's common stock significantly impacts the
extent to which the Company may be required or may be permitted to convert
the unrestricted and restricted portions of the Notes into shares of the
Company's common stock. The lower the market price of the Company's common
stock at the respective times of conversion, the more shares the Company
will need to issue to convert the principal and interest payments then due
on the Notes. If the market price of the Company's common stock falls below
certain thresholds, the Company will be unable to convert any such
repayments of principal and interest into equity, and the Company will be
forced to make such repayments in cash. The Company's operations could be
materially adversely impacted if the Company is forced to make repeated
cash payments on the Notes.
In summary, during 2005, the Company took a charge of $4,824,878 as a
result of the financing described above in accordance with guidance
provided in EITF 0019:
Note payable - original face amount $ 300,000
Conversions during the year 21,500
---------
Note payable balance at 12/31/2005 278,500
Note payable - discount 119,993
F-12
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
---------
Amortized amount charged to interest 151,801
Initial fair-value expense 4,216,193
Added fair-value charge due to change
in stock price 608,685
---------
Total (non-cash) fair-value charge $4,824,878
=========
Future minimum principal payments are as follows under the Debentures and
Notes for the years ending December 31: 2006 $ -
2007 $ 278,500
NOTE 6 COMMITMENTS AND CONTINGENCIES
(A) Operating Lease
The Company renewed its operating lease for its corporate facilities,
which expires April 30, 2006. The Company pays monthly rent of $3,926,
plus 16% of all building expenses.
Future minimum lease payments under the operating lease at December
31, 2005, consist of the following:
Year Amount
------ --------
2006 $ 15,705
Rent expense totaled $44,387 and $45,500 for the years ended
December 31, 2005 and 2004, respectively.
(B) Royalty Agreements
On September 14, 1989, the Company entered into a twenty-year royalty
agreement relating to its ROAD WHIZ(tm) product. After the sale of
20,000 ROAD WHIZ(tm) units, the agreement thereafter provides for a 1%
royalty payment on net sales of the ROAD WHIZ(tm) product and 0.5% on the
Company's other products that incorporate the ROAD WHIZ(tm) database.
Royalty payments are made quarterly until September 13, 2009. During
the years ended December 31, 2005 and 2004, royalty expense totaled
$16,662 and $35,799, respectively.
F-13
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
On September 15, 1998, the Company entered into a three-year royalty
agreement with AAA related to the AAA TripWizard(tm). The terms are
automatically renewable for one year and amount to 10% of the
wholesale price on sales other than through AAA stores and $1.00 per
unit on AAA sales. This agreement recognizes the benefit of the AAA
logo and data and their promotion of the product through their travel
stores. On July 1, 2002, the agreement was amended to provide a
royalty of $1 per unit on all sales of the unit.
In August of 2003, the Company entered into a royalty agreement with
AAA for use of the AAA brand on the Company's Talking Road Navigator.
This agreement is similar to the above agreement with regard to sales
through AAA stores and royalties for other sales. Prior review and
approval by AAA of the use of AAA brands in TV and other media are a
part of the agreement.
In January 2004, the Company reached an agreement with AAA National to
terminate the existing agreement for private branding of the AAA
Talking Road Navigator(tm) as of March 27, 2004. This termination
occurred at the request of AAA National for internal business reasons
and not for cause or non-performance by the Company, in accordance
with the terms for cancellation of the agreement by either party.
In May 2004, AAA notified the Company that it does not intend to renew
the marketing agreement on the AAA TripWizard. The Company, per terms
of the agreement, can continue to market the product and divest itself
of its inventory during 2005.
During the years ended December 31, 2005 and 2004, AAA royalty expense
for both products totaled $0 and $45,837, respectively.
On April 19, 2001, the Company entered into a three-year royalty
agreement with Rand McNally. The agreement renews automatically for
one-year periods up to a maximum of five additional years unless
terminated earlier. The agreement calls for the Company to pay a
royalty of 10% of net sales of the TripLink and Pocket TripLink
devices that contain the Rand McNally logo or $1.50 for each device
sold, whichever is greater. For the first year of the agreement, the
Company guarantees a minimum payment of $150,000, and must pay an
additional $50,000 if 50,000 or more devices are sold. The guaranteed
annual minimum for each subsequent anniversary year increases to 115%
of the amount of the royalties due (inclusive of the guaranteed annual
minimum) for the previous year. In addition to the per unit royalty,
the Company must pay (1) a royalty of $.01 to $.02 for each route
created by authorized users of the services provided by the agreement,
(2) a royalty of $0.48 to $0.62 for each Pocket Road Atlas ordered
from Rand McNally, and (3) a $0.12 license fee for each Pocket Road
Atlas shipped to customers.
On February 21, 2002, the royalty agreement with Rand McNally was
amended as follows: (1) beginning December 16, 2002, either party may
terminate the agreement with sixty days written notice, (2) the
Company may begin using the Rand McNally logo on additional products,
(3) beginning March 1, 2002, the Company shall pay twelve monthly
F-14
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
installments of $8,333 to the remaining balance of $100,000 owed to
Rand McNally for the first year minimum, and (4) the Company shall
sell its TripLink device to Rand McNally for $7.50 per unit below the
normal selling price, and this discount shall be used as a credit
against the monthly payment in (3) above.
In February 2003, the agreement with Rand McNally was further amended
to provide a new payment schedule and basis for the TripLink royalties.
The Company agreed to pay the remaining balance for the TripLink Program
in accordance with the following terms:
The beginning balance of $52,251 on January 1, 2003, shall bear
interest at the rate of 6% APR. The payment schedule shall consist of
$2,000 upon signing of the amendment and $2,000 on the 15th of each
month commencing March 15, 2003. On or before August 31, 2003, a
final balloon payment is required equal to the sum of the outstanding
balance and any accrued unpaid interest, less any credits resulting
from TripLink sales in the interim. The agreement was signed and the
initial payment of $2,000 was made in February 2003.
In 2003, the Company paid $20,000, including $2,341 in interest, to
Rand McNally and reduced the balance to $27,045 on December 31, 2003,
when credits are also taken into account. Since the Company was
unable to retire the balance by August 31, 2003 as planned, the
Company continued monthly payments and accrual of interest.
In 2004, the Company paid $510 in interest, accrued $855 in credits,
and retired the balance of $26,802 in May 2004.
During the years ended December 31, 2005 and 2004, royalty expense
totaled $0 and $8, respectively.
(D) Stanton Walker Consulting Agreement
In September 2004, the Company signed a business advisory and
consulting services agreement with New York-based Stanton Walker &
Company. Stanton Walker will assist in the development of certain
strategic initiatives of the Company. These initiatives include
opening discussions with several companies regarding licensing
arrangements, joint ventures or distribution arrangements. Stanton
Walker's work will include due diligence, structuring transaction
terms and providing consulting services throughout the process.
Stanton Walker will also seek potential acquisition candidate
companies that fit Ultradata Systems' business objectives.
Stanton Walker & Company provides a full range of strategic
operational, marketing, financial advisory and M & A services to
public companies. While they provide assistance in a wide array of
industries, Stanton Walker is especially interested in working with
companies where their products and/or services appear to offer the
company's stakeholders an opportunity for a significant return.
F-15
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
Stanton Walker were issued 223,000 shares of Ultradata Common Stock
with a prevailing market value on the date of the agreement of
$173,940 in payment for their services. The Company is amortizing the
compensation expense over the 12-month life of the agreement. As of
December 31, 2004, the Company recognized $57,980 of the consulting
expense related to the agreement. During the year ended December 31,
2005 the Company recognized consulting fees of $115,960.
NOTE 7 STOCKHOLDERS' EQUITY (DEFICIENCY)
(A) Common Stock Issuances
During 2004, a portion of the notes payable in the amount of $27,600
was converted to 273,906 shares of common stock. No gain or loss was
recognized on this transaction.
During 2004, a director exercised 29,000 common stock options for cash
of $2,030.
During 2004, 223,000 shares were issued to a consultant for services
rendered (see Note 6).
During 2004, employees exercised 100,441 common stock options for cash
of $7,031.
During 2005, 6,000 shares were issued to directors for services
performed. The shares were valued at the fair value on the date of
grant of $1470.
During 2005, 1,925,156 shares of common stock were issued to Golden
Gate Investors, Inc. due to their conversion of $21,500 of the $300,000
debenture for Golden Gate Investors, Inc. and their exercising 9,500
warrants at $10 per share in accordance with that financing agreement
(see Note 5).
NOTE 8 STOCK OPTIONS AND WARRANTS
(A) Stock Options Issued Under Qualified Stock Option Plans
Under the 1994 Incentive Stock Option Plan, the Company may grant
incentive stock options to its employees, officers, directors, and
consultants of the Company to purchase up to 175,000 shares of common
stock. Under the 1996 Incentive Stock Option Plan the Company may
grant incentive stock options to its employees, officers, directors,
and consultants of the Company to purchase up to 175,000 shares of
common stock. In July 2000, the Company's shareholders approved an
extension of the 1996 Incentive Stock Options plan to provide for
150,000 additional shares to be made available for future grant.
Under both plans, the exercise price of each option equals or exceeds
the market price of the Company's stock on the date of grant, and the
options' maximum term is five years. Options are granted at various
times and are exercisable immediately.
F-16
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
During the year ended December 31, 2004, the Company granted 112,000
stock options to certain employees and directors. The Company applies
APB Opinion No. 25 and related interpretations in accounting for stock
options issued to employees. Accordingly, no compensation cost has
been recognized for options issued to employees. Had compensation
cost been determined based on the fair market value at the grant date,
consistent with SFAS 123, the Company's net income would have changed
to the pro-forma amounts indicated below.
2005 2004
------------ ----------
Net (loss) income As Reported $ (5,871,819) $ 317,822
Pro Forma $ (5,871,819) 239,552
Basic and diluted income per share
As Reported $ (0.86) $ 0.05
Pro Forma $ (0.86) $ .04
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 2004: dividend yield
of zero; expected volatility of 132%, risk-free interest rate of
5.40%; expected lives of five years for both plans.
A summary of the status of Company's two fixed stock option plans as
of December 31, 2005 and 2004, and the changes during the years then
ended is presented below:
2005 2004
-------------------- ------------------
Weighted Weighted
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
---------------------------------------------------------------------
Outstanding at beginning of
year 280,747 $ 0.10 392,188 $ 0.14
Cancelled - - - -
Granted - $ - - $ -
Forfeited - $ - - $ -
Expired (5,000) $ 1.50 (11,000) $ 2.00
Exercised - - (100,414) $ 0.07
-------- ----- -------- ------
Outstanding at end of year 275,747 $ 0.05 280,747 $ 0.10
======== ===== ======== ======
Options exercisable at year
end 275,747 280,747
======== ========
Weighted average fair value
of options granted to
employees during the year $ - $ -
======== ========
F-17
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
Options Outstanding Options Exercisable
---------------------------------------- ------------------------------------
Number Weighted
Outstanding Average Weighted Number Weighted
Range of at Remaining Average Exercisable at Average
Exercise December Contractual Exercise at December Exercise
Price 31, 2005 Life Price 31, 2005 Price
------------------------------------------------------------------------------
$0.00 - 0.99 275,747 1.0 $0.07 275,747 $0.07
------- --- ----- ------- -----
275,747 1.0 $0.07 275,747 $0.07
======= === ==== ======= ====
Options Outstanding Options Exercisable
---------------------------------------- ------------------------------------
Number Weighted
Outstanding Average Weighted Number Weighted
Range of at Remaining Average Exercisable at Average
Exercise December Contractual Exercise at December Exercise
Price 31, 2004 Life Price 31, 2004 Price
------------------------------------------------------------------------------
$0.00 - 0.99 275,747 1.0 $0.07 275,747 $0.07
1.00 - 1.99 5,000 1.0 1.50 5,000 1.50
------- --- ----- ------- -----
280,405 2.47 $0.10 280,405 $0.10
======= ==== ==== ======= ====
(B) Non-Qualified Stock Options and Warrants Issued and Outstanding
2005 2004
--------- ----------
Stock options issued to a technical
consultant at various times in the past.
The term of the options is five years
expiring in 2005 and 2006. The options are
exercisable at an average price of $2.53 per
share. 2,575 6,818
Stock options issued to a former affiliate.
The term of the option is five years
expiring May 9, 2005. The options are
exercisable at $4.00 and $5.00 per share. - 300,000
Stock options issued to directors for
services rendered. The term of the options
is five years expiring November 18, 2007.
The options are exercisable at $0.07 per
share. 4,000 4,000
Stock options issued to directors for
services rendered. The term of the options
is five years expiring December 11, 2009.
The options are exercisable at $0.72 per
share. 12,000 12,000
Stock options issued to directors for
services rendered. The term of the options
is five years expiring June 15, 2010. The
options are exercisable at $0.25 per share. 16,000 --
F-18
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
Stock options issued to employees. The term
of the options is ten years expiring
December 11, 2014. The options are
exercisable at $0.72 per share. 100,000 100,000
Warrant issued to Golden Gate Investors in
connection with sale of convertible
debenture 290,500 -
-------- --------
Total 425,075 422,818
======== ========
NOTE 9 INCOME PER SHARE
A reconciliation of the numerator and denominator of the income (loss)
per share calculations is provided for all periods presented. The
numerator and denominator for basic and diluted income (loss) per
share for the years ended December 31, 2005 and 2004, is as follows:
Basic and fully diluted 2005 2004
Numerator:
Net (loss) income $(5,871,819) $ 317,822
Numerator for basic and diluted
income per share $(5,871,819) $ 317,822
========== ========
Denominator:
Weighted average common shares 6,811,257 6,225,304
Denominator for basic and diluted
income per share 6,811,257 6,225,304
========= =========
Basic and diluted income (loss) per
share $(0.86) $0.05
========= =========
NOTE 10 INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2005 and
2004 consist of the following:
2005
--------------------------------
Current Deferred Total
Federal $ - $ - $ -
State - - -
------------------------------
$ - $ - $ -
==============================
2004
--------------------------------
Current Deferred Total
Federal $ - $ - $ -
State - - -
------------------------------
$ - $ - $ -
==============================
F-19
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
Income tax expense for the years ended December 31, 2005 and 2004
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:
2005 2004
------------ -----------
Expected income tax (benefit) expense $(1,996,418) $ 108,059
Increase (decrease) in income taxes
resulting from:
Valuation allowance (decrease) increase 355,920 (106,804)
Nondeductible expenses for federal income
tax purposes 1,640,498 (1,256)
--------- ---------
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,
2005 and 2004 include the following:
2005 2004
------------ -----------
Deferred tax assets:
Net operating loss carryforward $ 3,703,266 $ 3,347,346
Notes and accounts receivable reserves - 5,475
Inventory reserves, principally due to
accruals for financial reporting
purposes and basis differences 245,161 277,491
Other - -
--------- ---------
Total deferred tax assets 3,948,428 3,630,312
--------- ---------
Deferred tax liabilities
Property, plant and equipment, principally
due to differences in depreciation basis (9,435) (10,837)
--------- ---------
Total deferred tax liabilities - -
--------- ---------
Gross deferred tax asset 3,938,993 3,619,475
Valuation allowance (3,938,993) (3,619,475)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
At December 31, 2005, the Company had net operating loss carryforwards
of $14,531,237 for income tax purposes, available to offset future
taxable income expiring on various dates through 2025. The valuation
allowance at December 31, 2005 was $10,536,041. The net change in the
valuation allowance during the year ended December 31, 2005 was an
increase of $355,921.
F-20
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
NOTE 11 CONCENTRATIONS OF CREDIT RISK
The Company relied on two customers for approximately 38% of sales
for the year ended December 31, 2005, and on three customers for
approximately 82% of sales for the year ended December 31, 2004. At
December 31, 2005, accounts receivable, net, from those two customers
totaled $253,889.
NOTE 12 EMPLOYEE BENEFIT PLANS
Effective January 1, 1998, the Board of Director's approved a savings
and retirement plan covering all full-time employees. Subject to
approval by the Board of Directors, the Company fully matches employee
contributions up to 3% of total compensation paid to participating
employees and one-third of one percent is matched for each percentage
of participating employee contributions between 4% and 6% of total
compensation. Expense attributable to Company contributions totaled
$20,906 during the year ended December 31, 2004. Because of the
Company's financial condition, the Company contributions were
suspended in 2005.
NOTE 13 GOING CONCERN
As reflected in the accompanying financial statements, the Company
has a net loss of $5,871,819, a negative cash flow from operations of
$627,935, a working capital deficiency of $21,967, and a stockholders'
deficiency of $4,919,458. The ability of the Company to continue as
a going concern is dependent on the Company's ability to further
implement its business plan, raise capital and generate revenues. The
financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
The Company has continued its product design and development efforts
to introduce new products in 2006. The Road Genie, introduced in
2005, will be continued in new outlets in 2006. The Company has also
developed a low-cost voice-activated digital recorder for use in the
automobile. The Company is also opening a new source of revenue by
developing the cell-phone Road Whiz application. These products
afford the possibility of enhancing sales in 2006.
NOTE 14 SUBSEQUENT EVENT
During 2006, Golden Gate Investors has converted $29,000 of the
Convertible Debenture issued to it in 2005 into 1,207,254 shares of
the Company's common stock.
F-21
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.
April 7, 2006
/s/ Monte Ross
-------------------------------------------------
Monte Ross
Chief Executive Officer and Chairman of the Board
April 7, 2006
/s/Ernest Clarke
-------------------------------------------------
Ernest Clarke
Chief Financial and Accounting Officer, Director
April 7, 2006
/s/ Mark L. Peterson
-------------------------------------------------
Mark L. Peterson
Director
April 7, 2006
/s/ Donald Rattner
-------------------------------------------------
Donald Rattner
Director
April 7, 2006
/s/ Matthew Klapman
-------------------------------------------------
Matthew Klapman
Director