As filed with the Securities and Exchange Commission on April 1, 2005
An Exhibit List can be found on page II-4.
Registration No. 333-________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
-----------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
ULTRADATA SYSTEMS, INCORPORATED
(Name of small business issuer in its charter)
DELAWARE 3579 43-1401158
(State or other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification No.)
Incorporation or
Organization)
1240 DIELMAN INDUSTRIAL COURT
ST. LOUIS, MISSOURI 63132
(314) 997-2250
(Address and telephone number of principal executive offices
and principal place of business)
MONTE ROSS, CHIEF EXECUTIVE OFFICER
ULTRADATA SYSTEMS, INCORPORATED
1240 DIELMAN INDUSTRIAL COURT
ST. LOUIS, MISSOURI 63132
(314) 997-2250
(Name, address and telephone number of agent for service)
Copies to:
GREGORY SICHENZIA, ESQ.
SICHENZIA ROSS FRIEDMAN FERENCE LLP
1065 AVENUE OF THE AMERICAS, 21ST FLR.
NEW YORK, NEW YORK 10018
(212) 930-9700
(212) 930-9725 (FAX)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. _________
2
CALCULATION OF REGISTRATION FEE
---------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED PROPOSED AMOUNT OF
SECURITIES TO REGISTERED (1) MAXIMUM MAXIMUM REGISTRATION
BE REGISTERED OFFERING AGGREGATE FEE
PRICE PER OFFERING
SHARE PRICE
---------------------------- ---------------- ------------- -------------- ------------
Common stock, $0.01 par 3,000,000 (2) $ .41 (3) $1,230,000 $144.77
value issuable upon
conversion of debentures
---------------------------- ---------------- ------------- -------------- ------------
Common Stock, $0.01 par 100,000 (4) $10.00 (5) $1,000,000 $117.70
value issuable upon
exercise of warrants
---------------------------- ---------------- ------------- -------------- ------------
Total 3,100,000 $2,230,000.00 $262.47
---------------------------------------------------------------------------------------
(1) Includes shares of our common stock, $0.01par value per share, which may be
offered pursuant to this registration statement, which shares are issuable upon
conversion of convertible debentures and the exercise of warrants held by the
selling stockholder. In addition to the shares set forth in the table, the
amount to be registered includes an indeterminate number of shares issuable upon
conversion of the debentures and exercise of the warrants, as such number may be
adjusted as a result of stock splits, stock dividends and similar transactions
in accordance with Rule 416. The number of shares of common stock registered
hereunder represents a good faith estimate by us of the number of shares of
common stock issuable upon conversion of the debentures and upon exercise of the
warrants. For purposes of estimating the number of shares of common stock to be
included in this registration statement, we calculated a good faith estimate of
the number of shares of our common stock that we believe will be issuable upon
conversion of the debentures and upon exercise of the warrants to account for
market fluctuations, and antidilution and price protection adjustments,
respectively. Should the conversion ratio result in our having insufficient
shares, we will not rely upon Rule 416, but will file a new registration
statement to cover the resale of such additional shares should that become
necessary. In addition, should a decrease in the exercise price as a result of
an issuance or sale of shares below the then current market price, result in our
having insufficient shares, we will not rely upon Rule 416, but will file a new
registration statement to cover the resale of such additional shares should that
become necessary.
(2) Includes a good faith estimate of the shares underlying convertible
debentures to account for market fluctuations.
(3) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, using the average
of the high and low price as reported on the Over-The-Counter Bulletin Board on
March 29, 2005, which was $.41 per share.
(4) Includes a good faith estimate of the shares underlying warrants exercisable
at $10.00 per share to account for antidilution and price protection
adjustments.
(5) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933, using the exercise
price of $10.00.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
3
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED APRIL 1, 2005
ULTADATA SYSTEMS, INCORPORATED
3,100,000 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholder of up to
3,100,000 shares of our common stock, including up to 3,000,000 shares of common
stock underlying convertible debentures and up to 100,000 shares of common stock
issuable upon the exercise of common stock purchase warrants. The convertible
debentures are convertible into the number of our shares of common stock equal
to the principal amount of the debentures being converted multiplied by 11, less
the product of the conversion price multiplied by ten times the dollar amount.
The conversion price for the convertible debentures is the lesser of (i) $1.25
or (ii) eighty percent of the of the average of the three lowest volume weighted
average prices during the twenty (20) trading days prior to the conversion. If
the volume weighted average price is below $0.50 on a conversion date, we have
the right to pre-pay the amount of the debenture the holder elects to convert,
plus accrued and unpaid interest, at 125% of such amount; however, if we elect
to pre-pay in this situation, the debenture holder has the right to withdraw the
notice of conversion. Also, if the volume weighted average price is below $0.50
at any point during a month, the holder is not obligated to convert any portion
of the debenture during that month. The warrants are exercisable at $10.00 per
share.
The selling stockholder may sell common stock from time to time in the
principal market on which the stock is traded at the prevailing market price or
in negotiated transactions. The selling stockholder may be deemed an underwriter
of the shares of common stock, which it is offering. We will pay the expenses of
registering these shares.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under
the symbol "ULTR". The last reported sales price per share of our common stock
as reported by the Over-The-Counter Bulletin Board on March 29, 2005, was $0.45.
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______, 2005.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THIS PROSPECTUS IS INCLUDED IN THE REGISTRATION STATEMENT THAT WAS FILED BY
ULTRADATA SYSTEMS, INCORPORATED, WITH THE SECURITIES AND EXCHANGE COMMISSION.
THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE SALE IS NOT PERMITTED.
4
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
ULTRADATA SYSTEMS, INCORPORATED
Our 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. We are completing development of several new products which are based
on adding significant features to the successful Talking Road Navigator such as
a Spanish-speaking unit and a voice-recognition unit which allows for hands-free
operation. These new products are consistent with our goal of improved ease of
use by the consumer. The Spanish-speaking unit was completed in 2004 and initial
deliveries to customers have been made.
For the years ended December 31, 2004 and 2003, we generated revenue in
the amounts of $3,970,434 and $2,863,258, respectively, and net income of
$317,822 and $109,965, respectively. As a result of a major customer, who
accounted for 55.4% of sales during 2004, having experienced deteriorating
operations during 2004, which resulted in the customer ceasing to order products
from us during the second quarter and our terminating of our agreements with AAA
for the sale of our products using the AAA logo to AAA retail locations, our
independent registered public accounting firm, in their report dated March 5,
2005, have expressed substantial doubt about our ability to continue as a going
concern.
Our principal offices are located at 1240 Dielman Industrial Court, St.
Louis, Missouri 63132, and our telephone number is (314) 997-2250. We are a
Delaware corporation.
The Offering
Common stock offered
by selling stockholder.......Up to 3,100,000 shares, including the following:
- up to 3,000,000 shares of common stock
underlying convertible debentures in the
principal amount of $300,000 (includes a
good faith estimate of the shares
underlying convertible debentures to
account for market fluctuations
antidilution and price protection
adjustments, respectively), and
- up to 100,000 shares of common stock
issuable upon the exercise of common
stock purchase warrants at an exercise
price of $10.00 per share (includes a
good faith estimate of the shares
underlying warrants to account for
antidilution and price protection
adjustments, respectively).
This number represents 32.60% of our
current outstanding stock.
5
Common stock to be
outstanding after
the offering.................Up to 9,510,187 shares
Use of proceeds..............We will not receive any proceeds from
the sale of the common stock. However,
we will receive up to $1,000,000 upon
exercise of the warrants by the selling
stockholders. We expect to use the
proceeds received from the exercise of
the warrants, if any, for general
working capital purposes. However, the
selling stockholder will be entitled to
exercise the warrants on a cashless
basis if the shares of common stock
underlying the warrants are not
registered pursuant to an effective
registration statement within one year
from issuance. In the event that the
selling stockholder exercises the
warrants on a cashless basis, then we
will not receive any proceeds from the
exercise of those warrants. In addition,
we have received gross proceeds $100,000
from the sale of the secured convertible
debentures of which the investors have
withheld $50,000 for the payment of
professional fees and the investors are
obligated to provide us with an
additional $200,000 within five days of
this prospectus being declared
effective. The proceeds received from
the sale of the secured convertible
debentures will be used for business
development purposes, working capital
needs, payment of consulting and legal
fees and purchasing inventory.
Over-The-Counter Bulletin
Board Symbol.................ULTR
The above information regarding common stock to be outstanding after the
offering is based on 6,410,187 shares of common stock outstanding as of March
21, 2005 and assumes the subsequent conversion of our issued convertible
debentures and exercise of warrants by our selling stockholder.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with an accredited investor on February 14, 2005, and amended
on February 17, 2005, for the sale of (i) $300,000 in convertible debentures and
(ii) warrants to buy 300,000 shares of our common stock. This prospectus relates
to the resale of the common stock underlying these convertible debentures and
warrants.
The investors are obligated to provide us with an aggregate of $300,000 as
follows:
o $50,000 was disbursed to us on February 14, 2005;
o $50,000 has been retained for services provided to our company by
various professionals, which shall be disbursed upon effectiveness
of this registration statement; and
o $200,000 will be released upon effectiveness of this registration
statement.
The debentures bear interest at 4 3/4%, mature two years from the date of
issuance, and are convertible into our common stock, at the selling
stockholder's option. The convertible debentures are convertible into the number
of our shares of common stock equal to the principal amount of the debentures
being converted multiplied by 11, less the product of the conversion price
multiplied by ten times the dollar amount of the debenture. The conversion price
for the convertible debenture is the lesser of (i) $1.25 or (ii) eighty percent
of the of the average of the three lowest volume weighted average prices during
the twenty (20) trading days prior to the conversion. If the volume weighted
6
average price is below $0.50 on a conversion date, we have the right to pre-pay
the amount of the debenture the holder elects to convert, plus accrued and
unpaid interest, at 125% of such amount; however, if we elect to pre-pay in this
situation, the debenture holder has the right to withdraw the notice of
conversion. Also, if the volume weighted average price is below $0.50 at any
point during a month, the holder is not obligated to convert any portion of the
debenture during that month. Accordingly, there is in fact no limit on the
number of shares into which the debenture may be converted. In addition, the
selling stockholder is obligated to exercise the warrant concurrently with the
submission of a conversion notice by the selling stockholder. The warrant is
exercisable into 300,000 shares of common stock at an exercise price of $10.00
per share.
The selling stockholder has contractually agreed to restrict its ability
to convert or exercise its warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 9.99% of the then issued and
outstanding shares of common stock. See the "Selling Stockholders" and "Risk
Factors" sections for a complete description of the convertible debentures.
EXPLANATORY NOTE: ON FEBRUARY 14, 2005, WE ENTERED INTO A SECURITIES PURCHASE
AGREEMENT, AND AMENDED ON FEBRUARY 17, 2005 WITH GOLDEN GATE INVESTORS, INC. ANY
ISSUANCE OF SHARES OF COMMON STOCK PURSUANT TO THIS AGREEMENT THAT WOULD REQUIRE
US TO ISSUE SHARES OF COMMON STOCK IN EXCESS OF OUR AUTHORIZED CAPITAL IS ALSO
CONTINGENT UPON US OBTAINING SHAREHOLDER APPROVAL TO INCREASE OUR AUTHORIZED
SHARES OF COMMON STOCK FROM 10,000,000 TO 50,000,000 AND FILING THE CERTIFICATE
OF AMENDMENT TO OUR CERTIFICATE OF INCORPORATION. ON MARCH 28, 2005, WE FILED A
PRELIMINARY PROXY STATEMENT WITH THE SECURITIES AND EXCHANGE COMMISSION, WHICH
IS CURRENTLY BEING REVIEWED, ASKING A MAJORITY OF OUR SHAREHOLDERS TO AUTHORIZE
AN INCREASE IN THE NUMBER OF SHARES OF COMMON STOCK WE ARE AUTHORIZED TO ISSUE.
UPON FILING THE DEFINITIVE PROXY, WE WILL HAVE A SHAREHOLDERS MEETING AT WHICH
WE WILL ASK THE SHAREHOLDERS TO APPROVE AN INCREASE IN OUR NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK. WE INTEND ON FILING THE CERTIFICATE OF AMENDMENT TO OUR
CERTIFICATE OF INCORPORATION AS SOON AS THE INCREASE IN AUTHORIZED STOCK IS
APPROVED BY OUR SHAREHOLDERS. WE ARE REGISTERING 3,100,000 SHARES OF COMMON
STOCK PURSUANT TO THIS PROSPECTUS THAT ARE UNDERLYING THE CONVERTIBLE DEBENTURES
AND WARRANTS ISSUED IN CONNECTION WITH THE SECURITIES PURCHASE AGREEMENT. UPON
FILING THE CERTIFICATE OF AMENDMENT, WE WILL AMEND THIS PROSPECTUS TO INCLUDE
ADDITIONAL SHARES OF COMMON STOCK THAT ARE ISSUABLE PURSUANT TO THIS AGREEMENT.
7
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
RISKS RELATING TO OUR BUSINESS:
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING OUR BUSINESS OPERATIONS WILL BE
HARMED AND IF WE DO OBTAIN ADDITIONAL FINANCING OUR THEN EXISTING SHAREHOLDERS
MAY SUFFER SUBSTANTIAL DILUTION
Additional capital may be required to effectively support the operations
and to otherwise implement our overall business strategy. However, there can be
no assurance that financing will be available when needed on terms that are
acceptable to us. The inability to obtain additional capital will restrict our
ability to grow and may reduce our ability to continue to conduct business
operations. If we are unable to obtain additional financing, we will likely be
required to curtail our marketing and development plans and possibly cease our
operations. Any additional equity financing may involve substantial dilution to
our then existing shareholders.
MANY OF OUR COMPETITORS ARE LARGER AND HAVE GREATER FINANCIAL AND OTHER
RESOURCES THAN WE DO AND THOSE ADVANTAGES COULD MAKE IT DIFFICULT FOR US TO
COMPETE WITH THEM
The general market for our products and services is extremely competitive
and includes several companies which have achieved substantially greater market
shares than we have, and have longer operating histories, have larger customer
bases, have substantially greater financial, development and marketing resources
than we do. If overall demand for our products should decrease it could have a
materially adverse affect on our operating results.
A SUBSTANTIAL PORTION OF OUR NET SALES AND GROSS PROFIT IS DERIVED FROM A SMALL
NUMBER OF LARGE CUSTOMERS.
Our five largest customers accounted for approximately 89% and 77% of our
gross sales during fiscal years ending 2004 and 2003, respectively. Media
Solutions Services accounted for approximately 55.4% and 56.2% of our gross
sales in fiscal years 2004 and 2003, respectively. Office Max accounted for
approximately 14.1%% of our gross sales for fiscal year 2004. QVC accounted for
approximately 12.2% and 16.8% of our gross sales in fiscal years 2004 and 2003,
respectively. We do not enter into long-term agreements with any of our
customers. Instead, we enter into a number of individual purchase order
commitments with our customers. A decision by the controlling owner of a group
of stores or any other significant customer, whether motivated by competitive
conditions, financial difficulties or otherwise, to decrease the amount of
merchandise purchased from us, or to change their manner of doing business with
us, could have a material adverse effect on our financial condition and results
of operations.
A MANUFACTURER'S INABILITY TO PRODUCE OUR GOODS ON TIME AND TO OUR
SPECIFICATIONS COULD RESULT IN LOST REVENUE AND NET LOSSES
We do not own or operate any manufacturing facilities and therefore depend
upon independent third parties for the manufacture of all of our products. Our
products are manufactured to our specifications by a foreign manufacturer.
During fiscal 2004, all of our products were manufactured by one manufacturer.
The inability of a manufacturer to ship orders of our products in a timely
manner or to meet our quality standards could cause us to miss the delivery date
requirements of our customers for those items, which could result in
cancellation of orders, refusal to accept deliveries or a reduction in purchase
prices, any of which could have a material adverse effect as our revenues would
decrease and we would incur net losses as a result of sales of the product, if
any sales could be made. Further, because quality is a leading factor when
customers and retailers accept or reject goods, any decline in quality by our
third-party manufacturers could be detrimental not only to a particular order,
but also to our future relationship with that particular customer.
8
IF WE NEED TO REPLACE MANUFACTURERS, OUR EXPENSES COULD INCREASE RESULTING IN
SMALLER PROFIT MARGINS
We compete with other companies for the production capacity of our
manufacturer. Some of these competitors have greater financial and other
resources than we have, and thus may have an advantage in the competition for
production. If we experience a significant increase in demand, or if our
existing manufacturer of ours must be replaced, we may have to expand our
third-party manufacturing capacity. We cannot assure you that this additional
capacity will be available when required on terms that are acceptable to us or
similar to existing terms which we have with our current manufacturer, either
from a production standpoint or a financial standpoint. We typically enter into
a purchase order commitment, which is good for 90 days, specifying a time for
delivery, method of payment, design and quality specifications and other
standard industry provisions, but do not have a long-term contract with our
manufacturer. The manufacturer we use does not produce our products exclusively.
Should we be forced to replace our current manufacturer, who we rely upon
for all of our production needs, then we may experience an adverse financial
impact, or an adverse operational impact, such as being forced to pay increased
costs for such replacement manufacturing or delays upon distribution and
delivery of our products to our customers, which could cause us to lose
customers or lose revenues because of late shipments.
IF A MANUFACTURER OF OURS FAILS TO USE ACCEPTABLE LABOR PRACTICES, WE MIGHT HAVE
DELAYS IN SHIPMENTS OR FACE JOINT LIABILITY FOR VIOLATIONS, RESULTING IN
DECREASED REVENUE AND INCREASED EXPENSES
While we require our independent manufacturers to operate in compliance
with applicable laws and regulations, we have no control over the ultimate
actions of our independent manufacturers. While our internal and vendor
operating guidelines promote ethical business practices and our staff and buying
agents periodically visit and monitor the operations of our independent
manufacturers, we do not control these manufacturers or their labor practices.
The violation of labor or other laws by an independent manufacturer of ours, or
by one of our licensing partners, or the divergence of an independent
manufacturer's or licensing partner's labor practices from those generally
accepted as ethical in the United States, could interrupt, or otherwise disrupt
the shipment of finished products to us or damage our reputation. Any of these,
in turn, could have a material adverse effect on our financial condition and
results of operations.
ANY INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY COULD HARM OUR
ABILITY TO COMPETE
Our future success and ability to compete depends in part upon our
proprietary technology, patents and trademarks, which we attempt to protect with
a combination of patent, copyright, trademark and trade secret laws, as well as
with our confidentiality procedures and contractual provisions. These legal
protections afford only limited protection and are time-consuming and expensive
to obtain and/or maintain. Further, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating our intellectual
property.
We have been issued four patents by the United States Patent and Trademark
Office. Any patents that are issued to us could be invalidated, circumvented or
challenged. If challenged, our patents might not be upheld or their claims could
be narrowed. Our intellectual property may not be adequate to provide us with
competitive advantage or to prevent competitors from entering the markets for
our products. Additionally, our competitors could independently develop
non-infringing technologies that are competitive with, equivalent to, and/or
superior to our technology. Monitoring infringement and/or misappropriation of
intellectual property can be difficult, and there is no guarantee that we would
detect any infringement or misappropriation of our proprietary rights. Even if
we do detect infringement or misappropriation of our proprietary rights,
litigation to enforce these rights could cause us to divert financial and other
resources away from our business operations.
OUR PRODUCTS MAY INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS AND
RESULTING CLAIMS AGAINST US COULD BE COSTLY AND REQUIRE US TO ENTER INTO
DISADVANTAGEOUS LICENSE OR ROYALTY ARRANGEMENTS
The handheld computer industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement and the violation of intellectual property rights. Although we
attempt to avoid infringing upon known proprietary rights of third parties, we
may be subject to legal proceedings and claims for alleged infringement by us or
our licensees of third-party proprietary rights, such as patents, trade secrets,
trademarks or copyrights, from time to time in the ordinary course of business.
Any claims relating to the infringement of third-party proprietary rights, even
if not successful or meritorious, could result in costly litigation, divert
9
resources and our attention or require us to enter into royalty or license
agreements which are not advantageous to us. In addition, parties making these
claims may be able to obtain injunctions, which could prevent us from selling
our products. Furthermore, former employers of our employees may assert that
these employees have improperly disclosed confidential or proprietary
information to us. Any of these results could harm our business. We may be
increasingly subject to infringement claims as the number of, and number of
features of, our products grow.
IF WE ARE UNABLE TO RETAIN THE SERVICES OF MESSRS. ROSS, CLARKE AND PETERSON OR
IF WE ARE UNABLE TO SUCCESSFULLY RECRUIT QUALIFIED PERSONNEL, WE MAY NOT BE ABLE
TO CONTINUE OUR OPERATIONS.
Our success depends to a significant extent upon the continued service of
Mr. Monte Ross, our Chief Executive Officer, Mr. Ernest Clarke, our President
and Chief Financial Officer, and Mr. Mark L. Peterson, our Vice President -
Engineering and Secretary. Loss of the services of Messrs. Ross, Clarke or
Peterson could have a material adverse effect on our growth, revenues, and
prospective business. We do not maintain key-man insurance on the life of
Messrs. Ross, Clarke or Peterson. In addition, in order to successfully
implement and manage our business plan, we will be dependent upon, among other
things, successfully recruiting qualified personnel. Competition for qualified
individuals is intense. There can be no assurance that we will be able to find,
attract and retain existing employees or that we will be able to find, attract
and retain qualified personnel on acceptable terms.
RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT:
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CONVERTIBLE DEBENTURES AND
WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of March 21, 2005, we had 6,410,187 shares of common stock issued and
outstanding, convertible debentures outstanding that may be converted into an
estimated 2,524,390 shares of common stock at current market prices and
outstanding warrants to purchase 150,000 shares of common stock. Additionally,
we have an obligation to sell secured convertible debentures that may be
converted into an estimated 2,524,390 shares of common stock at current market
prices and issue warrants to purchase 150,000 shares of common stock in the near
future. In addition, the number of shares of common stock issuable upon
conversion of the outstanding convertible debentures may increase if the market
price of our stock declines. All of the shares, including all of the shares
issuable upon conversion of the debentures and upon exercise of our warrants,
may be sold without restriction. The sale of these shares may adversely affect
the market price of our common stock.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE
DEBENTURES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES,
WHICH WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
If we are unable to make repayment of the convertible debentures on a
monthly basis, our obligation to issue shares upon conversion of our convertible
debentures is essentially limitless. The following is an example of the amount
of shares of our common stock that are issuable, upon conversion of our
convertible debentures (excluding accrued interest), based on market prices 25%,
50% and 75% below the market price, as of March 31, 2005 of $0.45.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 20% Issuable Stock
------- --------- ------------- ----------- -----------
25% $.3375 $.27 9,222,223 58.99%
50% $ .225 $.18 15,333,334 70.52%
75% $.1125 $.09 33,666,667 84.01%
As illustrated, the number of shares of common stock issuable upon
conversion of our convertible debentures will increase if the market price of
our stock declines, which will cause dilution to our existing stockholders.
10
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE
DEBENTURES MAY ENCOURAGE INVESTORS TO MAKE SHORT SALES IN OUR COMMON STOCK,
WHICH COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The convertible debentures are convertible into shares of our common stock
at a 20% discount to the trading price of the common stock prior to the
conversion. The significant downward pressure on the price of the common stock
as Golden Gate Investors converts and sells material amounts of common stock
could encourage short sales by investors. This could place further downward
pressure on the price of the common stock. Golden Gate Investors could sell
common stock into the market in anticipation of covering the short sale by
converting its securities, which could cause the further downward pressure on
the stock price. In addition, not only the sale of shares issued upon conversion
or exercise of debentures and warrants, but also the mere perception that these
sales could occur, may adversely affect the market price of the common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE DEBENTURES AND
EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO
OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the convertible debentures and
exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although Golden Gate Investors may
not convert their convertible debentures and/or exercise their warrants if such
conversion or exercise would cause them to own more than 9.99% of our
outstanding common stock, this restriction does not prevent Golden Gate
Investors from converting and/or exercising some of their holdings and then
converting the rest of their holdings. In this way, Golden Gate Investors could
sell more than this limit while never holding more than this limit. There is no
upper limit on the number of shares that may be issued which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
IN THE EVENT THAT OUR STOCK PRICE DECLINES, THE SHARES OF COMMON STOCK ALLOCATED
FOR CONVERSION OF THE CONVERTIBLE DEBENTURES AND REGISTERED PURSUANT TO THIS
PROSPECTUS MAY NOT BE ADEQUATE AND WE MAY BE REQUIRED TO FILE A SUBSEQUENT
REGISTRATION STATEMENT COVERING ADDITIONAL SHARES. IF THE SHARES WE HAVE
ALLOCATED AND ARE REGISTERING HEREWITH ARE NOT ADEQUATE AND WE ARE REQUIRED TO
FILE AN ADDITIONAL REGISTRATION STATEMENT, WE MAY INCUR SUBSTANTIAL COSTS IN
CONNECTION THEREWITH.
Based on our current market price and the potential decrease in our market
price as a result of the issuance of shares upon conversion of the convertible
debentures, we have made a good faith estimate as to the amount of shares of
common stock that we are required to register and allocate for conversion of the
convertible debentures. Accordingly, we are registering 3,000,000 shares to
cover the conversion of the convertible debentures. In the event that our stock
price decreases, the shares of common stock we have allocated for conversion of
the convertible debentures and are registering hereunder may not be adequate. If
the shares we have allocated to the registration statement are not adequate and
we are required to file an additional registration statement, we may incur
substantial costs in connection with the preparation and filing of such
registration statement.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING CONVERTIBLE
DEBENTURES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE,
OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE CONVERTIBLE DEBENTURES, IF
REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE
OF SUBSTANTIAL ASSETS.
In February 2005, we entered into a Securities Purchase Agreement for the
sale of an aggregate of $300,000 principal amount of convertible debentures. The
convertible debentures are due and payable, with 4 3/4% interest, two years from
the date of issuance, unless sooner converted into shares of our common stock.
In addition, any event of default could require the early repayment of the
convertible debentures at a price equal to 125% of the amount due under the
debentures. We anticipate that the full amount of the convertible debentures,
together with accrued interest, will be converted into shares of our common
stock, in accordance with the terms of the convertible debentures. If we are
required to repay the convertible debentures, we would be required to use our
limited working capital and raise additional funds. If we were unable to repay
the debentures when required, the debenture holders could commence legal action
against us and foreclose on all of our assets to recover the amounts due. Any
such action would require us to curtail or cease operations.
11
RISKS RELATING TO OUR COMMON STOCK:
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
12
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholder. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the sale price of any common stock we sell to the selling
stockholder upon exercise of the warrants. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes. However, the selling stockholder will be entitled to exercise the
warrants on a cashless basis if the shares of common stock underlying the
warrants are not registered pursuant to an effective registration statement
within one year from issuance. In the event that the selling stockholder
exercises the warrants on a cashless basis, then we will not receive any
proceeds from the exercise of those warrants. In addition, we have received
gross proceeds $100,000 from the sale of the secured convertible debentures of
which the investors have withheld $50,000 for the payment of professional fees
and the investors are obligated to provide us with an additional $200,000 within
five days of this prospectus being declared effective. The proceeds received
from the sale of the secured convertible debentures will be used for business
development purposes, working capital needs, payment of consulting and legal
fees and purchasing inventory.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
"ULTR." For the periods indicated, the following table sets forth the high and
low bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
Low High
---- ----
2003
First Quarter .13 .32
Second Quarter .05 .19
Third Quarter .10 .22
Fourth Quarter .12 .35
2004
First Quarter .11 1.65
Second Quarter 1.45 2.20
Third Quarter .60 1.80
Fourth Quarter .37 1.01
2005
First Quarter .37 .69
HOLDERS
As of March 21, 2005, we had approximately 124 holders of our common
stock. The number of record holders was determined from the records of our
transfer agent and does not include beneficial owners of common stock whose
shares are held in the names of various security brokers, dealers, and
registered clearing agencies. The transfer agent of our common stock is American
Stock Transfer and Trust Company.
We have never declared or paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends to stockholders in the foreseeable
future. In addition, any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will be dependent upon our
financial condition, results of operations, capital requirements, and such other
factors as the Board of Directors deem relevant.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there
may be events in the future that we are not able to accurately predict or over
which we have no control. Our actual results and the timing of certain events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
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 us to overcome losses in the first three
quarters of the year with a superb fourth quarter and be profitable for the
year. In 2004, this trend continued through the first two quarters of the year.
In the second half of the year, sale declined due to internal problems at two of
our major customers. We are working to rectify that situation in 2005 by
expanding our channels of distribution and introducing new attractive products.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2003
Sales
Sales for 2004 increased 38.7% to $3,970,434 from $2,863,258 in 2003 due
to the success of the Talking Road Whiz(TM) in the first half of 2004. Our plan
is to continue to pursue mass-market outlets for both our traditional products
as well as new products and to grow sales in this fashion. In addition, we have
engaged the services of new representative organizations in an effort to reach
new retail sales channels with which they have significant contacts.
Gross Profit
Because of the increase in sales of new products, our gross profit in 2004
was $1,943,678, or 49.0% of sales, compared to $1,376,716, or 48.1% of sales, in
2003.
Selling Expenses
During 2004, we incurred $329,137, or 8.3% of sales, in advertising,
promotion, and marketing program expenses, as compared to $253,564, or 8.9% of
sales, in 2003. The reduced percentage is primarily due to the increased sales
base.
Research and Development Expenses
Our research and development expenses in 2004 were $140,507 as compared
with $63,156 in 2003, an increase of $77,351, or 122.5%. The primary reason for
the increase was the fact that an additional engineer was hired to develop the
software for the Road Genie(TM), the Spanish Talking Road Navigator, and for
other R&D activities. We will continue to perform research and development in
our own niche market, which we anticipate will lead to improved products. R&D
work in early 2005 will be devoted to completing the Road Genie, pursuing other
applications of this new speech-recognition technology, and developing the
cell-phone Road Whiz.
14
General and Administrative Expenses
Our general and administrative expenses were $1,151,439 in 2004 as
compared to $876,528 in 2003, representing an increase of $274,911, or 31.4%.
This increase is primarily due to the recognition an unexpected bad-debt expense
of $170,000 that we are continuing to pursue through legal action. Another
source of increased expense is the resumption of our employee matching savings
plan that we had suspended throughout most of 2003.
Other Expense
During 2004, other expense was ($4,773) compared to ($73,773) in 2003, a
decrease of $69,000, or 93.5%. This reduction was due to the elimination of most
of the interest-bearing debt that had burdened this item in 2003.
Net Income
As a result of the foregoing, net income for 2004 was $317,822 as compared
to $109,695 for 2003. Net income available to common stockholders for 2004 was
$317,822, or $0.05 per basic and diluted share, compared with $104,505, or $0.02
per basic and diluted share in 2003, including $5,190 of preferred dividends.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2004, total current assets were $591,732 consisting of
cash and cash equivalents of $385,966, accounts receivable of $38,459, net
inventories of $89,890 and prepaid expenses of $41,515.
Total current liabilities were $181,986 as of December 31, 2004,
consisting of accounts payable of $126,019 and accrued liabilities of $55,967.
We had net working capital of $373,844 for the year ended December 31,
2004.
We did not have any cash flows from investing activities during the year
ended December 31, 2004.
Net cash used in financing activities was $19,475 during the year ended
December 31, 2004, consisting of capital expenditures.
A major customer of ours experienced deteriorating operations during 2004
and during the second quarter ceased ordering products from us. This customer
accounted 55.4% of sales during 2004. In addition, we terminated our agreements
with AAA for the sale of our products using the AAA logo to AAA retail
locations. As a result, our independent registered public accounting firm, in
their report dated March 5, 2005, have expressed substantial doubt about our
ability to continue as a going concern.
Our ability to continue as a going concern is dependent upon several
factors. These factors include our ability to:
o further implement our business plan;
o obtain additional financing or refinancing as may be required; and
o generate revenues.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with an accredited investor on February 14, 2005, and amended
on February 17, 2005, for the sale of (i) $300,000 in convertible debentures and
(ii) warrants to buy 300,000 shares of our common stock. This prospectus relates
to the resale of the common stock underlying these convertible debentures and
warrants.
The investors are obligated to provide us with an aggregate of $300,000 as
follows:
o $50,000 was disbursed to us on February 14, 2005;
o $50,000 has been retained for services provided to our company by
various professionals, which shall be disbursed upon effectiveness
of this registration statement; and
o $200,000 will be released upon effectiveness of this registration
statement.
15
The debentures bear interest at 4 3/4%, mature two years from the date of
issuance, and are convertible into our common stock, at the selling
stockholder's option. The convertible debentures are convertible into the number
of our shares of common stock equal to the principal amount of the debentures
being converted multiplied by 11, less the product of the conversion price
multiplied by ten times the dollar amount of the debenture. The conversion price
for the convertible debenture is the lesser of (i) $1.25 or (ii) eighty percent
of the of the average of the three lowest volume weighted average prices during
the twenty (20) trading days prior to the conversion. If the volume weighted
average price is below $0.50 on a conversion date, we have the right to pre-pay
the amount of the debenture the holder elects to convert, plus accrued and
unpaid interest, at 125% of such amount; however, if we elect to pre-pay in this
situation, the debenture holder has the right to withdraw the notice of
conversion. Also, if the volume weighted average price is below $0.50 at any
point during a month, the holder is not obligated to convert any portion of the
debenture during that month. Accordingly, there is in fact no limit on the
number of shares into which the debenture may be converted. In addition, the
selling stockholder is obligated to exercise the warrant concurrently with the
submission of a conversion notice by the selling stockholder. The warrant is
exercisable into 300,000 shares of common stock at an exercise price of $10.00
per share.
Golden Gate Investors has contractually committed to convert not less than
5% of the original face value of the debenture monthly beginning the month after
the effective date of the Registration Statement. Golden Gate Investors is
required to exercise warrants concurrently with the exercise of a conversion
notice under the debenture and is committed to exercise at least 5% of the
warrants per month after the effective date of the Registration Statement. In
the event that Golden Gate Investors breaches the minimum restriction on the
debenture and warrant, Golden Gate will not be entitled to collect interest on
the debenture for that month. If Golden Gate submits a conversion notice and the
volume weighted average price is less then $.50 per share, then we will be
entitled to prepay the portion of the debenture that is being converted at 125%
of such amount. If we elect to prepay, then Golden Gate may withdraw its
conversion notice.
Golden Gate has further contractually agreed to restrict its ability to
convert the debenture or exercise their warrants and receive shares of our
common stock such that the number of shares held by the Holder and its
affiliates after such conversion or exercise does not exceed 9.99% of the then
issued and outstanding shares of our common stock.
We believe that we can operate at our current level of liquidity for the
next twelve months. In addition to the money raised pursuant to the Securities
Purchase Agreement, it is imperative that we raise an additional $1,000,000 of
capital in order to implement our business plan. We are attempting to raise
additional funds through debt and/or equity offerings. We intend to use any
funds raised to pay down debt and to provide us with working capital. There can
be no assurance that any new capital would be available to us or that adequate
funds for our operations, whether from our revenues, financial markets, or other
arrangements will be available when needed or on terms satisfactory to us. Any
additional financing may involve dilution to our then-existing shareholders. At
this time, no additional financing has been secured or identified. We have no
commitments from officers, directors or affiliates to provide funding. If we are
unable to obtain debt and/or equity financing upon terms that we deem
sufficiently favorable, or at all, it would have a materially adverse impact
upon our ability to pursue our business strategy and maintain our current
operations. As a result, it may require us to delay, curtail or scale back some
or all of our operations including future golf tournaments. We do not currently
have commitments for capital at this time.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our financial statements we are required to formulate working
policies regarding valuation of our assets and liabilities and to develop
estimates of those values. In our preparation of the financial statements for
2004, there were estimates made which were (a) subject to a high degree of
uncertainty and (b) material to our results. Those were:
- Estimating returns and allowances;
- Estimating allowance for doubtful accounts;
16
- Estimating reserve for excess and obsolete inventory; and
- Estimating a tax asset valuation allowance.
With regards to estimating a tax asset valuation allowance, (1) our
determination, detailed in Note 11 to the audited financial statements for the
year ended December 31, 2004, which are included in this prospectus, 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 we would carry on
profitable operations in the future, and (2) the reserving of a receivable that
has required us to file a collection suit. The aging of the receivable from a
company undergoing some business problems has led us to be in significant doubt
as to its collectibility.
We made no material changes to our critical accounting policies in
connection with the preparation of financial statements for 2004.
ESTIMATING RETURNS AND ALLOWANCES
Net revenue consists of product revenue reduced by estimated sales returns
and allowances. To estimate sales returns and allowances, we analyze, both when
we initially establish the reserve, and then each quarter when we review the
adequacy of the reserve, the following factors: historical returns, current
economic trends, levels of inventories of our products held by our customers,
and changes in customer demand and acceptance of our products. This reserve
represents a reserve of the gross margin on estimated future returns and is
reflected as a reduction to accounts receivable in the accompanying consolidated
balance sheet. Increases to the reserve are recorded as a reduction to net
revenue equal to the expected customer credit memo and a corresponding credit is
made to cost of sales equal to the estimated cost of the returned product. The
net difference, or gross margin, is recorded as an addition to the reserve.
Because the reserve for sales returns and allowances is based on our judgments
and estimates, particularly as to future customer demand and acceptance of our
products, our reserves may not be adequate to cover actual sales returns and
other allowances. If our reserves are not adequate, our future net revenues
could be adversely affected.
ESTIMATING ALLOWANCE FOR DOUBTFUL ACCOUNTS
As needed based on specific customers' circumstances affecting his
probability of payment, we reserve an allowance for losses we may incur as a
result of our customers' inability to make required payments. Any increase in
the allowance results in a corresponding increase in our general and
administrative expenses. In establishing this allowance, and then evaluating the
adequacy of the allowance for doubtful accounts each quarter, we analyze
historical bad debts, customer concentrations, customer credit-worthiness,
current economic trends and changes in our customer payment terms. If the
financial condition of one or more of our customers deteriorates, resulting in
their inability to make payments, or if we otherwise underestimate the losses we
incur as a result of our customers' inability to pay us, we could be required to
increase our allowance for doubtful accounts which could adversely affect our
operating results. We have a case whereby the aging of the receivable from a
company undergoing some business problems has led us to be in significant doubt
as to its collectibility and has caused us to institute legal proceedings for
collection. This situation has caused the allowance to be unusually large in the
present financial statements.
ESTIMATING RESERVE FOR EXCESS AND OBSOLETE INVENTORY
We identify excess and obsolete products and analyze historical usage,
forecasted production based on demand forecasts, current economic trends, and
historical write-offs when evaluating the adequacy of the reserve for excess and
obsolete inventory. This reserve is reflected as a reduction to inventory in the
accompanying consolidated balance sheet, and an increase in cost of revenues. If
actual market conditions are less favorable than our assumptions, we may be
required to take additional reserves, which could adversely impact our cost of
revenues and operating results.
17
ESTIMATING A TAX ASSET VALUATION ALLOWANCE
Note 11 to the Financial Statements details our determination that we
should record a valuation allowance for the full value of the deferred tax asset
created by our net operating loss carryforward. The primary reason for the
determination was our lack of certainty as to whether Ultradata would carry on
profitable operations in the future.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition
or results of operations.
There were no recent accounting pronouncements that have had or are likely
to have a material effect on our financial position or results of operations.
18
BUSINESS
OVERVIEW
Our 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. We are completing development of several new products which are based
on adding significant features to the successful Talking Road Navigator such as
a Spanish-speaking unit and a voice-recognition unit which allows for hands-free
operation. These new products are consistent with our goal of improved ease of
use by the consumer. The Spanish-speaking unit was completed in 2004 and initial
deliveries to customers have been made. We expect the voice-recognition unit
should be completed and available for sale before June 2005. The voice
recognition product is called the Road Genie Audio Navigation System and will
result in greater user convenience.
We have sold over 3 million of our 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, we have developed a
Talking Road Whiz(TM). Significant deliveries of this product began in September
of 2003 and we received significant revenue in the last four months of 2003 from
sales of this new addition to our product line. Our 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 us. Our growth was stalled, however, in the
second half of 2004, when our primary distributor and one significant customer
both ceased placing orders. We are now engaged in efforts to replace those lost
sales.
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 our 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, we
feel we have barely penetrated this market. We hope 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 our sales and profits.
Ease of use and low cost are major considerations. With the new
voice-recognition unit, we hope to further penetrate this market. The
introduction of expensive GPS navigation systems has brought more awareness to
this category. However, most consumers do not wish to pay over $500 or monthly
fees for directions. Our low-cost user-friendly products offer an affordable
alternative.
HANDHELD TRAVEL COMPUTERS
The Road Whiz(TM) Line of Products
Our core business is a line (currently 7 products) of hand-held computers
that utilize our proprietary data compression technology to provide a library of
information in a pocket-size box. Most of the products contain travel
information, customized to specific markets, and so the flagship products have
carried variations of the trademark "Road Whiz(TM)." Within the chip that powers
a Road Whiz(TM) can be found information regarding over 100,000 services and
amenities along the U.S. Interstate Highway System and directions on how to
reach the service or amenity of choice. Some versions of the Road Whiz(TM) also
contain information about services and attractions within the cities linked by
the Interstate Highway System, and some versions include U.S. highways as well
as Interstates. The products also provide distances between major U. S. cities,
with over 100,000 pre-calculated routes. The service information provided by a
Road Whiz(TM) product includes directions and mileage to gas stations, hotels,
motels, hospitals, and 24-hour restaurants, as well as highway patrol emergency
numbers. We sell our handheld products through independent sales
representatives, mass merchandise retailers, catalog companies, department
stores, office supply stores, direct mail promotions, luggage stores and
selected television shopping channels.
19
We have achieved a significant advance in the technology in our product
with the introduction of the Talking Road Whiz(TM). The unit speaks in a clear,
loud, real voice appropriate prompts for the user's next action as well as the
information presented on the display. This technological improvement makes the
unit easier to use and more attractive to buy, and paves the way for other
applications of this new technology such as the new Road Genie(R) Audio
Navigation System. This new product enables the user to operate the unit
hands-free with eyes on the road. It will recognize voice commands and respond
with appropriate recorded voice responses - not computer-generated voice.
Among the other hand-held products we currently offer are the following:
Road Whiz(TM) Plus provides complete routing information for over 90
cities, giving driving distances, driving time and detailed directions. A
similar product made by is is sold by one of our major distributors under the
name Auto Pilot(TM). Our products are designed to be marketed by mass
merchandise retailers.
The Road Whiz(TM) RV Special adds to the standard Road Whiz(TM) features
useful for an RV owner, such as the location of dump stations and the
availability of parking for recreational vehicles at restaurants, and is 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. A major
customer of ours experienced deteriorating operations during 2004 and during the
second quarter ceased ordering products from us. This customer accounted 55.4%
of sales during 2004. In addition, we terminated our agreements with AAA for the
sale of our products using the AAA logo to AAA retail locations. We are
consequently attempting to broaden the markets for our products in 2005 and are
taking on the tasks of promoting the products that traditionally have been
performed by our customers. This development will add to our marketing costs in
2005 but should permit us to command a higher margin than we could with
customers burdened with these tasks and expenses themselves.
Distribution through mass merchandise channels accounted for almost 75% of
our revenue in 2004. We expect that a small group of mass-market channels will
continue to be an important source of sales for our handheld computer products.
We also expect to increase the share of direct sales as result of these new
marketing initiatives mentioned above. The following table identifies the most
significant customers on the basis of sales in the past two years as well as
other mass-market retailers that carry our products. In 2002, sales emphasis
shifted from mass-market retailers to other channels of mass distribution that
require far less marketing costs. This approach continued throughout 2003 and
2004.
20
Channel of Distribution 2004 Sales % of SaleS 2003 Sales % of Sales
------------------------ ---------- ---- ---------- ----
Media Solutions Services $2,200,642 55.4% $1,608,052 56.2%
Office Max $ 560,352 14.1% -- --
QVC $ 484,219 12.2% $ 481,619 16.8%
AAA Clubs $ 162,220 4.1% $ 118,657 4.1%
DMD, LLC $ 129,263 3.2% -- --
Central to the marketing strategy is our effort to develop a variety of
distribution paths, so as to maximize our penetration of the potential market
for our products. Our 2005 success depends on steering our marketing thrust more
to direct sales through TV advertising and to use those inroads to pull sales
through retail channels in response to the TV ads.
The objective of this marketing strategy is an increase in sales revenue
and gross margin with attendant increases in selling expenses. With expected
success of existing proven products as well as new products soon to be available
in the marketplace, we expect to continue the profitability begun in 2003 and
exhibited in 2004.
MANUFACTURING
We do not manufacture any of our products. We retain assemblers to
manufacture the products. At present, there is one manufacturer to whom we
contracted all of our assembly work in 2004. Each year, the manufacturer quotes
prices to us based upon estimated annual quantities. Exact pricing is usually
good for 90 days. Significant changes in chip prices result in similar changes
from our manufacturer. Then we place individual purchase orders for production.
Our arrangements with this manufacturer - up to the point of a purchase order -
are terminable at will by either party. If the manufacturer becomes unavailable
to us, alternate sources would be readily available. Nevertheless, the sudden
loss of our manufacturer or unanticipated interruptions or delays from our
present manufacturer would likely result in a temporary interruption to our
planned operations.
BACKLOG
As of March 4, 2005 our total backlog was $68,147, as compared to $973,865
on March 7, 2004.
PATENTS
We own four patents - two that are utilized in our present Road Whiz(TM)
products. They provide us a technological advantage which, to date, has
prevented any similar product from appearing. One patent covers our method of
compressing data relating to travel information. This compression technology
permits our travel products to store more data on smaller and less expensive
memory devices. The second patent covers the methodology that enables our travel
devices to account for changes that occur when the traveler crosses a state
border. We have another patent involving electronic coupons while traveling that
we believe would be valuable for future use in up-scale travel information
products.
We hold two additional patents that have potential utility in the road
navigation market and cover 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 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.
Our patents issued are as follows:
21
Patent Name Patent Number Patent Issue Date
----------- ------------- -----------------
Highway Information System 5,021,961 June 4, 1991
Highway Information System 5,229,947 July 20, 1993
Electronic coupon storage and retrieval system correlated to
highway exit service availability information 5,943,653 August 24, 1999
Radar detector responsive to vehicle speed 5,977,884 November 2, 1999
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
We face significant competition from a number of different sources. There
are companies that make handheld PDA's (personal digital assistants) such as
Sharp and Casio, or Palm computer products such as Palm, HP and others make, and
then there are GPS (global positioning system) handhelds made by Garmin and
Magellan. Although we have specialized in travel data, all of these products can
offer some overlapping information and compete for the consumer dollar. It is
not clear that the voice recognition and talk features we are emphasizing will
distinguish ourself sufficiently from other products to be successful
considering the wide array of different handheld computer products on the
market.
We believe that the following factors will help us compete within this
market:
o Our data compression technology is patented;
o Our database is unique, and would be time-consuming to replicate it;
o We have fourteen years of experience in developing this line of
products;
o Our products are less expensive than others on the market.
RESEARCH AND DEVELOPMENT
We perform ongoing research and development, seeking to improve existing
products and to develop new products. These activities are primarily conducted
at our corporate headquarters, although we periodically engage outside computer
system design consultants to expedite the completion of the development and test
stages. The success of the Talking Road Whiz(TM) came directly from our R&D
efforts, and we plan to carry the product line to the next level of voice
recognition. This feature promises to further simplify product use and attract a
wider market by requiring less of the user to access valuable information.
In 2004, we incurred $140,507 in research and development costs compared
to $63,156 in 2003. Research activities for 2004 were primarily focused on
continued development of the Talking Road Whiz(TM) products and the Road
Genie(TM) Audio Navigation System. In 2005, we plan to add features to the Road
Genie(TM), which will enhance its usefulness to the road traveler. We plan to
develop a digital voice recorder feature to be added in late 2005. Further, we
have been developing a cell-phone application that would make our software and
database available to a cell-phone user who opts to subscribe to this service
thought his service provider. We see this channel as a new opportunity for
revenue from our patents. Thus, two different paths to enhance profitability
will be advanced in 2005: the voice-activated Road Genie(TM) with a digital
voice recorder and the cell-phone Road Whiz application.
22
EMPLOYEES
We currently have 8 full-time employees, including four officers, all of
whom are located at our headquarters in St. Louis, Missouri. We employ 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 our 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. We have not experienced a work stoppage and believes that
our employee relations are good.
DESCRIPTION OF PROPERTIES
We maintain our principal office at 1240 Dielman Industrial Court, St.
Louis, Missouri 63132. Our telephone number at that office is (314) 997-2250 and
our facsimile number is (314) 997-1281. We lease approximately 5,000 square feet
of office space. The lease expires on October 31, 2005. The monthly rent is
$3,569.29 plus 16% of all building expenses. We maintain no manufacturing
operations on site and employ outside contractors to perform all of our
manufacturing requirements. We believe that our current office space and
facilities are sufficient to meet our present needs and do not anticipate any
difficulty securing alternative or additional space, if needed, on terms
acceptable to us.
LEGAL PROCEEDINGS
From time to time, we may become party to litigation or other legal
proceedings that we consider to be a part of the ordinary course of our
business. We are not involved currently in legal proceedings that could
reasonably be expected to have a material adverse effect on our business,
prospects, financial condition or results of operations. We may become involved
in material legal proceedings in the future.
23
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following information sets forth the names of our officers and
directors, their present positions with us, and their biographical information.
NAME AGE POSITION
Monte Ross 72 Chief Executive Officer, Director
Ernest Clarke 65 President & Chief Financial Officer, Director
Mark L. Peterson 48 Vice President-Engineering, Secretary, Director
Donald Rattner 72 Director
H. Krollfeifer, Jr. 64 Director
Matthew Klapman 35 Director
Directors hold office until the election and qualification of their successors
at a meeting of the Company's stockholders. Officers hold office, subject to
removal at any time by the Board, until their successors are appointed and
qualified.
Background of Directors and Executive Officers:
MONTE ROSS founded our company in 1986 and has served as our Chief
Executive Officer and Chairman since inception. He also served as President
until April 2001. For over 20 years prior to founding our company, Mr. Ross was
employed by McDonnell Douglas Corporation (now Boeing) in a variety of
positions. When he left McDonnell Douglas, Mr. Ross was Director of Laser
Systems, responsible for the group of approximately 400 employees, which
developed the first space laser communication system and first space laser
radar. Mr. Ross is a Fellow of the Institute of Electrical and Electronic
Engineers and the past President of the International Laser Communication
Society. Mr. Ross was awarded a Master of Science degree in Electrical
Engineering by Northwestern University in 1962. He is the father-in-law of Mark
L. Peterson, the Company's Vice President-Engineering.
ERNEST CLARKE has been a Director of ours since we were founded in 1986.
From August 1990 to June 1999 he served as Vice President - Government Programs.
He then served as our 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 us, 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 ours since we were founded in
1986. He has served as our Vice President of Engineering since 1988. He is
responsible for the design of our hand-held products. During the four years
prior to joining us, 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 us in 1999 to serve as a member of the Board of
Directors. Mr. Rattner is a member/partner in BrookWeiner, LLC, a Chicago-based
accounting firm, and a member of the American Institute of Certified Public
Accountants and the Illinois CPA Society. He has served on the boards of several
corporations.
H. KROLLFEIFER, JR. joined us in 2000 to serve as a member of the Board of
Directors. Mr. Krollfeifer is retired after 35 years in the equipment leasing
and financing industry. He has worked closely with The American Association of
Equipment Lessors (AAEL), an industry trade group for which he served as a
speaker, lecturer, and teacher for various educational programs starting in
1986. That organization evolved into The Equipment Leasing Association of
America (ELA), and Mr. Krollfeifer was added to their training faculty in
January 2000 where he continues to serve on a part-time basis.
24
MATTHEW KLAPMAN joined us in 2002 to serve as a member of the Board of
Directors. Mr. Klapman is the CEO of Future Vision Technologies, Inc., which he
co-founded 1990. He has maintained a strong career in technological innovation,
business strategy, negotiation, and team management. He has invented and
developed a myriad of products in the video, 3-D graphics, and communication
fields. As a Director at Motorola, he developed the computer graphics and
marketing strategy for its corporate strategy office and broadband wireless
communications sector. In addition, as Director of Research and Development for
Motorola's Personal Communications Sector, he spearheaded the creation of the
new user interface platform that is the basis for all of Motorola's cellular
phones. He has developed products and designs that have earned several industry
awards. He received a B.S. in Computer Engineering and a J.D. from the
University of Illinois at Urbana. He holds 4 issued and 7 pending patents.
AUDIT COMMITTEE
The Board of Directors has appointed an Audit Committee of the Board. The
present members of the Audit Committee are Donald Rattner and H. Krollfeifer,
Jr. The Board of Directors has determined that Donald Rattner is qualified to
serve as an "audit committee financial expert", as defined in the Regulations of
the Securities and Exchange Commission. Mr. Rattner is an "independent
director", as defined in the Regulations of the Securities and Exchange
Commission.
CODE OF ETHICS
The Company has adopted a "Code of Business Ethics for Ultradata Systems,
Inc." The Code is applicable to all employees of the Company, including its
principal executive officer, principal financial officer, principal accounting
officer, or persons performing similar functions. The Company will provide a
copy of the Code of Ethics, without charge, to any person who submits a request
in writing to the President of the Company.
EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO and
each of our most highly-compensated executive officers whose total annual salary
and bonus for the fiscal years ending December 31, 2004, 2003 and 2002 exceeded
$100,000:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards($) (#) ($) Compensation
------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Monte Ross 2004 167,880 0 -- -- 25,000 -- --
Chief Executive 2003 157,367 0 -- -- -- -- --
Officer 2002 152,938 0 -- -- 121,813 -- --
------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ ----------
Ernest Clarke 2004 111,040 0 -- -- 25,000 -- --
President 2003 103,695 0 -- -- -- -- --
2002 103,783 0 -- -- 66,423 -- --
------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ ----------
Mark Peterson 2004 101,152 0 -- -- 30,000 -- --
Vice President - 2003 93,101 0 -- -- -- -- --
Engineering 2002 97,877 0 -- -- 87,511 -- --
25
EMPLOYMENT AGREEMENTS
Messrs. Ross, Peterson, and Clarke have individual employment agreements
with us beginning September 1, 1994. Except as noted herein, the terms of the
employment agreements are substantially identical. The agreements were extended
in 1997 by action of the Board of Directors to October 31, 2000, again in 2000
to October 31, 2003, and again in 2003 to October 1, 2005. The agreements
provide for base salaries, which are adjusted annually by the Board of
Directors. If the majority of the Board cannot agree as to a level of salary
adjustment, the salary will increase by 10% for Mr. Clarke and Mr. Peterson and
5% for Mr. Ross. The employment agreements restrict each officer from competing
with us 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 us.
STOCK OPTION AWARDS
The following tables set forth certain information regarding the stock
options acquired by the Company's Chief Executive Officer and Chief Financial
Officer during the year ended December 31, 2004 and those options held by each
of them on December 31, 2004.
Option Grants in the Last Fiscal Year
Percent
of total
Number of options
securities granted to
underlying employees Exercise
option in fiscal Price Expiration
Name granted year ($/share) Date
---- ------------ ----------- --------- ------------
M. Ross 25,000 25 $.72 12/11/2014
E. Clarke 25,000 25 $.72 12/11/2014
Aggregated Fiscal Year-End Option Values
Number of securities underlying Value of unexercised in-the-money
unexercised options at fiscal options at fiscal year-end ($)
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
2004, the outside directors each received 4,000 options for Ultradata common
stock with a strike price of $.72 that are exercisable within ten years.
STOCK OPTION PLANS
The information set forth in the table below regarding equity compensation plans
(which includes individual compensation arrangements) was determined as of
December 31, 2004.
EQUITY COMPENSATION PLAN INFORMATION
Number of Weighted Number of securities
securities to be issued average exercise remaining available
upon exercise of price of outstanding for future issuance
outstanding options, options, warrants under equity
warrants and rights and rights compensation 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
26
* Represents non-qualified stock options given to the Company's outside
directors and employees in 2004. The options expire on December 11, 2014.
We have two stock option plans: the 1994 Incentive Stock Option Plan and
the 1996 Incentive Stock Option Plan, both of which were approved by our
shareholders. The material terms of the Plans are identical. In aggregate, the
Plan authorize the issuance of options for 500,000 shares, all of which have
been issued. Of those, options have been exercised to purchase 94,523 shares of
common stock. These plans have now expired.
We approved a new stock option plan, the 2004 Non-Qualified Stock Option
Plan, which is similar to our previous plans. This plan authorized 500,000
shares for options, of which 238,236 options have been granted as of March 31,
2005.
27
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the first quarter of 2004, Monte Ross loaned us $15,000, with no
interest. We paid off the loan by March 31, 2004.
We have no policy regarding entering into transactions with affiliated
parties.
28
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of March 21, 2005
o by each person who is known by us to beneficially own more than 5%
of our common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
Name and Address Amount and Nature Percent Prior Percent After
Of Beneficial Holder of Beneficial Ownership(1) to Offering (2) Offering (3)
-------------------- -------------------------- --------------- -------------
Monte Ross 485,813 (4) 7.41% 5.03%
1240 Dielman Industrial Court
St. Louis, MO 63132
Ernest Clarke 222,275 (5) 3.42% 2.31%
1240 Dielman Industrial Court
St. Louis, MO 63132
Mark Peterson 254,893 (6) 3.94% 2.66%
1240 Dielman Industrial Court
St. Louis, MO 63132
Donald Rattner 66,000 (7) 1.02% *
1240 Dielman Industrial Court
St. Louis, MO 63132
K. Krollfeifer, Jr. 32,000 (8) * *
1240 Dielman Industrial Court
St. Louis, MO 63132
Matthew Klapman 16,500 (9) * *
1240 Dielman Industrial Court
St. Louis, MO 63132
Executive Officers and Directors 1,077,481 (10) 15.89% 10.90%
As A Group (6 persons)
Harley Brixey 1,350,000 (11) 21.06% 14.20%
4389 Winding Oaks Drive
Mulberry, FL 33860
* Less then one percent.
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock
subject to options or warrants currently exercisable or convertible, or
exercisable or convertible within 60 days of March 21, 2005 are deemed
outstanding for computing the percentage of the person holding such option
or warrant but are not deemed outstanding for computing the percentage of
any other person.
(2) Percentage based on 6,410,187 shares of common stock outstanding.
(3) Percentage based on 9,510,187 shares of common stock outstanding.
(4) Includes 100,000 shares owned by the Harriet Ross Revocable Trust, and
174,000 shares owned by the Monte Ross Revocable Trust. Also includes
options to purchase 146,813 shares.
(5) All shares are owned jointly with Mr. Clarke's spouse. Also includes
options for 91,423 shares.
(6) Includes options for 62,000 shares.
29
(7) Includes options for 29,000 shares.
(8) Includes 24,000 shares owned by D&H Enterprises, Inc., of which Mr.
Krollfeifer is a principal. Also includes options for 4,000 shares.
(9) Includes options for 4,000 shares.
(10) Includes options for 371,747 shares.
(11) As reflected by Mr. Brixey's Form 4, filed March 18, 2005.
30
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 10,000,000 shares of Common Stock, $0.01
par value. As of March 21, 2005, there were 6,410,187 shares of common stock
issued and outstanding. Holders of the common stock are entitled to one vote per
share on all matters to be voted upon by the stockholders. Holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged American Stock Transfer & Trust Company, as independent
transfer agent or registrar.
PREFERRED STOCK
We are authorized to issue 5,000,000 shares of preferred stock, $0.01 par
value per share. As of March 21, 2005, there were no shares of preferred stock
issued and outstanding. The shares of preferred stock may be issued in series,
and shall have such voting powers, full or limited, or no voting powers, and
such designations, preferences and relative participating, optional or other
special rights, and qualifications, limitations or restrictions thereof, as
shall be stated and expressed in the resolution or resolutions providing for the
issuance of such stock adopted from time to time by the board of directors. The
board of directors is expressly vested with the authority to determine and fix
in the resolution or resolutions providing for the issuances of preferred stock
the voting powers, designations, preferences and rights, and the qualifications,
limitations or restrictions thereof, of each such series to the full extent now
or hereafter permitted by the laws of the State of Delaware.
WARRANTS
In connection with a Securities Purchase Agreement dated February 2005,
the accredited investor was issued 300,000 warrants to purchase shares of common
stock. The warrants are exercisable until two years from the date of issuance at
a purchase price of $10.00 per share.
OPTIONS
We currently have 238,236 options outstanding,
CONVERTIBLE SECURITIES
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with an accredited investor on February 14, 2005, and amended
on February 17, 2005, for the sale of (i) $300,000 in convertible debentures and
(ii) warrants to buy 300,000 shares of our common stock. This prospectus relates
to the resale of the common stock underlying these convertible debentures and
warrants.
The investor is obligated to provide us with an aggregate of $300,000 as
follows:
o $50,000 was disbursed to us on February 14, 2005;
o $50,000 has been retained for services provided to our company by
various professionals, which shall be disbursed upon effectiveness
of this registration statement; and
o $200,000 will be released upon effectiveness of this registration
statement.
31
The debentures bear interest at 4 3/4%, mature two years from the date of
issuance, and are convertible into our common stock, at the selling
stockholder's option. The convertible debentures are convertible into the number
of our shares of common stock equal to the principal amount of the debentures
being converted multiplied by 11, less the product of the conversion price
multiplied by ten times the dollar amount of the debenture. The conversion price
for the convertible debenture is the lesser of (i) $1.25 or (ii) eighty percent
of the of the average of the five lowest volume weighted average prices during
the twenty (20) trading days prior to the conversion. If the volume weighted
average price is below $0.50 on a conversion date, we have the right to pre-pay
the amount of the debenture the holder elects to convert, plus accrued and
unpaid interest, at 125% of such amount; however, if we elect to pre-pay in this
situation, the debenture holder has the right to withdraw the notice of
conversion. Also, if the volume weighted average price is below $0.50 at any
point during a month, the holder is not obligated to convert any portion of the
debenture during that month. Accordingly, there is in fact no limit on the
number of shares into which the debenture may be converted. In addition, the
selling stockholder is obligated to exercise the warrant concurrently with the
submission of a conversion notice by the selling stockholder. The warrant is
exercisable into 300,000 shares of common stock at an exercise price of $10.00
per share.
Golden Gate Investors has contractually committed to convert not less than
5% of the original face value of the debenture monthly beginning the month after
the effective date of the Registration Statement. Golden Gate Investors is
required to exercise warrants concurrently with the exercise of a conversion
notice under the debenture and is committed to exercise at least 5% of the
warrants per month after the effective date of the Registration Statement. In
the event that Golden Gate Investors breaches the minimum restriction on the
debenture and warrant, Golden Gate will not be entitled to collect interest on
the debenture for that month. If Golden Gate submits a conversion notice and the
volume weighted average price is less then $.50 per share, then we will be
entitled to prepay the portion of the debenture that is being converted at 125%
of such amount. If we elect to prepay, then Golden Gate may withdraw its
conversion notice.
Golden Gate has further contractually agreed to restrict its ability to
convert the debenture or exercise their warrants and receive shares of our
common stock such that the number of shares held by the Holder and its
affiliates after such conversion or exercise does not exceed 9.99% of the then
issued and outstanding shares of our common stock.
In the event that the registration statement is not declared effective by
the required deadline, which is 150 days from the date of the Securities
Purchase Agreement, Golden Gate may demand repayment of the Debenture of 150% of
the face amount outstanding, plus all accrued and unpaid interest, in cash. If
the repayment is accelerated, we are also obligated to issue to Golden Gate
50,000 shares of common stock and $15,000 for each 30-day period, or portion
thereof, during which the face amount, including interest thereon, remains
unpaid. If Golden Gate does not elect to accelerate the debenture, we are
required to immediately issue to Golden Gate 50,000 shares of common stock and
$15,000 for each 30-day period, or portion thereof, during which the face
amount, including interest thereon, remains unpaid.
Sample Conversion Calculation
The convertible debentures are convertible into the number of our shares
of common stock equal to the principal amount of the debentures being converted
multiplied by 11, less the product of the conversion price multiplied by ten
times the dollar amount. The conversion price for the convertible debentures is
the lesser of (i) $1.25 or (ii) eighty percent of the of the average of the
three lowest volume weighted average prices during the twenty (20) trading days
prior to the conversion. For example, assuming conversion of $300,000 of
debentures on March 29, 2005, a conversion price of $0.3387 per share, the
number of shares issuable upon conversion would be:
($300,000 x 11) - ($0.3387 x (10 x $300,000)) = 2,283,900/$0.3387 = 6,743,136
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our convertible
debentures, based on market prices 25%, 50% and 75% below the market price, as
of March 31, 2005 of $0.45.
32
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 20% Issuable Stock
------- --------- ------------- ----------- -----------
25% $.3375 $.27 9,222,223 58.99%
50% $ .225 $.18 15,333,334 70.52%
75% $.1125 $.09 33,666,667 84.01%
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Certificate of Incorporation, as amended, provide to the fullest
extent permitted by Delaware law, our directors or officers shall not be
personally liable to us or our shareholders for damages for breach of such
director's or officer's fiduciary duty. The effect of this provision of our
Certificate of Incorporation, as amended, is to eliminate our rights and our
shareholders (through shareholders' derivative suits on behalf of our company)
to recover damages against a director or officer for breach of the fiduciary
duty of care as a director or officer (including breaches resulting from
negligent or grossly negligent behavior), except under certain situations
defined by statute. We believe that the indemnification provisions in our
Certificate of Incorporation, as amended, are necessary to attract and retain
qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
33
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders, but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholders defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder is contractually
restricted from engaging in short sells. In addition, if a such short sale is
deemed to be a stabilizing activity, then the selling stockholder will not be
permitted to engage in a short sale of our common stock. All of these
limitations may affect the marketability of the shares.
We have agreed to indemnify the selling stockholders, or their transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
34
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
35
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholders. We will not receive any proceeds
from the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the number of
shares of common stock beneficially owned by each person, the number of shares
of common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all of
the shares offered.
------------------------------------------------------------------------------------------------------------------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Name Debentures, Notes Full Prospectus Before the Owned Before Offering Offering
and/or Warrants Conversion (1) Offering* Offering* (4) (4)
------------------------------------------------------------------------------------------------------------------------
Golden Gate 7,043,136 (3) 52.35% Up to 711,451 9.99% -- --
Investors, 3,100,000
Inc.(2) shares of
common stock
------------------------------------------------------------------------------------------------------------------------
* These columns represents the aggregate maximum number and percentage
of shares that the selling stockholders can own at one time (and
therefore, offer for resale at any one time) due to their 9.99%
limitation.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the convertible debentures is subject to adjustment depending on,
among other factors, the future market price of the common stock, and could be
materially less or more than the number estimated in the table.
(1) Includes a good faith estimate of the shares issuable upon
conversion of the convertible debentures and exercise of warrants,
based on current market prices. Because the number of shares of
common stock issuable upon conversion of the convertible debentures
is dependent in part upon the market price of the common stock prior
to a conversion, the actual number of shares of common stock that
will be issued upon conversion will fluctuate daily and cannot be
determined at this time. Under the terms of the convertible
debentures, if the convertible debentures had actually been
converted on March 29, 2005, the conversion price would have been
$.3387. The actual number of shares of common stock offered in this
prospectus, and included in the registration statement of which this
prospectus is a part, includes such additional number of shares of
common stock as may be issued or issuable upon conversion of the
convertible debentures and exercise of the related warrants by
reason of any stock split, stock dividend or similar transaction
involving the common stock, in accordance with Rule 416 under the
Securities Act of 1933. However the selling stockholders have
contractually agreed to restrict their ability to convert their
convertible debentures or exercise their warrants and receive shares
of our common stock such that the number of shares of common stock
held by them in the aggregate and their affiliates after such
conversion or exercise does not exceed 9.99% of the then issued and
outstanding shares of common stock as determined in accordance with
Section 13(d) of the Exchange Act. Accordingly, the number of shares
of common stock set forth in the table for the selling stockholders
exceeds the number of shares of common stock that the selling
stockholders could own beneficially at any given time through their
ownership of the convertible debentures and the warrants. In that
regard, the beneficial ownership of the common stock by the selling
stockholder set forth in the table is not determined in accordance
with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended.
36
(2) The selling stockholder is an unaffiliated third party. In
accordance with rule 13d-3 under the Securities Exchange Act of
1934, Norman Lizt may be deemed a control person of the shares owned
by the selling stockholder.
(3) Includes 6,743,136 shares of common stock underlying our $300,000
convertible debenture and 300,000 shares of common stock underlying
common stock purchase warrants issued to Golden Gate Investors, Inc.
(4) Assumes that all securities registered will be sold.
Terms of Convertible Debentures
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with an accredited investor on February 14, 2005, and amended
on February 17, 2005, for the sale of (i) $300,000 in convertible debentures and
(ii) warrants to buy 300,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying these
convertible debentures and warrants.
The investors are obligated to provide us with an aggregate of $300,000 as
follows:
o $50,000 was disbursed to us on February 14, 2005;
o $50,000 has been retained for services provided to our company by
various professionals, which shall be disbursed upon effectiveness
of this registration statement; and
o $200,000 will be released upon effectiveness of this registration
statement.
The debentures bear interest at 4 3/4%, mature two years from the date of
issuance, and are convertible into our common stock, at the selling
stockholder's option. The convertible debentures are convertible into the number
of our shares of common stock equal to the principal amount of the debentures
being converted multiplied by 11, less the product of the conversion price
multiplied by ten times the dollar amount of the debenture. The conversion price
for the convertible debenture is the lesser of (i) $1.25 or (ii) eighty percent
of the of the average of the three lowest volume weighted average prices during
the twenty (20) trading days prior to the conversion. If the volume weighted
average price is below $0.50 on a conversion date, we have the right to pre-pay
the amount of the debenture the holder elects to convert, plus accrued and
unpaid interest, at 125% of such amount; however, if we elect to pre-pay in this
situation, the debenture holder has the right to withdraw the notice of
conversion. Also, if the volume weighted average price is below $0.50 at any
point during a month, the holder is not obligated to convert any portion of the
debenture during that month. Accordingly, there is in fact no limit on the
number of shares into which the debenture may be converted. In addition, the
selling stockholder is obligated to exercise the warrant concurrently with the
submission of a conversion notice by the selling stockholder. The warrant is
exercisable into 300,000 shares of common stock at an exercise price of $10.00
per share.
Golden Gate Investors has contractually committed to convert not less than
5% of the original face value of the debenture monthly beginning the month after
the effective date of the Registration Statement. Golden Gate Investors is
required to exercise warrants concurrently with the exercise of a conversion
notice under the debenture and is committed to exercise at least 5% of the
warrants per month after the effective date of the Registration Statement. In
the event that Golden Gate Investors breaches the minimum restriction on the
debenture and warrant, Golden Gate will not be entitled to collect interest on
the debenture for that month. If Golden Gate submits a conversion notice and the
volume weighted average price is less then $.50 per share, then we will be
entitled to prepay the portion of the debenture that is being converted at 125%
of such amount. If we elect to prepay, then Golden Gate may withdraw its
conversion notice.
Golden Gate has further contractually agreed to restrict its ability to
convert the debenture or exercise their warrants and receive shares of our
common stock such that the number of shares held by the Holder and its
affiliates after such conversion or exercise does not exceed 9.99% of the then
issued and outstanding shares of our common stock.
37
In the event that the registration statement is not declared effective by
the required deadline, which is 150 days from the date of the Securities
Purchase Agreement, Golden Gate may demand repayment of the Debenture of 150% of
the face amount outstanding, plus all accrued and unpaid interest, in cash. If
the repayment is accelerated, we are also obligated to issue to Golden Gate
50,000 shares of common stock and $15,000 for each 30-day period, or portion
thereof, during which the face amount, including interest thereon, remains
unpaid. If Golden Gate does not elect to accelerate the debenture, we are
required to immediately issue to Golden Gate 50,000 shares of common stock and
$15,000 for each 30-day period, or portion thereof, during which the face
amount, including interest thereon, remains unpaid.
Sample Conversion Calculation
The convertible debentures are convertible into the number of our shares
of common stock equal to the principal amount of the debentures being converted
multiplied by 11, less the product of the conversion price multiplied by ten
times the dollar amount. The conversion price for the convertible debentures is
the lesser of (i) $1.25 or (ii) eighty percent of the of the average of the
three lowest volume weighted average prices during the twenty (20) trading days
prior to the conversion. For example, assuming conversion of $300,000 of
debentures on March 29, 2005, a conversion price of $0.3387 per share, the
number of shares issuable upon conversion would be:
($300,000 x 11) - ($0.3387 x (10 x $300,000)) = 2,283,900/$0.3387 = 6,743,136
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our convertible
debentures, based on market prices 25%, 50% and 75% below the market price, as
of March 28, 2005 of $0.45.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 20% Issuable Stock
------- --------- ------------- ----------- -----------
25% $.3375 $.27 9,222,223 58.99%
50% $ .225 $.18 15,333,334 70.52%
75% $.1125 $.09 33,666,667 84.01%
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Webb & Company, P.A., Independent Registered Public Accounting Firm, have
audited, as set forth in their report thereon appearing elsewhere herein, our
financial statements at December 31, 2004 and 2003 and for the years then ended
that appear in the prospectus. The financial statements referred to above are
included in this prospectus with reliance upon the Independent Registered Public
Accounting Firm's opinions based on their expertise in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Ultradata Systems, Incorporated, filed
as part of the registration statement, and it does not contain all information
in the registration statement, as certain portions have been omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission.
38
We are subject to the informational requirements of the Securities
Exchange Act of 1934 which requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C.
20549. Copies of such material can be obtained from the Public Reference Section
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
39
INDEX TO FINANCIAL STATEMENTS
ULTRADATA SYSTEMS, INCORPORATED
FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and December 31, 2003
Reports of Independent Registered Public Accounting Firm F-1
Balance Sheets F-2 to F-3
Statements of Operations F-3
Statement of Stockholders' Equity (Deficit) F-4
Statements of Cash Flows F-5 to F-6
Notes to Financial Statements F-7 to F-22
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of:
Ultradata Systems, Inc.
We have audited the accompanying balance sheet of Ultradata Systems, Inc. as of
December 31, 2004, and the related statements of operations, changes in
stockholders' equity (deficiency) and cash flows for the years ended December
31, 2004 and 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Ultradata Systems, Inc. as of
December 31, 2004 and the results of its operations and its cash flows for the
years ended December 31, 2004 and 2003 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, a major customer of the Company has experienced
deteriorating operations during 2004 and during the second quarter ceased
ordering products from the Company. This customer accounted for 55.4% of sales
during 2004. In addition the Company terminated its agreements with AAA for the
sale of its products using the AAA logo to AAA retail locations. These factors
raise substantial doubt about its ability to continue as a going concern.
Management's plans concerning this matter are also described in Note 13. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ WEBB & COMPANY, P.A.
------------------------
Boynton Beach, Florida
March 5, 2005
F-1
ULTRADATA SYSTEMS, INCORPORATED
BALANCE SHEET
AS OF DECEMBER 31, 2004
ASSETS
CURRENT ASSETS
Cash $385,966
Trade accounts receivable, net of allowance for doubtful accounts of $179,575 38,459
Inventories, net 89,890
Prepaid expenses 41,515
-----------
Total Current Assets 555,830
PROPERTY AND EQUIPMENT - NET 30,458
OTHER ASSETS 5,444
-----------
TOTAL ASSETS $591,732
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $126,019
Accrued liabilities 55,967
-----------
TOTAL CURRENT LIABILITIES 181,986
-----------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 4,996,680 shares authorized, none issued and outstanding --
Series A convertible preferred stock, 3,320 shares authorized, none issued and outstanding --
Common stock, $0.01 par value, 10,000,000 shares authorized, 6,410,187 issued and outstanding 64,102
Additional paid-in capital 9,121,022
Accumulated deficit (8,659,418)
Deferred stock compensation (115,960)
-----------
TOTAL STOCKHOLDERS' EQUITY 409,746
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $591,732
===========
See accompanying notes to financial statements.
F-2
ULTRADATA SYSTEMS, INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
----------- -----------
NET SALES $ 3,970,434 $ 2,863,258
COST OF SALES 2,026,756 1,486,542
----------- -----------
GROSS PROFIT 1,943,678 1,376,716
----------- -----------
OPERATING EXPENSES
Selling 329,137 253,564
General and administrative 1,151,439 876,528
Research and development 140,507 63,156
----------- -----------
Total Operating Expenses 1,621,083 1,193,248
----------- -----------
OPERATING INCOME 322,595 183,468
----------- -----------
OTHER INCOME (EXPENSE)
Interest and dividend income 1,620 6,402
Interest expense (6,408) (155,801)
Loss on early retirement of note receivable -- (57,813)
Settlement of legal dispute -- 127,000
Other, net 15 6,439
----------- -----------
Total Other Income (Expense) (4,773) (73,773)
----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 317,822 109,695
Income tax expense -- --
----------- -----------
NET INCOME $ 317,822 $ 109,695
----------- -----------
INCOME PER SHARE
Net income $ 317,822 $ 109,695
Preferred stock dividends -- (5,190)
----------- -----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 317,822 $ 104,505
=========== ===========
Income per share - basic and diluted $ 0.05 $ 0.02
=========== ===========
Weighted average shares outstanding - basic and diluted 6,225,304 4,872,026
=========== ===========
See accompanying notes to financial statements.
F-3
ULTRADATA SYSTEMS, INCORPORATED
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Notes
Receivable
Additional For
Preferred Stock Common Stock paid-in Common
Shares Amount Shares Amount capital Stock
------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 16 $16,000 4,224,456 $42,244 $9,631,750 $(102,369)
Conversion of preferred
stock to note payable (16) (16,000) (8,790)
Conversion of notes payable
to common stock 1,372,555 13,726 141,494
Issuance of common stock to
non-employee for services
performed 30,000 3,000 4,200
Exercise of employee stock
options 3,000 30 180
Stock issued as part of
short-term loan 480,000 4,800 86,900
offering
Payments on notes
receivable
to purchase common 102,369
stock
Retirement of treasure (326,171) (3,262) (939,049)
shares
Net income, 2003
--------- ------------ ------------ ------------ -------------- ------------
Balance at December 31, -- -- 5,783,840 57,838 8,916,685 --
2003
Conversion of notes payable
to common stock 273,906 2,739 24,861
Issuance of common stock to
non-employee for services
performed 223,000 2,230 171,710
Exercise of employee stock
options 100,441 1,005 6,026
Exercise of director stock
options 29,000 290 1740
Net income, 2004
--------- ------------ ------------ ------------ -------------- ------------
Balance at December 31, -- $ -- 6,410,187 $64,102 $9,121,022 $ --
2004
Total
Deferred Stockholders'
Treasury Stock Accumulated Stock Equity
Shares Amount deficit Compensation (Deficiency)
------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 326,171 $(942,311) $(9,086,935) $ -- $(441,621)
Conversion of preferred
stock to note payable (24,790)
Conversion of notes payable
to common stock 155,220
Issuance of common stock to
non-employee for services
performed 4,500
Exercise of employee stock
options 210
Stock issued as part of
short-term loan 91,700
offering
Payments on notes
receivable
to purchase common 102,369
stock
Retirement of treasure (326,171) 942,311 --
shares
Net income, 2003 109,695 109,695
------------ ------------ ----------------------------------------
Balance at December 31, 2003 -- -- (8,977,240) (2,717)
Conversion of notes payable
to common stock 27,600
Issuance of common stock to
non-employee for services
performed (115,960) 60,010
Exercise of employee stock
options 7,031
Exercise of director stock
options 2,030
Net income, 2004 317,822 317,882
------------ ------------ ----------------------------------------
Balance at December 31, 2004 -- -- $(8,659,418) $(115,960) $ 409,746
See accompanying notes to financial statements.
F-4
ULTRADATA SYSTEMS, INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 317,822 $ 109,695
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 14,976 32,308
Write-down of inventory 30,457 17,673
Stock issued for services 57,980 4,500
Loss on early settlement of notes receivable -- 57,813
Provision for doubtful accounts 176,848 (693)
Non-cash accrued interest receivable -- (12,397)
Changes in assets and liabilities:
Trade accounts receivable, net 412,182 (485,198)
Inventories (64,752) 29,219
Prepaid expenses and other assets (36,349) (604)
Accounts payable (334,682) 182,872
Accrued liabilities (34,826) (98,032)
--------- ---------
Net Cash Provided By (Used In) Operating Activities 539,656 (162,844)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from early settlement of notes receivable -- 202,517
Capital expenditures (19,475) (12,834)
--------- ---------
Net Cash (Used In) Provided By Investing Activities (19,475) 189,683
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercising stock options 9,061 --
Payments on notes payable (311,202) (338,844)
Dividends paid to preferred stockholders -- (8,790)
Proceeds from notes payable 165,000 91,600
Proceeds from sale of common stock -- 91,910
Payments received on subscriptions, net -- 102,369
--------- ---------
Net Cash Used In Financing Activities (137,141) (61,755)
--------- ---------
NET INCREASE (DECREASE) IN CASH 383,040 (34,916)
CASH - BEGINNING OF YEAR 2,926 37,842
--------- ---------
CASH - END OF YEAR $ 385,966 $ 2,926
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
Interest paid during the year $ 6,408 $ 48,204
========= =========
See accompanying notes to financial statements.
F-5
ULTRADATA SYSTEMS, INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 2004, a portion of the notes payable in the amount of $27,600 was
converted to 273,906 shares of common stock.
During 2003, a portion of the notes payable in the amount of $155,220 was
converted to 1,312,535 shares of common stock.
During 2003, the Company retired 326,171 shares of Treasury Stock with a cost of
$942,311.
See accompanying notes to financial statements.
F-6
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Operations
Ultradata Systems, Incorporated (the "Company") was incorporated in the
State of Missouri in March 1986 under the name of Laser Data Technology,
Inc. The Company subsequently merged into its wholly owned subsidiary,
Ultradata Systems, Incorporated, incorporated in the State of Delaware,
and Laser Data was dissolved. The principal business activity of the
Company, located in St. Louis, is the design, manufacture, and sale of
hand-held electronic information products. The Company sells the products
in the United States through direct marketing, independent sales
representatives, mail order catalogs, and mass market retailers.
(B) Use of Estimates
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America and, as
such, include amounts based on informed estimates and assumptions by
management, with consideration given to materiality. Actual results could
vary from those estimates.
(C) Cash and Cash Equivalents
Cash includes deposits at financial institutions with maturities of three
months or less. The Company at times has cash in banks in excess of FDIC
insurance limits and places its temporary cash investments with high
credit quality financial institutions. At December 31, 2004, the Company
had approximately $285,800 in cash balances at financial institutions
which were in excess of the FDIC insured limits.
(D) Revenue Recognition
Net sales are recognized when products are shipped. The Company has
established programs, which, under specified conditions, enable customers
to return product. The Company establishes liabilities for estimated
returns at time of shipment. In addition, accruals for customer discounts
and rebates are recorded when revenues are recognized.
(E) Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Provision for potentially
obsolete or slow moving inventory is made based on management's analysis
of inventory levels and future sales forecasts.
F-7
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont')
(F) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
The Company capitalizes certain software development costs in accordance
with the American Institute of Certified Public Accountants Statement of
Position No. 98-1, "Accounting for the Costs of Software Developed or
Obtained for Internal Use." Depreciation is provided using the
straight-line basis over the estimated useful lives of the assets,
generally five years. Leasehold improvements are amortized over the
shorter of the term of the related lease or their useful life.
Expenditures for maintenance and repairs are charged to expense as
incurred. The Company continually reviews property and equipment to
determine that the carrying values are not impaired.
(G) Long-Lived Assets
The Company accounts for long-lived assets under the Statements of
Financial Accounting Standards Nos. 142 and 144 "Accounting for Goodwill
and Other Intangible Assets" and "Accounting for Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 142 and 144"). In accordance with SFAS No.
142 and 144, long-lived assets, goodwill and certain identifiable
intangible assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. For purposes of evaluating the
recoverability of long-lived assets, goodwill and intangible assets, the
recoverability test is performed using undiscounted net cash flows related
to the long-lived assets.
(H) Advertising
The Company expenses the production costs of advertising the first time
advertising takes place, except for direct response advertising, which is
capitalized and amortized over its expected period of future benefits.
Advertising expense totaled $95,664 and $60,950 for the years ended
December 31, 2004 and 2003, respectively.
(I) Reclassification
Certain amounts from prior periods have been reclassified to conform to
the current year presentation.
F-8
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont')
(J) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure About
Fair Value of Financial Instruments," requires certain disclosures
regarding the fair value of financial instruments. Trade accounts
receivable, accounts payable, and accrued liabilities are reflected in the
financial statements at fair value because of the short-term maturity of
the instruments.
(K) Research and Development Costs
Research and development costs consist primarily of expenditures incurred
bringing a new product to market or significantly enhancing existing
products. The Company expenses all research and development costs as they
are incurred unless they are associated with the development of tools or
processes for production used in-house rather than for product delivered
to a customer.
(L) Royalty Expense
Royalty expense is recognized on a pro rata basis as units are sold during
the same period in which the related unit sales were recognized.
(M) Income Taxes
The Company accounts for income taxes under the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", ("SFAS 109").
Under SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(N) Income Per Share
Basic and diluted income per share is calculated by dividing net income
for the period (plus preferred stock dividends) by the weighted average
number of shares of common stock outstanding during the period. The
assumed exercise of stock options and warrants is only included in the
calculation of diluted earnings per share, if dilutive (see Note 10).
F-9
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont')
(O) Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards No. 123
(SFAS No. 123), the Company has elected to account for stock options
issued to employees under Accounting Principles Board Opinion No. 25 ("APB
Opinion No. 25") and related interpretations. The Company accounts for
stock options issued to consultants and for other services in accordance
with SFAS No. 123.
(P) New Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory
Costs - an amendment of ARB No. 43, Chapter 4"" SFAS No. 152, "Accounting
for Real Estate Time-Sharing Transactions - an amendment of FASB
Statements No. 66 and 67," SFAS No. 153, "Exchanges of Non-monetary Assets
- an amendment of APB Opinion No. 29," and SFAS No. 123 (revised 2004),
"Share-Based Payment," were recently issued. SFAS No. 151, 152, 153 and
123 (revised 2004) have no current applicability to the Company and have
no effect on the financial statements.
(Q) Business Segments
The Company applies Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information." The
Company operates in one segment and therefore segment information is not
presented.
NOTE 2 INVENTORIES
Inventories (net) at December 31, 2004 consist of the following:
Raw materials $ 4,966
Finished goods 84,924
-------
$89,890
=======
At December 31, 2004, the Company has reserved $738,826 for obsolete
inventory. During 2004 and 2003, the Company recognized an impairment of
$30,456 and $17,673 respectively.
F-10
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 consist of the following:
Research and development equipment $ 39,997
Tooling and test equipment 86,112
Office furniture and equipment 219,025
Sales displays 52,101
Leasehold improvements 29,989
---------
427,224
Less accumulated depreciation and amortization (396,766)
---------
$ 30,458
=========
Depreciation and amortization expense for the years ended December 31,
2004 and 2003 totaled $14,976 and $32,308, respectively.
NOTE 4 ACCRUED LIABILITIES
Accrued liabilities at December 31, 2004 consist of the following:
Accrued payroll and related expenses 10,961
Accrued vacation 24,224
Accrued expenses 19,818
Other accrued liabilities 964
-------
$55,967
=======
NOTE 5 NOTES PAYABLE
On January 8, 2004, all remaining convertible debt was retired by payment
in full of the outstanding balance including all accrued interest. Between
January 1, 2004, and January 8, 2004, a portion of the notes payable in
the amount of $27,600 was converted to 273,906 shares of common stock.
(See Note 8).
On January 7, 2004, the Company issued a nine-month note payable in the
amount of $150,000. The note earned interest at 12% APR and is unsecured.
The note was fully repaid during 2004.
During 2004, the Company received a loan of $15,000 from its Chief
Executive Officer to fund operations with no interest. The outstanding
balance of the loan was paid in full as of March 31, 2004.
Interest expense for the years ended December 31, 2004 and 2003 was $6,408
and $155,801, respectively.
F-11
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 6 COMMITMENTS AND CONTINGENCIES
(A) Operating Lease
The Company renewed its operating lease whereby it reduced the size of its
corporate facilities as of November 1, 2001. The lease is an operating
lease, which expires October 31, 2005. The Company pays monthly rent of
$3,779, plus 16% of all building expenses.
Future minimum lease payments under the operating lease at December 31,
2004, consist of the following:
Year Amount
---- -------
2005 $37,790
Rent expense totaled $45,500 and $47,299 for the years ended December 31,
2004 and 2003, respectively.
(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, 2004 and 2003, royalty expense totaled $35,799
and $26,693, respectively.
On September 15, 1998, the Company entered into a three-year royalty
agreement with AAA related to the AAA TripWizard(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.
F-12
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 6 COMMITMENTS AND CONTINGENCIES (cont')
In January 2004, the Company reached an agreement with AAA National to
terminate the existing agreement for private branding of the AAA Talking
Road Navigator(TM) as of March 27, 2004. This termination occurred at the
request of AAA National for internal business reasons and not for cause or
non-performance by the Company, in accordance with the terms for
cancellation of the agreement by either party.
In May 2004, AAA notified the Company that it does not intend to renew the
marketing agreement on the AAA TripWizard. The Company, per terms of the
agreement, can continue to market the product and divest itself of its
inventory during 2005.
During the years ended December 31, 2004 and 2003, AAA royalty expense for
both products totaled $45,837 and $39,821, respectively.
On April 19, 2001, the Company entered into a three-year royalty agreement
with Rand McNally. The agreement renews automatically for one-year periods
up to a maximum of five additional years unless terminated earlier. The
agreement calls for the Company to pay a royalty of 10% of net sales of
the TripLink and Pocket TripLink devices that contain the Rand McNally
logo or $1.50 for each device sold, whichever is greater. For the first
year of the agreement, the Company guarantees a minimum payment of
$150,000, and must pay an additional $50,000 if 50,000 or more devices are
sold. The guaranteed annual minimum for each subsequent anniversary year
increases to 115% of the amount of the royalties due (inclusive of the
guaranteed annual minimum) for the previous year. In addition to the per
unit royalty, the Company must pay (1) a royalty of $.01 to $.02 for each
route created by authorized users of the services provided by the
agreement, (2) a royalty of $0.48 to $0.62 for each Pocket Road Atlas
ordered from Rand McNally, and (3) a $0.12 license fee for each Pocket
Road Atlas shipped to customers.
On February 21, 2002, the royalty agreement with Rand McNally was amended
as follows: (1) beginning December 16, 2002, either party may terminate
the agreement with sixty days written notice, (2) the Company may begin
using the Rand McNally logo on additional products, (3) beginning March 1,
2002, the Company shall pay twelve monthly installments of $8,333 to the
remaining balance of $100,000 owed to Rand McNally for the first year
minimum, and (4) the Company shall sell its TripLink device to Rand
McNally for $7.50 per unit below the normal selling price, and this
discount shall be used as a credit against the monthly payment in (3)
above.
In February 2003, the agreement with Rand McNally was further amended to
provide a new payment schedule and basis for the TripLink royalties. The
Company agreed to pay the remaining balance for the TripLink Program in
accordance with the following terms:
F-13
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 6 COMMITMENTS AND CONTINGENCIES (cont')
The beginning balance of $52,251 on January 1, 2003, shall bear interest
at the rate of 6% APR. The payment schedule shall consist of $2,000 upon
signing of the amendment and $2,000 on the 15th of each month commencing
March 15, 2003. On or before August 31, 2003, a final balloon payment is
required equal to the sum of the outstanding balance and any accrued
unpaid interest, less any credits resulting from TripLink sales in the
interim. The agreement was signed and the initial payment of $2,000 was
made in February 2003.
In 2003, the Company paid $20,000, including $2,341 in interest, to Rand
McNally and reduced the balance to $27,045 on December 31, 2003, when
credits are also taken into account. Since the Company was unable to
retire the balance by August 31, 2003 as planned, the Company continued
monthly payments and accrual of interest.
In 2004, the Company paid $510 in interest, accrued $855 in credits, and
retired the balance of $26,802 in May 2004.
During the years ended December 31, 2004 and 2003, royalty expense totaled
$8 and $138, respectively.
(D) Stanton Walker Consulting Agreement
In September 2004, the Company signed a business advisory and consulting
services agreement with New York-based Stanton Walker & Company. Stanton
Walker will assist in the development of certain strategic initiatives of
the Company. These initiatives include opening discussions with several
companies regarding licensing arrangements, joint ventures or distribution
arrangements. Stanton Walker's work will include due diligence,
structuring transaction terms and providing consulting services throughout
the process. Stanton Walker will also seek potential acquisition candidate
companies that fit Ultradata Systems' business objectives.
Stanton Walker & Company provides a full range of strategic operational,
marketing, financial advisory and M & A services to public companies.
While they provide assistance in a wide array of industries, Stanton
Walker is especially interested in working with companies where their
products and/or services appear to offer the company's stakeholders an
opportunity for a significant return.
Stanton Walker were issued 223,000 shares of Ultradata Common Stock with a
prevailing market value on the date of the agreement of $173,940 in
payment for their services. The Company is amortizing the compensation
expense over the 12-month life of the agreement. As of December 31, 2004,
the Company recognized $57,980 of the consulting expense related to the
agreement and recorded deferred consulting fees of $115,960.
F-14
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 7 STOCKHOLDERS' EQUITY (DEFICIENCY)
(A) Common Stock Issuances
During 2003, a portion of the notes payable in the amount of $155,220 was
converted to 1,372,555 shares of common stock. No gain or loss was
recognized on this transaction.
During 2003, an aggregate of 30,000 shares of common stock having a fair
value of $4,500 were issued to a consultant for services rendered during
the year. The shares were valued based on the prevailing market price on
the grant date.
During 2003, an aggregate of 480,000 shares of common stock were issued
for cash of $91,700 to holders of short-term notes.
During 2003, a director exercised 3,000 common stock options for cash of
$210.
During 2004, a portion of the notes payable in the amount of $27,600 was
converted to 273,906 shares of common stock. No gain or loss was
recognized on this transaction.
During 2004, a director exercised 29,000 common stock options for cash of
$2,030.
During 2004, 223,000 shares were issued to a consultant for services
rendered (see Note 6). During 2004, employees exercised 100,441 common
stock options for cash of $7,031.
(B) Convertible Preferred Stock
(i) Original Terms
On May 16, 2000, the Company issued 16 Series A Convertible
Preferred Shares to a consultant as a commission. These shares have
no voting rights. The holder of the shares is not entitled to any
cash dividends. However, they accrue an additional 11.25% per annum
(or 22.5% if the Common Stock is de-listed by NASDAQ) for purposes
of conversion, redemption, and liquidation ($6,529 at December 31,
2002). The main points of the Preferred Shares were as follows:
1. The Preferred Shares have a liquidation preference, upon the
liquidation of the Company or its bankruptcy or certain other
events, equal to their $1,000 face value plus an accrued
amount equal to 11.25% from the date of their issuance (22.5%
if the Common Stock is delisted by NASDAQ).
F-15
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 7 STOCKHOLDERS' EQUITY (DEFICIENCY) (cont')
2. The Preferred Shares, combined with the additional 11.25% per
annum, may be converted into Common Stock at any time at the
option of the holders. If not previously converted, the
Preferred Shares will automatically convert into Common Stock
on May 15, 2003. The conversion rate will be the lower of
$3.50 or 75% of the 5-day average closing bid price, subject
to certain anti-dilution rights and to the Floor. The "Floor"
was originally $2.50 and applies only during the first 18
months after issuance of the Preferred Shares. Under the terms
of the Preferred Shares, the floor price was initially
adjusted to $2.00, then to $1.50. In March 2001, the floor was
eliminated.
In May of 2003, the Company and the shareholder reached a mutually
satisfactory agreement to convert the shares to a note of $24,870 rather
than converting in accordance with the formula above. This note was paid
off completely by September 30, 2003.
NOTE 8 STOCK OPTIONS AND WARRANTS
(A) Stock Options Issued Under Qualified Stock Option Plans
Under the 1994 Incentive Stock Option Plan, the Company may grant
incentive stock options to its employees, officers, directors, and
consultants of the Company to purchase up to 175,000 shares of common
stock. Under the 1996 Incentive Stock Option Plan the Company may grant
incentive stock options to its employees, officers, directors, and
consultants of the Company to purchase up to 175,000 shares of common
stock. In July 2000, the Company's shareholders approved an extension of
the 1996 Incentive Stock Options plan to provide for 150,000 additional
shares to be made available for future grant. Under both plans, the
exercise price of each option equals or exceeds the market price of the
Company's stock on the date of grant, and the options' maximum term is
five years. Options are granted at various times and are exercisable
immediately.
During the year ended December 31, 2004, the Company granted 112,000 stock
options to certain employees and directors. The Company 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.
F-16
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 8 STOCK OPTIONS AND WARRANTS (cont')
2004 2003
----------- -----------
Net income available to common
shareholders As Reported $317,822 $104,505
Pro Forma $239,552 104,505
Basic and diluted income per share As Reported $0.05 $0.02
Pro Forma $0.04 $0.02
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 2004: dividend yield of zero;
expected volatility of 132%, risk-free interest rate of 5.40%; expected
lives of five years for both plans.
A summary of the status of Company's two fixed stock option plans as of
December 31, 2004 and 2003, and the changes during the years then ended is
presented below:
2004 2003
------------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
---------------------------------------- ------------ ------------ ----------- -----------
Outstanding at beginning of year 392,188 $0.14 392,188 $0.14
Cancelled -- -- -- --
Granted -- $ -- -- $ --
Forfeited -- $ -- -- $ --
Expired (11,000) $2.00 -- $ --
Exercised (100,414) $ .07 -- $ --
--------- ----- --------- -----------
Outstanding at end of year 280,747 $0.10 392,188 $0.14
========= ===== ========= ===========
Options exercisable at year end 280,747 392,188
========= ========
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, 2004 AND 2003
NOTE 8 STOCK OPTIONS AND WARRANTS (cont')
Options Outstanding Options Exercisable
---------------------------------------------------------------- ------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable Average
Range of December 31, Contractual Exercise at December Exercise
Exercise Price 2004 Life Price 31, 2004 Price
--------------- ----------------- --------------- ------------ --------------- ------------
$0.00 - 0.99 275,747 2.5 $ 0.07 275,747 $ 0.07
1.00 - 1.99 5,000 1.0 1.50 5,000 1.50
2.00 - 2.99 -- -- -- -- --
3.00 - 3.99 -- -- -- -- --
4.00 - 4.99 -- -- -- -- --
5.00 - 5.56 -- -- -- 1,658 --
------- ------- ------- ------- -------
280,405 2.47 0.10 280,405 0.10
======= ======= ======= ======= =======
Options Outstanding Options Exercisable
---------------------------------------------------------------- ------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable Average
Range of December 31, Contractual Exercise at December Exercise
Exercise Price 2003 Life Price 31, 2003 Price
--------------- ----------------- --------------- ------------ --------------- ------------
$0.00 - 0.99 376,161 4.0 $ 0.07 376,161 $ 0.07
1.00 - 1.99 5,000 2.0 1.50 5,000 1.50
2.00 - 2.99 11,000 0.8 2.00 11,000 2.00
3.00 - 3.99 -- -- -- -- --
4.00 - 4.99 -- -- -- -- --
5.00 - 5.56 -- -- -- -- --
------- ------- ------- ------- -------
392,188 3.88 0.14 392,188 0.14
======= ======= ======= ======= =======
F-18
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 8 STOCK OPTIONS AND WARRANTS (cont')
(B) Non-Qualified Stock Options Issued and Outstanding
2004 2003
------- -------
Stock options issued to a technical consultant at various times in 6,818 6,818
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
Stock options issued to a former affiliate. The term of the option
is five years expiring May 9, 2005. The options are exercisable
at $4.00 and $5.00 per share 300,000 300,000
Stock options issued to directors for services rendered. The term
of the options is five years expiring November 18, 2007. The
options are exercisable at $0.07 per share 4,000 33,000
------- -------
Stock options issued to directors for services rendered. The term 12,000 --
of the options is five years expiring December 11, 2009.The
options are exercisable at $0.72 per share
Stock options issued to employees. The term of the options is ten
years expiring December 11, 2014. The options are exercisable at
$0.72 per share 100,000 --
------- -------
Total 422,818 339,818
======= =======
NOTE 9 INCOME PER SHARE
A reconciliation of the numerator and denominator of the income per share
calculations is provided for all periods presented. The numerator and
denominator for basic and diluted income per share for the years ended
December 31, 2004 and 2003, is as follows:
Basic and fully diluted 2004 2003
--------- -----------
Numerator:
Net income $ 317,822 $ 109,695
Preferred Stock Dividends (a) -- (5,190)
========= ===========
Numerator for basic and diluted income per share $ 317,822 $ 104,505
========= ===========
Denominator:
Weighted average common shares 6,225,304 4,872,026
Denominator for basic and diluted income per share 6,225,304 4,872,026
========= ===========
Basic and diluted income per share $ 0.05 $ 0.02
========= ===========
(a) See Note 7(B)
F-19
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 10 INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2004 and
2003 consist of the following:
2004
Current Deferred Total
-------- -------- --------
Federal $ -- $ -- $ --
State -- -- --
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
2003
Current Deferred Total
-------- -------- --------
Federal $ -- $ -- $ --
State -- -- --
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
Income tax expense for the years ended December 31, 2004 and 2003 differed
from amounts computed by applying the statutory U. S. federal corporate
income tax rate of 34% to income before income tax benefit as a result of
the following:
2004 2003
--------- ---------
Expected income tax (benefit) expense $ 108,059 $ 37,296
Increase (decrease) in income taxes resulting from:
Valuation allowance decrease (106,804) (36,880)
Nondeductible expenses for federal income tax purposes (1,256) (416)
--------- ---------
Income tax expense (benefit) $ -- $ --
========= =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2004
and 2003 include the following:
F-20
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 10 INCOME TAXES (cont')
2004 2003
----------- -----------
Deferred tax assets:
Net operating loss carryforward $ 3,347,346 $ 3,454,150
Note receivable reserved for financial reporting
Purposes -- --
Notes and accounts receivable reserves 5,475 5,475
Inventory reserves, principally due to accruals for
financial reporting purposes and basis differences 277,491 277,491
Other -- --
----------- -----------
Total deferred tax assets 3,630,312 3,989,776
----------- -----------
Deferred tax liabilities
Property, plant and equipment, principally due to
differences in depreciation basis (10,837) (12,385)
----------- -----------
Total deferred tax liabilities -- (12,385)
----------- -----------
Gross deferred tax asset 3,619,475 3,977,391
Valuation allowance (3,619,475) (3,977,391)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
At December 31, 2004, the Company had net operating loss carryforwards of
$9,845,135 for income tax purposes, available to offset future taxable
income expiring on various dates through 2024. The valuation allowance at
December 31, 2003 was $10,159,265. The net change in the valuation
allowance during the year ended December 31, 2004 was a decrease of
$314,130.
NOTE 11 CONCENTRATIONS OF CREDIT RISK
The Company relied on three customers for approximately 82% of sales for
the year ended December 31, 2004, and two customers for approximately 70%
of sales for the year ended December 31, 2003. At December 31, 2004,
accounts receivable, net, from those three customers totaled $2,793.
F-21
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 12 EMPLOYEE BENEFIT PLANS
Effective January 1, 1998, the Board of Director's approved a savings and
retirement plan covering all full-time employees. Subject to approval by
the Board of Directors, the Company fully matches employee contributions
up to 3% of total compensation paid to participating employees and
one-third of one percent is matched for each percentage of participating
employee contributions between 4% and 6% of total compensation. Because of
the Company's financial condition, the Company contributions were
suspended in late 2002 and throughout 2003. Expense attributable to
Company contributions totaled $20,906 during the year ended December 31,
2004.
NOTE 13 GOING CONCERN
As reflected in the accompanying financial statements, a major customer of
the Company has experienced deteriorating operations during 2004 and
during the second quarter ceased ordering products from the Company. This
customer accounted 55.4% of sales during 2004. In addition the Company
terminated its agreements with AAA for the sale of its products using the
AAA logo to AAA retail locations. Although Management has a plan in place
to replace these lost customers, it is not yet clear that the plan will be
successful. The ability of the Company to continue as a going concern is
dependent on the Company's ability to further implement its business plan,
raise capital and generate revenues. The financial statements do not
include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
The Company has continued its product design and development efforts to
introduce new products in 2005 and expects to introduce its Road Genie(TM)
in 2005. Based on the success of the Talking Road Whiz with direct TV
marketing, the Company is proceeding with plans to market Road Genie(TM)
by means of similar commercials, with the Company marketing directly to
consumers. This new product represents an increase in technology compared
to the Talking Road Whiz and, in addition, can be enhanced to include a
digital voice recorder for additional value to the customer. The Company
is also opening a new source of revenue by developing the cell-phone Road
Whiz application. Thus, the Company has two different methods in work to
enhance sales revenue. In addition, the Company has obtained a loan and a
commitment for additional equity capital for up to $3.3 million (see Note
14). Management believes that actions presently taken to obtain additional
funding provide the opportunity for the Company to continue as a going
concern.
F-22
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 14 SUBSEQUENT EVENTS
Convertible Debenture Financing
On February 17, 2005 Ultradata entered into a Securities Purchase
Agreement dated February 14, 2005 with Golden Gate Investors, Inc., which
was modified by an Addendum dated February 17, 2005. Ultradata sold to
Golden Gate a 4 3/4% Convertible Debenture and a Warrant to Purchase
Shares of Common Stock, all for a purchase price of $300,000. The Company
received proceeds of $100,000 of the purchase price, except that $50,000
of that sum is being held in escrow for payment of the costs of preparing
and filing a registration statement that will permit Golden Gate to make a
public resale of the shares into which the Debenture is convertible and
for which the Warrant is exercisable (the "Registration Statement'). As a
result of the warrants issued alongside the debenture, the Company will
record a discount on the debenture and amortize it over the life of the
debenture. The remainder of the purchase price is payable when the
Securities and Exchange Commission declares the Registration Statement
effective.
Interest that accrues on the Debenture, at 4 3/4% per annum, will be
payable monthly. The principal amount of the Debenture is payable on
February 14, 2007. However, the holder of the Debenture has agreed that,
in each month after the Securities and Exchange Commission declares the
Registration Statement effective, the holder will convert at least 3% of
the face amount of the debenture into common stock. Similarly, the holder
of the Warrant is required to purchase at least 3% of the shares subject
to the Warrant in each month after the Securities and Exchange Commission
declares the Registration Statement effective.
The conversion provisions of the Debenture and the exercise provisions of
the Warrant are correlated so that the Debenture will be converted and the
Warrant exercised in like proportions. The result is that in any month in
which the holder converts the 3% minimum it will also exercise the 3%
minimum under the Warrant, which will result in it purchasing common stock
for $99,000 ($90,000 paid in cash and $9,000 of the Debenture principal
converted). The number of shares that will be purchased will equal the
purchase price divided by the lesser of (a) $1.25 or (b) 80% of the
average of the three lowest volume weighted average prices during the
twenty trading days preceding conversion/exercise. In total, the
conversion of the Debenture and exercise of the Warrant will result in
Golden Gate purchasing Ultradata common stock for up to $3,300,000
($3,000,000 paid in cash and $300,000 of the Debenture principal
converted) during the period between the effective date of the
Registration Statement and February 14, 2007.
There are four conditions that may reduce the aggregate purchase price
paid by Golden Gate below $3,300,000:
F-23
ULTRADATA SYSTEMS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 14 SUBSEQUENT EVENTS (cont')
1. If Golden Gate only converts the 3% minimum per month, the February 14,
2007 payment date for the Debenture will occur before full conversion and
exercise have occurred.
2. The conversion and exercise provisions of the securities provide that
at no time may Golden Gate acquire ownership of more that 9.9% of
Ultradata's outstanding common stock.
3. If at the time of a conversion/exercise, the conversion price would be
less than $.40, then either (a) Ultradata may opt to redeem the amount of
principal that the holder presents for conversion at 125% of face value,
or (b) if the conversion/exercise date is later than November 11, 2005,
the holder may elect to convert up to $100,000 of the Debenture without
exercising the Warrant, either of which events would reduce the aggregate
purchases under the Debenture and Warrant by 900% of the amount redeemed
by Ultradata or converted without exercise.
4. When the principal amount of the Debenture falls below $100,000,
Ultradata may redeem the remaining principal for its face value. In that
event, the aggregate purchase price paid by Golden Gate for Ultradata
common stock would be only $2,200,000.
F-24
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation limit, to the maximum extent permitted by
Delaware law, the personal liability of directors for monetary damages for
breach of their fiduciary duties as a director. Our Bylaws provided that we
shall indemnify our officers and directors and may indemnify our employees and
other agents to the fullest extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify a director, officer, employee or agent made a party to
an action by reason of that fact that he or she was a director, officer employee
or agent of the corporation or was serving at the request of the corporation
against expenses actually and reasonably incurred by him or her in connection
with such action if he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and with respect to any criminal action, had no reasonable cause to
believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, we have been advised that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 262.47
Accounting fees and expenses 20,000.00*
Legal fees and expenses 35,000.00*
Miscellaneous 5,000.00
----------
TOTAL $60,262.47*
==========
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the first quarter of 2003 the Company sold, in a private offering,
12% promissory notes in the principal amount of $165,000 and 320,000 shares of
common stock. The securities were sold in units, each consisting of two shares
of common stock and a $1.00 note. The aggregate purchase price received by the
Company was $168,200. The securities were sold to 12 individuals who are
accredited investors. There was no underwriter. The offering was made pursuant
to the exemption from registration afforded by Section 4(6) of the Securities
Act of 1933 and SEC Rule 506.
On July 31, 2003, the Company sold 150,000 shares of common stock to
eleven individuals who hold promissory notes issued by the Company. The shares
were sold for $.01 per share and the agreement of the note holders to extend the
maturity date of their notes from July 31, 2003 to October 31, 2003. The shares
were sold in reliance on Section 4(2) and Section 4(6) of the Securities Act,
since the note holders were accredited investors and the offer was made
privately to them.
From January 2004 through June 2004 the Company employees and directors
exercised a total of 129,441 stock options for 129,441 shares of common stock.
The shares were sold for $9,061 cash, upon the exercise of options previously
granted to the individuals. 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
individuals who had access to detailed information about the Company and who
were acquiring the shares for their own accounts. There were no underwriters.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with an accredited investor on February 14, 2005, and amended
on February 17, 2005, for the sale of (i) $300,000 in convertible debentures and
(ii) warrants to buy 300,000 shares of our common stock. This prospectus relates
to the resale of the common stock underlying these convertible debentures and
warrants.
The investors are obligated to provide us with an aggregate of $300,000 as
follows:
o $100,000 was disbursed to us on February 14, 2005;
o $50,000 has been retained for services provided to our company by
various professionals, which shall be disbursed upon effectiveness
of this registration statement; and
o $150,000 will be released upon effectiveness of this registration
statement.
The debentures bear interest at 4 3/4%, mature two years from the date of
issuance, and are convertible into our common stock, at the selling
stockholder's option. The convertible debentures are convertible into the number
of our shares of common stock equal to the principal amount of the debentures
being converted multiplied by 11, less the product of the conversion price
multiplied by ten times the dollar amount of the debenture. The conversion price
for the convertible debenture is the lesser of (i) $1.25 or (ii) eighty percent
of the of the average of the three lowest volume weighted average prices during
the twenty (20) trading days prior to the conversion. If the volume weighted
average price is below $0.50 on a conversion date, we have the right to pre-pay
the amount of the debenture the holder elects to convert, plus accrued and
unpaid interest, at 125% of such amount; however, if we elect to pre-pay in this
situation, the debenture holder has the right to withdraw the notice of
conversion. Also, if the volume weighted average price is below $0.50 at any
point during a month, the holder is not obligated to convert any portion of the
debenture during that month. Accordingly, there is in fact no limit on the
number of shares into which the debenture may be converted. In addition, the
selling stockholder is obligated to exercise the warrant concurrently with the
submission of a conversion notice by the selling stockholder. The warrant is
exercisable into 300,000 shares of common stock at an exercise price of $10.00
per share.
The selling stockholder has contractually agreed to restrict its ability
to convert or exercise its warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 9.99% of the then issued and
outstanding shares of common stock. See the "Selling Stockholders" and "Risk
Factors" sections for a complete description of the convertible debentures.
II-2
In the event that the registration statement is not declared effective by
the required deadline, Golden Gate may demand repayment of the debenture of 150%
of the face amount outstanding, plus all accrued and unpaid interest, in cash.
If the repayment is accelerated, we are also obligated to issue to Golden Gate
50,000 shares of common stock and $15,000 for each 30 day period, or portion
thereof, during which the face amount, including interest thereon, remains
unpaid. If Golden Gate does not elect to accelerate the debenture, we are
required to immediately issue to Golden Gate 50,000 shares of common stock and
$15,000 for each 30 day period, or portion thereof, during which the face
amount, including interest thereon, remains unpaid.
* All of the above offerings and sales were deemed to be exempt under rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.
No advertising or general solicitation was employed in offering the securities.
The offerings and sales were made to a limited number of persons, all of whom
were accredited investors, business associates of Radix or executive officers of
Quintek, and transfer was restricted by Quintek in accordance with the
requirements of the Securities Act of 1933. In addition to representations by
the above-referenced persons, we have made independent determinations that all
of the above-referenced persons were accredited or sophisticated investors, and
that they were capable of analyzing the merits and risks of their investment,
and that they understood the speculative nature of their investment.
Furthermore, all of the above-referenced persons were provided with access to
our Securities and Exchange Commission filings.
Except as expressly set forth above, the individuals and entities to whom
we issued securities as indicated in this section of the registration statement
are unaffiliated with the Company.
II-3
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References
to "the Company" in this Exhibit List mean Ultradata Systems, Incorporated, a
Delaware corporation.
Exhibit # Exhibit Name
--------- ------------
3.1 Certificate of Incorporation, filed as an exhibit to the
registration statement on Form SB-2 (33-85218) filed with the
Commission and incorporated herein by reference.
3.2 Certification of Correction of Certificate of Incorporation, filed
as an exhibit to the registration statement on Form SB-2
(33-85218) filed with the Commission and incorporated herein by
reference.
3.3 Amendment to the Certificate of Incorporation, dated [ ], 1989,
filed as an exhibit to the registration statement on Form SB-2
(33-85218) filed with the Commission and incorporated herein by
reference.
3.4 Amendment to the Certificate of Incorporation, dated March 4,
1991, filed as an exhibit to the registration statement on Form
SB-2 (33-85218) filed with the Commission and incorporated herein
by reference.
3.5 Amendment to the Certificate of Incorporation, dated March 22,
1994, filed as an exhibit to the registration statement on Form
SB-2 (33-85218) filed with the Commission and incorporated herein
by reference.
3.6 Amendment to the Certificate of Incorporation, dated November 18,
1994, filed as an exhibit to the registration statement on Form
SB-2 (33-85218) filed with the Commission and incorporated herein
by reference.
3.7 Amendment to the Certificate of Incorporation, dated July 26,
1996, filed as an exhibit to the annual report on Form 10-KSB
filed with the Commission on April 1, 1998 and incorporated herein
by reference.
3.8 By-laws, filed as an exhibit to the registration statement on Form
SB-2 (33-85218) filed with the Commission and incorporated herein
by reference.
4.1 Specimen of Common Stock Certificate, filed as an exhibit to the
registration statement on Form SB-2 (33-85218) filed with the
Commission and incorporated herein by reference.
4.2 Securities Purchase Agreement dated February 14, 2005 entered
between the Company and Golden Gate Investors, Inc., filed as an
exhibit to the current report on Form 8-K filed with the
Commission on February 22, 2005 and incorporated herein by
reference.
4.3 Securities Purchase Agreement dated February 14, 2005 entered
between the Company and Golden Gate Investors, Inc., filed as an
exhibit to the current report on Form 8-K filed with the
Commission on February 22, 2005 and incorporated herein by
reference.
4.4 Convertible Debenture dated February 2005 entered between the
Company and Golden Gate Investors, Inc., filed as an exhibit to
the current report on Form 8-K filed with the Commission on
February 22, 2005 and incorporated herein by reference.
4.5 Warrant to Purchase Common Stock dated February 2005 issued to
Golden Gate Investors, Inc., filed as an exhibit to the current
report on Form 8-K filed with the Commission on February 22, 2005
and incorporated herein by reference.
II-4
4.6 Registration Rights Agreement dated February 2005 entered between
Golden Gate Investors, Inc. and the Company, filed as an exhibit
to the current report on Form 8-K filed with the Commission on
February 22, 2005 and incorporated herein by reference.
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent (filed
herewith)
10.1 Lease dated May 23, 1990, as amended on November 31, 1993, for
premises at 9375 Dielman Industrial Drive, St. Louis, Missouri,
filed as an exhibit to the registration statement on Form SB-2
(33-85218) filed with the Commission and incorporated herein by
reference.
10.2 Lease Addendum dated October 17, 1995, for premises at 9375
Dielman Industrial Drive, St. Louis, Missouri, filed as an exhibit
to the registration statement on Form SB-2 (33-85218) filed with
the Commission and incorporated herein by reference.
10.3 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 filed with the
Commission on May 9, 2002 and incorporated herein by reference.
10.4 1994 Stock Option Plan, filed as an exhibit to the registration
statement on Form SB-2 (33-85218) filed with the Commission and
incorporated herein by reference.
10.5 Amended and Restated 1996 Stock Option Plan, filed as an exhibit
to the registration statement on Form S-8 filed with the
Commission on March 10, 2000 and incorporated herein by reference.
10.6 Employment Agreement with Monte Ross, filed as an exhibit to the
registration statement on Form SB-2 (33-85218) filed with the
Commission and incorporated herein by reference.
10.7 Extended Employment Agreement between the Company and Monte Ross,
filed as an exhibit to the annual report on Form 10-KSB filed with
the Commission on April 1, 1998 and incorporated herein by
reference.
10.8 Employment Agreement with Mark L. Peterson, filed as an exhibit to
the registration statement on Form SB-2 (33-85218) filed with the
Commission and incorporated herein by reference.
10.9 Extended Employment Agreement between the Company and Mark L.
Peterson, filed as an exhibit to the annual report on Form 10-KSB
filed with the Commission on April 1, 1998 and incorporated herein
by reference.
10.10 Employment Agreement with Ernest Clarke, filed as an exhibit to
the registration statement on Form SB-2 (33-85218) filed with the
Commission and incorporated herein by reference.
10.11 Extended Employment Agreement between the Company and Ernest
Clarke, filed as an exhibit to the annual report on Form 10-KSB
filed with the Commission on April 1, 1998 and incorporated herein
by reference.
10.12 Royalty Agreement dated September 14, 1989, between the Company
and Leonard Missler, filed as an exhibit to the registration
statement on Form SB-2 (33-85218) filed with the Commission and
incorporated herein by reference.
10.13 Modification Agreement dated November 4, 1995, to Royalty
Agreement dated September 14, 1989, between the Company and
Leonard Missler, filed as an exhibit to the registration statement
on Form SB-2 (33-85218) filed with the Commission and incorporated
herein by reference.
10.14 Option Agreement between the Company and Influence Incubator,
L.L.C. dated May 30, 2000 - filed as an exhibit to the Company's
Current Report on Form 8-K dated May 30, 2000 and incorporated
herein by reference.
II-5
23.1 Consent of Webb & Company, P.A., Independent Registered Public
Accounting Firm
23.2 Consent of legal counsel (see Exhibit 5.1)
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of St.
Louis, State of Missouri, on April 1, 2005.
ULTRADATA SYSTEMS, INCORPORATED
By: /s/ MONTE ROSS
-------------------------------------
Monte Ross, Chief Executive Officer
and Director
By: /s/ ERNEST CLARKE
-------------------------------------
Ernest Clarke, President,
Chief Financial Officer
and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MONTE ROSS Chief Executive Officer and Director April 1, 2005
--------------------------------
Monte Ross
/s/ ERNEST CLARKE President, Chief Financial Officer April 1, 2005
-------------------------------- and Director
Ernest Clarke
/s/ MARK L. PETERSON Vice President - Engineering, Secretary April 1, 2005
-------------------------------- and Director
Mark L. Peterson
/s/ DONALD RATTNER Director April 1, 2005
--------------------------------
Donald Rattner
/s/ H. KROLLFEIFER, JR. Director April 1, 2005
--------------------------------
H. Krollfeifer, Jr.
/s/ MATTHEW KLAPMAN Director April 1, 2005
--------------------------------
Matthrew Klapman
II-7