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SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarterly period ended Commission File Number 0-19437
June 30, 2002 -------
- -------------
CELLULAR TECHNICAL SERVICES COMPANY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2962080
- ------------------------------------------- -------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2815 Second Avenue. Suite 100, Seattle, Washington 98121
--------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (206) 443-6400
--------------
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes X No
--- ---
2,291,770 Common Shares were outstanding as of August 7, 2002.
CELLULAR TECHNICAL SERVICES COMPANY, INC.
TABLE OF CONTENTS FOR FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS................................................................................3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........................................14
PART II. OTHER INFORMATION..................................................................................15
ITEM 1. LEGAL PROCEEDINGS..................................................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................................15
2
CELLULAR TECHNICAL SERVICES COMPANY, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in 000's, except share and per share amounts)
June 30, December 31,
2002 2001
---- ----
(unaudited) (NOTE A)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,462 $ 6,353
Accounts receivable, net of reserves of $265 at June 30, 2002 and $259 at 633 529
December 31, 2001
Employee receivable, net of reserves of $13 at June 30, 2002 and December 31, 2001 -- 16
Inventories 321 531
Prepaid expenses, deposits and other current assets 392 205
-------- --------
Total Current Assets 5,808 7,634
PROPERTY AND EQUIPMENT, net 353 477
LONG-TERM DEPOSIT 20 25
GOODWILL -- 100
LONG-TERM INVESTMENT 1,754 1,754
-------- --------
TOTAL ASSETS $ 7,935 $ 9,990
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 793 $ 847
Payroll related liabilities 166 180
Customers' deposits and deferred revenue 78 84
-------- --------
Total Current Liabilities 1,037 1,111
STOCKHOLDERS' EQUITY
Preferred Stock, $0.01 par value per share, 5,000 shares
authorized, none issued and outstanding -- --
Common Stock, $0.001 par value per share, 30,000 shares
authorized, 2,292 shares issued and outstanding at
June 30, 2002 and at December 31, 2001 23 23
Additional paid-in capital 29,976 29,976
Accumulated deficit (23,101) (21,120)
-------- --------
Total Stockholders' Equity 6,898 8,879
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,935 $ 9,990
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
3
CELLULAR TECHNICAL SERVICES COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in 000's, except per share amounts)
(unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- -----------------------
2002 2001 2002 2001
----------------------------------------------------
REVENUE
Phonecards $ 3,331 $4,187 $ 5,689 $ 8,343
Services and Systems -- 1,381 -- 2,786
----------------------------------------------------
Total Revenue 3,331 5,568 5,689 11,129
COSTS AND EXPENSES
Cost of phonecards 3,346 4,373 5,617 8,340
Cost of services and systems -- 367 -- 754
Sales and marketing 246 365 537 771
General and administrative 343 515 650 957
Research and development 411 486 815 977
----------------------------------------------------
Total Costs and Expenses 4,346 6,106 7,619 11,799
----------------------------------------------------
LOSS FROM OPERATIONS (1,015) (538) (1,930) (670)
OTHER INCOME, net 2 921 5 945
INTEREST INCOME, net 22 121 51 181
----------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (991) 504 (1,874) 456
PROVISION FOR INCOME TAXES 7 -- 7 2
----------------------------------------------------
INCOME (LOSS) BEFORE THE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (998) 504 (1,881) 454
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE -- -- (100) --
----------------------------------------------------
NET INCOME (LOSS) $ (998) $ 504 $(1,981) $ 454
====================================================
BASIC AND DILUTED SHARE DATA:
Income (loss) before the effect of a change in $ (0.44) $ 0.22 $ (0.82) $ 0.20
accounting principle
Cumulative effect of a change in accounting
principle -- -- (0.04) --
----------------------------------------------------
Net Income (Loss) $ (0.44) $ 0.22 $ (0.86) $ 0.20
====================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 2,292 2,292 2,292 2,292
Diluted 2,292 2,297 2,292 2,302
The accompanying notes are an integral part of these consolidated financial statements.
4
CELLULAR TECHNICAL SERVICES COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000's)
(unaudited)
Six Months Ended
June 30,
--------------------
2002 2001
------- ------
OPERATING ACTIVITIES
Net income (loss) $(1,981) $ 454
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization of property and equipment 124 264
Impairment writeoff of goodwill 100 --
Amortization of goodwill -- 13
Gain on disposal of assets -- (25)
Changes in operating assets and liabilities:
Increase in accounts receivable, net (104) (3)
Decrease in employee receivable, net 16 18
Decrease in inventories, net 210 335
Decrease (increase) in prepaid expenses and deposits (187) 168
Increase (decrease) in accounts payable, accrued liabilities and taxes
other than payroll or income (54) 287
Decrease in payroll related liabilities (14) (347)
Increase (decrease) in deferred revenue and customers' deposits (6) 2,131
------- ------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,896) 3,295
INVESTING ACTIVITIES
Purchase of property and equipment -- (45)
Proceeds from sale of assets -- 39
Long term deposit 5 --
Long term investment -- 4
------- ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 5 (2)
------- ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,891) 3,293
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,353 4,529
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,462 $7,822
======= ======
The accompanying notes are an integral part of these consolidated financial statements.
5
CELLULAR TECHNICAL SERVICES COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Cellular
Technical Services Company, Inc. ("CTS"), including the December 31, 2001
balance sheet which has been derived from audited financial statements, have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The operating results for the three-month and six-month periods
ended June 30, 2002 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2002. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001 and in
the Company's other filings with the Securities and Exchange Commission. Unless
the context otherwise requires, all references to the "Company" herein include
Cellular Technical Services Company, Inc. and any entity over which it has or
shares operational control.
NOTE B - LIQUIDITY:
Going forward into 2002, the Company has continued to reduce its fixed operating
costs. Management believes that under its current business plan, its current
cash balances and cash flows expected to be generated from operations are
sufficient to fund its operations and capital requirements through mid to late
2003. However, the Company's inability to successfully generate sufficient cash
flow from operations or obtain financing from external sources would have a
material adverse impact on the Company's financial position, liquidity or
results of operations and may require the Company to reduce its expenditures
further or curtail certain operations to enable it to continue its operations
for that period.
On March 4, 2002 the Company received a notice from Nasdaq indicating that the
Company's public float had not been over $5 million for 30 consecutive days, a
violation of the Nasdaq National Market's continued listing requirements. In
late May the Company applied for listing on the Nasdaq SmallCap Market System,
was accepted and began trading on the SmallCap market on June 14, 2002. This
transfer could have a material adverse affect on the price of its common stock,
could adversely affect the liquidity of the shares held by its shareholders, and
could restrict the Company's ability to raise additional capital in the future.
The Company may reapply for listing on the Nasdaq National Market in the future
but must meet the National Market's initial listing requirements at that time.
NOTE C - CHANGE IN ACCOUNTING FOR GOODWILL AND CERTAIN OTHER INTANGIBLES:
In July 2001, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standard 141 -- Business Combinations ("FAS 141"). FAS 141, effective
for all business combinations initiated after July 1, 2001, requires that all
business combinations be accounted for using the purchase method of accounting.
Further, FAS 141 requires certain intangible assets to be recognized as assets
apart from goodwill if they meet certain criteria. FAS 141 also requires
expanded disclosures regarding the primary reason for consummation of the
combination and the allocation of the purchase price to the assets acquired and
liabilities assumed by major balance sheet caption. The Company adopted FAS 141
on January 1, 2002 and the adoption did not have a material effect on the
Company's results of operations or financial position.
In July 2001, the FASB issued Financial Accounting Standard 142 -- Goodwill and
Intangible Assets ("FAS 142"). FAS 142, effective for fiscal years beginning
after December 15, 2001, defines accounting requirements for the treatment of
goodwill. The Company adopted FAS 142 effective January 1, 2002. Under FAS 142,
goodwill is considered to have an indefinite life and is therefore subject to
impairment accounting rather than amortization. As of January 1, 2002, the
Company had approximately $100,000 of goodwill related to the acquisition of New
England Telecom, Inc., in August 2000. As part of the adoption of FAS 142, the
Company no longer amortizes goodwill, and performed an initial test of
impairment on goodwill that resulted in the recording of an impairment loss in
the amount of $100,000 during the three months ended March 31, 2002. This
writedown has been presented as the cumulative effect of an accounting change in
the statement of operations. The following table summarizes the effects of FAS
142 on net loss had it been applied retroactively to 2001:
6
(in $000 except per share amounts) Three months ended Three months ended Six months ended Six months ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Net income (loss): $(998) $504 $(1,981) $454
Goodwill Amortization -- 6 -- 13
----------------------------------------------------------------------------------
Adjusted net income (loss): $(998) $510 $(1,981) $467
==================================================================================
There is no impact on basic or diluted loss per share due to the amortization of
goodwill, net of taxes.
NOTE D - INVENTORIES:
Inventory reflects phonecards sold through the Company's phonecard business.
Included in phonecard inventory at June 30, 2002 is $75,000 related to sales
that have been accounted for on a consignment basis and $146,000 related to
sales returns reserves at June 30, 2002. Included in phonecard inventory at
December 31, 2001 is $80,000 related to sales that have been accounted for on a
consignment basis and $143,000 related to sales returns reserves at December 31,
2001. Inventory consists of the following (in 000's):
June 30, December 31,
2002 2001
--------- ------------
Inventory $ 441 $578
Less reserves (120) (47)
----- ----
$ 321 $531
===== ====
NOTE E - CONTINGENCIES:
From time to time, the Company may be a party to legal proceedings, which may or
may not be in the ordinary course of business and which may have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company is currently involved in one commercial litigation case.
On October 25, 2001, New England Telecom, Inc. and Paul Gregory, a former
employee, filed a claim in the Superior Court of Massachusetts against the
Company and its Chairman alleging, among other things, that the Company breached
a purchase agreement and a related employment contract. The Company has answered
the allegations and intends to vigorously defend the case. Since the case is
currently in the discovery phase, the Company is unable to assess the likely
outcome of the case.
NOTE F- EARNINGS (LOSS) PER SHARE:
The calculation of basic and diluted earnings (loss) per share is as follows (in
000's, except per share amounts):
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) (A) $ (998) $ 504 $(1,981) $ 454
===========================================================
Weighted average number of shares outstanding (B) 2,292 2,292 2,292 2,292
Stock options -- 5 -- 10
-----------------------------------------------------------
Weighted average number of shares and common share
equivalents outstanding (C) 2,292 2,297 2,292 2302
===========================================================
Basic income (loss) per share (A)/(B) $(0.44) $ 0.22 $ (0.86) $ 0.20
===========================================================
Diluted income (loss) per share (A)/(C) $(0.44) $ 0.22 $ (0.86) $ 0.20
===========================================================
Outstanding stock options of 255,177 and 281,861 at June 30, 2002 and 2001,
respectively, were excluded from the computation of diluted earnings per share
because their effect was anti-dilutive.
NOTE G- SEGMENT INFORMATION:
The Company has two reportable business segments offering distinctive products
and services marketed through different channels: (i) a telecom
hardware/software segment including the Company's Blackbird'r' Platform product
line, which
7
included the Blackbird'r' Platform, PreTect'TM' cloning-fraud prevention
application, No Clone Zone'TM' roaming-fraud prevention service, and related
application products and services and the Company's Neumobility location-based
services platform and software applications; and (ii) the Company's prepaid
long-distance phonecard business, which is conducted through its majority-owned
subsidiary, Isis Tele-Communications, Inc. Management evaluates segment
performance based upon segment profit or loss before income taxes. The
difference in pretax segment income of $456,000 and net income of $454,000 for
the six months ended June 30, 2001 is attributable to income tax expense of
$2,000. The difference in pretax segment loss of $1,874,000 and net loss of
$1,981,000 for the six months ended June 30, 2002 is attributable to the
write-down of $100,000 in goodwill and income tax expense of $7,000. There were
no inter-company sales of products between the segments. In the first quarter of
2002 the Company recorded an impairment writedown of $100,000 related to the
writedown of goodwill associated with its phone card segment. The impairment
loss was presented in the statement of operations as a cumulative effect of a
change in accounting principle in accordance with the transitional rules of FAS
142. In the period ended June 30, 2001 the Company recorded $13,000 of goodwill
amortization associated with its phone card segment. The value of goodwill
recorded for the Company's phone card segment was $104,000 at December 31, 2000,
$91,000 at June 30, 2001, $100,000 at December 31, 2001 and zero at June 30,
2002.
Three months ended June 30, 2002
------------------------------------------
(in 000's) Segments
----------------------------------- Consolidated
Telecom HW/SW Phone cards Totals
------------- ----------- ------
Revenue from external customers -- $3,331 $3,331
Inter-segment revenue -- -- --
Pretax segment loss before the effects
of a change in accounting principle ($682) (309) (991)
Expenditures for segment assets -- -- --
Segment assets (at June 30, 2002) 6,638 1,297 7,935
Three months ended June 30, 2001
------------------------------------------
(in 000's) Segments
----------------------------------- Consolidated
Telecom HW/SW Phone cards Totals
------------- ----------- ------
Revenue from external customers $ 1,381 $4,187 $ 5,568
Inter-segment revenue -- -- --
Pretax segment income (loss) 1,141 (637) 504
Expenditures for segment assets 14 -- 14
Segment assets (at June 30, 2001) 10,513 1,786 12,299
Six months ended June 30, 2002
------------------------------------------
(in 000's) Segments
----------------------------------- Consolidated
Telecom HW/SW Phone cards Totals
------------- ----------- ------
Revenue from external customers -- $5,689 $ 5,689
Inter-segment revenue -- -- --
Pretax segment loss before the effects
of a change in accounting principle ($1,289) (585) (1,874)
Expenditures for segment assets -- -- --
Six months ended June 30, 2001
------------------------------------------
(in 000's) Segments
----------------------------------- Consolidated
Telecom HW/SW Phone cards Totals
------------- ----------- ------
Revenue from external customers $2,786 $8,343 $11,129
Inter-segment revenue -- -- --
Pretax segment income (loss) 1,395 (939) 456
Expenditures for segment assets 33 12 45
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. The discussion should be read in
conjunction with the financial statements and notes thereto. Unless the context
otherwise requires, all references to the "Company" herein include Cellular
Technical Services Company, Inc. and any entity over which it has or shares
operational control.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 that
reflect the Company's views with respect to future events and financial
performance. The Company uses words and phrases such as "anticipate," "expect,"
"intend," "the Company believes," "future," and similar words and phrases to
identify forward-looking statements. Reliance should not be placed on these
forward-looking statements. These forward-looking statements are based on
current expectations and are subject to risks, uncertainties and assumptions
that could cause, or contribute to causing actual results to differ materially
from those expressed or implied in the applicable statements. Readers should pay
particular attention to the descriptions of risks and uncertainties described in
this report and in the Company's other filings with the Securities and Exchange
Commission. All forward-looking statements included in this report are based on
information available to the Company on the date of this report. The Company
assumes no obligation or duty to update any such forward-looking statements.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these consolidated financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to revenue recognition, product returns,
bad debts, inventories, investments, intangible assets, contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. A more detailed discussion on the application of these and other
accounting policies can be found in Note C in the Notes to the Consolidated
Financial Statements in Item 14 of the Company's 2001 Annual Report on Form
10-K. Actual results may differ from these estimates under different assumptions
or conditions.
Bad Debt: The Company maintains allowances for doubtful accounts for estimated
losses based on past collection history and specific risks identified in the
portfolio, resulting from the inability of its customers to make required
payments. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Allowance for Sales Returns: The Company maintains a provision for estimated
sales returns of prepaid phonecards. The Company records a provision for
estimated sales returns in the same period as the related revenues are recorded.
These estimates are based on historical sales returns, analysis of credit memo
data and other known factors. If the historical data the Company uses to
calculate these estimates does not properly reflect future returns, revenue
could be overstated.
Inventory: The Company is required to state its inventories at the lower of cost
or market. In assessing the ultimate realization of inventories, the Company is
required to make judgments as to future demand requirements and compare that
with the current or committed inventory levels. An allowance for obsolete
inventory is maintained to reflect the expected un-saleable inventory based on
an evaluation of slow moving products. It is possible that changes in required
inventory reserves may occur in the future.
Goodwill and Intangible Impairment: In assessing the recoverability of the
Company's goodwill and other intangibles the Company must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. On January 1, 2002 the Company adopted Statement
of Financial Accounting Standards No. 142,
9
"Goodwill and Other Intangible Assets," and was required to analyze its goodwill
for impairment issues in accordance with the transition rules of FAS 142. In the
three-month period ended March 31, 2002 the Company recorded an impairment
writedown of $100,000 related to the writedown of goodwill associated with its
phone card segment. The impairment loss was presented in the statement of
operations as a cumulative effect of a change in accounting principle in
accordance with the transitional rules of FAS 142. The Company has no goodwill
recorded on its books at June 30, 2002.
Long-Term Investment: The Company accounts for its investment of $1,754,000 in
TruePosition, Inc. under the cost method as the Company does not have the
ability to exercise significant influence. Under the cost method of accounting,
an investment in a private company is carried at cost and adjusted only for
other-than-temporary declines in fair value, distributions of earnings and
additional investments. The Company periodically evaluates whether any decline
in fair value of its investment is other-than-temporary. This evaluation
consists of review of qualitative and quantitative factors by members of senior
management as well as market prices of comparable public companies. The Company
receives periodic financial statements to assist in reviewing relevant financial
data and to assist in determining whether such data may indicate
other-than-temporary declines in fair value below the Company's accounting
basis. If the decline in fair value is determined to be other-than-temporary and
below the accounting basis, the Company would record an expense to reduce the
cost to fair value.
Overview
The Company develops, markets, distributes and supports a diversified mix of
products and services for the telecommunications industry. Over the past 13
years, the Company has developed expertise in real-time wireless call processing
and has created technologically advanced solutions for this industry, focusing
primarily in the area of wireless communications fraud management. During the
past three years the Company implemented short and long-range strategic plans to
diversify its product mix. This diversification strategy is at the foundation of
the Company's future plans.
Products
Prepaid Long-Distance Phonecard Products: To provide revenue growth for the
Company, and in alignment with its product diversification strategy, the Company
expanded into the prepaid long-distance service arena in December 1999. Through
its majority-owned subsidiary, Isis Tele-Communications, Inc., the Company
markets and distributes branded prepaid long-distance phonecards in
denominations generally ranging from $5 to $20 per card. Isis also markets
prepaid wireless phones and phonecards. Isis specializes in targeted marketing
programs and features local and toll-free access numbers and aggressive domestic
and international long-distance rates. Isis distributes cards through regional
and national multi-level distribution channels, using direct sales, third party
distributors and telemarketing. Isis has sales offices in Los Angeles and
Boston.
Location Based Services ("LBS") Platform and Applications: The Federal
Communications Commission ("FCC") has required all wireless carriers to deploy
wireless geo-location technology to provide the location of 911 wireless calls,
similar to that of wireline 911 calls. Wireless geo-location technology provides
and identifies the specific geographic location (in latitude and longitude
measurements) of a wireless telephone, and can eventually be applied to other
wireless communications devices.
In late 1999 the Company began development of a location-based wireless software
product platform and mobile commerce applications. The Company expects to
leverage its entrance into the geo-location marketplace by developing,
marketing, distributing, and supporting a suite of commercial geo-location
applications as the technology evolves and is deployed by all wireless carriers
to comply with the FCC's requirements. In January 2001 the Company formed a
division called Neumobility'TM' for this product line. The Neumobility family of
products includes a scalable platform and an application suite providing
location-based information utilizing both network and satellite positioning
technologies. The platform is called NeuTrac'TM', and is a system utilizing
positioning data to create, maintain and deliver relevant content and services
in a location-based format. The NeuTrac platform is configurable and creates a
combination of subscription-based, pay-per-use and free value-added services.
The application suite will include: NeuCommerce'TM', which allows for
personalized, permission-based one-to-one marketing; NeuMerchant'TM', which
allows for the tracking of merchant offers and creates metrics to analyze the
impact of marketing efforts; NeuMap'TM', which creates directions based upon
positioning data; NeuList'TM', which adds a location-sensitive component to
wireless e-mail functions; and NeuJournal'TM', a journaling feature which allows
for the documentation of location and content. The Company completed the initial
product suite in 2001.
10
Blackbird Platform Products: The Company's Blackbird Platform product line
included a suite of radio frequency based platform solutions focusing on
wireless fraud prevention. It involved various forms of "pre-call" verification
to ensure that the use of an analog wireless telephone was legitimate before the
device was allowed to connect to a carrier's analog wireless communications
network. Blackbird Platform products were initially installed in over 2,000 cell
sites in the US by wireless carriers in 1996-1998. As digital wireless
communication was adopted, analog fraud decreased, and carriers gradually
removed the Blackbird Platform products from service. The final contract expired
December 31, 2001, and no future revenue is anticipated from the Blackbird
Platform product line.
Revenue and Expense
Revenue: During the first six months of 2002, the Company generated revenue
through sales of its Isis pre-paid phonecard products. Prepaid phone-card
revenue is comprised of wholesale and retail sales of prepaid local,
long-distance and wireless products. Revenue is recognized at shipment of
product, net of any reserves for estimated returns. The Company maintains an
allowance for sales returns of prepaid phonecards (based on estimated returns)
in accordance with SFAS 48. Estimated returns, along with their costs, have been
reflected as a reduction in sales and cost of goods sold, respectively, and
reflected as a reduction in accounts receivable and an increase in inventory,
respectively.
During the first six months of 2001, the Company generated revenue from two
sources: sales of Isis pre-paid phone card products and Blackbird service
revenue. Service revenue was derived primarily from hardware and software
maintenance programs, No Clone Zone roaming fraud prevention service, Blackbird
Platform Monitoring service and related professional services provided in
support of the Company's previously deployed product base. Service revenue was
recognized ratably over the period that the service was provided.
Costs and Expenses: Costs of phonecards, services and systems are primarily
comprised of: (i) prepaid phonecard costs; (ii) equipment, including both
proprietary and third-party hardware and, to a lesser extent, manufacturing
overhead and related expenses; (iii) customer support; and (iv) activities
associated with the evaluation, repair and testing of parts returned from the
field in connection with the Company's previous hardware maintenance service
activities.
Research and development expenditures include the costs for research, design,
development, testing, preparation of training and user documentation and fixing
and refining features for the software and hardware components included in the
Company's current and future products and services.
The Company expects that its costs and expenses in these and other areas will
continue to be incurred in the future, due to the ongoing need to: (i) make
investments in research and development to develop new products and services
which address emerging market opportunities in the LBS market; (ii) enhance its
sales and marketing activities; and (iii) enhance its general and administrative
activities.
Three months ended June 30, 2002 compared to three months ended June 30, 2001
Overview: Total revenue decreased 40% to $3,331,000 in 2002 from $5,568,000 in
2001. Net loss was ($998,000), or ($0.44) per diluted share, in 2002 compared to
net income of $504,000, or $0.22 per diluted share, in 2001. The decreased
revenue resulted from the closure of the Company's Blackbird Platform product
system at the end of 2001 as well as reduced sales from its Isis phonecard
segment due to the closure of unprofitable sales offices and increased
competition in its marketplace.
The $1,502,000 decrease in net income is due to several factors.
o Gross margin decreased by $843,000. Gross margin from the Blackbird
products was zero in 2002, compared to $1,014,000 in 2001, as this
business ceased on December 31, 2001 resulting in a revenue decrease
of $1,381,000 and associated cost decrease of $367,000. Gross margin
in the Isis segment increased by $171,000 as revenue decreased
$856,000 and cost of phone cards decreased $1,027,000.
o Operating expenses decreased by $366,000 due to reductions of $75,000
in R&D, $172,000 in general and administrative and $119,000 in sales
and marketing expenses.
11
o Net other income declined by a total of $919,000 from the 2001 period
to the 2002 period as the Company recognized a net $0.9 million
arbitration settlement during the second quarter of 2001.
o Net interest income decreased by $99,000 from 2001 period to the 2002
period and income taxes increased by $7,000 in the 2002 period.
Revenue: Prepaid phone card revenue was $3,331,000 in 2002, compared to
$4,187,000 in 2001. Service revenue decreased to zero in 2002 from $1,381,000 in
2001. All of the 2001 service revenue was derived from the Blackbird Platform
Product line, which was discontinued at the end of 2001 after reaching the end
of its service life.
Costs and Expenses: Costs of phone cards, services and systems decreased by
$1,394,000 to $3,346,000 in second quarter of 2002, from $4,740,000 in the same
period of 2001. As a percent of total revenue, the costs were 100% and 85% for
the 2002 and 2001 periods, respectively. The decrease in the amounts and
increase in the percentages of costs for 2002 relative to 2001 is primarily due
to the prepaid phone card business being a larger percentage of the Company's
overall business with lower gross margins compared to the Company's prior
Blackbird service product offerings.
Sales and marketing expenses decreased 33% to $246,000 in 2002 from $365,000 in
2001. The decrease in sales and marketing expenses is attributable to headcount
decreases and office closures in the Isis segment, and to zero sales and
marketing expenses incurred for the Blackbird Platform product line in 2002.
General and administrative expenses decreased 33% to $343,000 in 2002 from
$515,000 in 2001, primarily due to headcount reductions in comparison to the
prior year period.
Research and development costs decreased 15% to $411,000 in 2002 from $486,000
in 2001. The decrease in expenditures from 2001 was primarily attributable to
reduced spending on outside contractors, depreciation and prototypes in the LBS
technology area.
Other Income, net: Net other income was $2,000 in 2002 compared to $921,000 in
2001. Other income includes gains or losses from sales of equipment and other
miscellaneous income items. Other income in 2001 included $0.9 million related
to a one-time arbitration settlement, net of expenses.
Interest Income and Expense: Net interest income decreased to $22,000 in 2002
from $121,000 in 2001. This decrease is attributable to lower interest rates
earned on invested cash in the 2002 period compared to the 2001 period, lower
average cash balances on hand and interest related to the net arbitration
settlement received in the 2001 period.
Six months ended June 30, 2002 compared to six months ended June 30, 2001
Overview: Total revenue decreased 49% to $5,689,000 in 2002 from $11,129,000 in
2001. Net loss was ($1,981,000), or ($0.86) per diluted share, in 2002 compared
net income of $454,000, or $0.20 per diluted share, in 2001. The decreased
revenue was due to the closure of the Company's Blackbird Platform product
system at the end of 2001 and to reduced sales from its Isis phonecard segment
due to the closure of sales offices and increased competition in its
marketplace.
The $2,435,000 decrease in net income is due to several factors.
o Gross margin decreased by $1,963,000. Gross margin from the Blackbird
products was zero in 2002, compared to $2,032,000 in 2001, as this
business closed on December 31, 2001 resulting in a revenue decrease
of $2,786,000 and associated cost decrease of $754,000. Gross margin
in the Isis segment increased by $69,000 as revenue decreased by
$2,654,000, combined with cost decreases of $2,723,000.
o Operating expenses decreased by $703,000 due to reductions of $162,000
in R&D, $307,000 in general and administrative and $234,000 in sales
and marketing expenses.
o Net other income declined by a total of $940,000 from the 2001 period
to the 2002 period.
12
o Net interest income decreased by $130,000 from the 2001 period to the
2002 period and income taxes increased $5,000 in the 2002 period.
o The Company recorded a goodwill writedown of $100,000 as the
cumulative effect of the change in accounting principle related to its
adoption of FAS 142 during the 2002 period.
Revenue: Prepaid phone card revenue was $5,689,000 in 2002, compared to
$8,343,000 in 2001. Service revenue decreased to zero in 2002 from $2,786,000 in
2001. All of the 2001 service revenue was derived from the Blackbird Platform
Product line, which was discontinued at the end of 2001 after reaching the end
of its service life.
Costs and Expenses: Costs of phone cards, services and systems decreased by
$3,477,000 to $5,617,000 in first six months of 2002, from $9,094,000 in the
same period of 2001. As a percent of total revenue, the costs were 99% and 82%
for the 2002 and 2001 periods, respectively. The decrease in the amount is due
to lower revenue levels in the 2002 period. The increase in the percentages of
costs for 2002 relative to 2001 is primarily due to the prepaid phone card
business being a larger percentage of the Company's overall business with lower
gross margins compared to the Company's prior Blackbird service product
offerings.
Sales and marketing expenses decreased 30% to $537,000 in 2002 from $771,000 in
2001. The decrease in sales and marketing expenses is attributable to headcount
decreases and office closures in the Isis segment, higher trade show costs
incurred in the 2001 period related to introduction of the Company's Neumobility
product line, and to zero sales and marketing expenses incurred for the
Blackbird Platform product line in 2002.
General and administrative expenses decreased 32% to $650,000 in 2002 from
$957,000 in 2001, primarily due to headcount reductions in comparison to the
prior year period.
Research and development costs decreased 17% to $815,000 in 2002 from $977,000
in 2001. The decrease in expenditures from 2001 was primarily attributable to
reduced spending on outside contractors, depreciation and prototypes in the LBS
technology area.
Other Income, net: Net other income was $5,000 in 2002 compared to $945,000 in
2001. Other income includes gains or losses from sales of equipment and other
miscellaneous income items. Other income in 2001 included $0.9 million related
to a one-time arbitration settlement, net of expenses.
Interest Income and Expense: Net interest income decreased to $51,000 in 2002
from $181,000 in 2001. This decrease is primarily attributable to lower interest
rates earned on invested cash in the 2002 period compared to the 2001 period,
lower average cash balances on hand and interest related to the net arbitration
settlement received in the 2001 period.
Liquidity and Capital Resources
The Company's capital requirements have consisted primarily of funding software
and hardware product development, property and equipment requirements, working
capital and the Company's operating expenses. The Company historically has
funded these requirements through the sale of common stock (including proceeds
from the exercise of warrants and options) and from operating profits in certain
periods. On June 30, 2002, the Company's cash balance was $4.5 million as
compared to $6.4 million on December 31, 2001. The Company's working capital
decreased to $4.8 million at June 30, 2002 from $6.5 million at December 31,
2001.
Net cash used in operating activities amounted to $1.9 million in the first six
months of 2002, compared to net cash provided of $3.3 million in the comparable
2001 period. The largest factors in the decreased level of cash provided by
operations in 2002 compared to 2001 were $2.1 million in customer deposits in
2001, the $2.4 million in reduced net income in the 2002 period and changes in
balance sheet accounts in the current period. At June 30, 2002, the Company had
no commitments for capital expenditures.
Operating Trends: The Company had a net loss of $1,981,000 in the first six
months of 2002, compared to net income of $0.6 million and $2.6 million for each
of the full years ended December 31, 2001 and 2000, respectively. As of June 30,
2002, the Company had an accumulated deficit of $23.1 million, which primarily
accumulated during the three years ended December 31, 1998. In the first six
months of 2002, revenue from prepaid phone cards represented 100% of total
revenue,
13
compared to 75% in the prior year period.
There can be no assurance that the Company's operations will be profitable on a
quarterly or annual basis in the future or that existing revenue levels can be
enhanced or sustained. Past and existing revenue levels should not be considered
indicative of future operating results. While the Company believes that its
current cash reserves and projected cash flow from operations will provide
sufficient cash to fund its operations through mid to late 2003, unanticipated
changes in customer needs and/or other external factors may require additional
financing and/or further expense reductions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk related to changes in interest rates that
could adversely affect the value of the Company's investments. The Company does
not use derivative financial instruments for speculative or trading purposes.
The Company maintains a short-term investment portfolio consisting of interest
bearing securities with maturities of less than ninety days. These securities
are classified as cash. These securities are interest bearing and thus subject
to interest rate risk and may fall in value if market interest rates increase.
Because the Company has the ability to hold its fixed income investments until
maturity, the Company does not expect its operating results or cash flows to be
affected to any significant degree by a sudden change in market interest rates
on its securities portfolio. The Company has operated primarily in the United
States and all revenues to date have been in U.S. dollars. Accordingly, the
Company does not have material exposure to foreign currency rate fluctuations.
The Company has not entered into any foreign exchange contracts to hedge any
exposure to foreign currency rate fluctuations because such exposure is
immaterial.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company may be a party to legal proceedings, which may or
may not be in the ordinary course of business and which may have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company is currently involved in one commercial litigation case.
On October 25, 2001, New England Telecom, Inc. and Paul Gregory, a former
employee, filed a claim in the Superior Court of Massachusetts against the
Company and its Chairman alleging, among other things, that the Company breached
a purchase agreement and a related employment contract. The Company has answered
the allegations and intends to vigorously defend the case. Since the case is
currently in the discovery phase, the Company is unable to assess the likely
outcome of the case.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of the Company was held on June 6, 2002.
Election of One Class II Director
Lawrence Schoenberg was elected as a Class II director of the Company's Board of
Directors to hold office until the Company's third annual meeting of
stockholders following the election or until his successor is duly elected and
qualified. In connection with the election of the Class II director, the voting
of stockholders was as follows:
Nominee For Withheld
------- --- --------
Lawrence Schoenberg 1,604,563 58,531
The other directors, whose terms of office continue after the meeting, are
Stephen Katz, Henry Ellis and Joshua Angel.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
15
b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated June 12, 2002,
under Item 5 of such Report, relating to a Press Release describing the
transfer of trading of the Company's common stock from the Nasdaq
National Market to the Nasdaq SmallCap Market effective June 14, 2002.
No financial statements were included in such Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELLULAR TECHNICAL SERVICES COMPANY, INC.
By: /s/ Bruce R. York
-----------------
Bruce R. York
Vice President and Chief Financial Officer
August 7, 2002
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STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as........................'r'
The trademark symbol shall be expressed as..................................'TM'