Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended.................................December 31, 2002
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from....................to.......................
Commission File Number 0-19437
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
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of June 30, 2002, there were 2,291,770 shares of Common Stock, $.001 par
value outstanding. As of June 30, 2002 the aggregate market value of the
Registrant's Common Stock, $.001 par value, held by non-affiliates was
approximately $2.5 million. The aggregate market value of the Company's stock
was calculated using $1.11, the closing price for its Common Stock on June 30,
2002 as reported on The Nasdaq Stock Market (SmallCap System).
Documents incorporated by reference in Part III: The Company's definitive proxy
statement to be filed in connection with the 2003 Annual Meeting of
Stockholders.
CELLULAR TECHNICAL SERVICES COMPANY, INC.
TABLE OF CONTENTS FOR FORM 10-K
PART I....................................................................................................................3
ITEM 1. BUSINESS........................................................................................................3
ITEM 2. PROPERTIES.....................................................................................................13
ITEM 3. LEGAL PROCEEDINGS..............................................................................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................................13
PART II..................................................................................................................14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................................14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA...........................................................................15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................................24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................................25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................25
PART III.................................................................................................................25
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................................25
ITEM 11. EXECUTIVE COMPENSATION........................................................................................26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................................26
PART IV..................................................................................................................27
ITEM 14. CONTROLS AND PROCEDURES........................................................................................27
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...............................................27
2
PART I
Item 1. Business
Unless the context otherwise requires, all references to the "Company" in this
Annual Report on Form 10-K include Cellular Technical Services Company, Inc. and
any entity over which it has or shares operational control.
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K 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.
General
The Company has developed, marketed, distributed and supported a diversified mix
of products and services for the telecommunications industry. Over the past 14
years, the Company 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, geo-location
wireless software applications and sales of prepaid long-distance phonecard
products.
On November 9, 2002, CTS ceased development efforts of its Neumobility
development project, and on December 11, 2002 adopted a plan to wind down the
operations of its Isis Tele-Communications, Inc. subsidiary. As a result, as of
December 31, 2002 CTS has no current business other than to complete the
wind-down of the operations of Isis. Management anticipates that all remaining
assets of Isis will be realized, and liabilities settled during 2003. Management
currently has no plan to liquidate the Company and distribute the remaining
assets to stockholders. During 2002 and 2003, management has been and will
continue evaluating alternative businesses and acquisitions. There is no
assurance that such alternative businesses and acquisitions can be identified
before CTS spends all of its remaining cash balances, that it will be able to
raise money on acceptable terms, if at all, to fund the acquisitions and/or the
operating activities of the businesses it may acquire, and that the acquired
businesses will represent viable business strategies and/or will be consistent
with the expectations and risk profiles of CTS' stockholders.
Management expects that during 2003 the Company will incur costs of
approximately $1.2 million, primarily related to remaining non-cancelable office
leases, employee compensation, costs of maintaining the business as a public
entity, and insurance. The Company does not have any current source of revenue
and has de minimis operations. Accordingly, management believes that its cash
balances as of December 31, 2002 of approximately $3.3 million are sufficient to
fund its current cash flow requirements through at least the next twelve months.
Description of Products sold in 2002 and prior years and Business through 2002
Prepaid Long-Distance Phonecard Products
The Company expanded into the prepaid long-distance service arena in the fourth
quarter of 1999. Through its majority-owned subsidiary, Isis
Tele-Communications, Inc., the Company marketed and distributed branded prepaid
long-distance phonecards in denominations generally ranging from $5 to $20 per
card. Isis also marketed prepaid wireless phones and phonecards. Isis
specialized in targeted marketing programs and featured local and toll-free
access numbers and aggressive domestic and international long-distance rates.
Isis distributed cards through regional and national multi-level distribution
channels, using direct sales, third party distributors and telemarketing. Due to
continuing losses from declining margins and increased competition in this
marketplace,
3
the Company decided to close the Isis business in December 2002. At December 31,
2002, the Company was in the process of winding down its Isis operations. During
2002 Isis maintained sales offices in Los Angeles and Boston. Isis revenue
accounted for 100 % and 74% of consolidated revenue for 2002 and 20001
respectively.
Location-Based Services: TruePosition, Inc. Investment and Neumobility'TM'
Division
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 wire-line 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. In January 2001 the Company formed a division called
Neumobility'TM' for this product line. The services or applications to be
delivered to mobile phones or other wireless devices included finder
applications assisting users in locating others, businesses, or addresses; maps;
directions; traffic reports; coupons; and many other similar services. Revenue
from these services was designed to help wireless carriers offset the costs of
providing the location data within their networks and to increase data airtime
usage. The Company ceased its development efforts of the Neumobility platform
and applications in November 2002 due to slow market development and low future
revenue projections which did not justify continued investment at that time.
Additionally, during the fourth quarter of 1999, the Company made a strategic
investment in KSI, a provider of development-stage wireless geo-location
technology. In August 2000, TruePosition, Inc., a subsidiary of Liberty Media
Corporation, acquired KSI. The Company's total investment valued at cost in
TruePosition, Inc. common stock at December 31, 2001 was $1,754,000. In December
2002 the Company received certain valuation information from TruePosition
indicating a range of values for TruePosition. Based upon its review of
available information and communications with Liberty Media, the Company
concluded there had been an other-than-temporary decline in estimated fair value
of its investment, and reduced the recorded carrying value of this investment
from its cost basis of $1,754,000 to zero, representing its best estimate of the
current fair value of the Company's investment in the net equity of
TruePosition. TruePosition's operations have required significant infusions of
cash by Liberty Media to date, and have not generated significant revenues. The
Company's investment in TruePosition common stock has been diluted by these
advances, which have recently been converted to preferred stock. It is possible
that in the future the Company may receive proceeds from the sale of this
investment but no such amount can be estimated at this time.
The 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
revenue is anticipated from the Blackbird Platform product line past that date.
Blackbird revenue accounted for 26% of consolidated revenue for 2001.
The Company's Strategy
As a result of the foregoing, the Company currently has de minimis business
operations. As such, the Company's principal business purpose at this time is to
locate and consummate a merger or acquisition with a private entity. Because of
the Company's current status, in the event the Company does successfully acquire
or merge with an operating business opportunity, it is likely that the Company's
present shareholders may experience substantial dilution.
The Company has no current business operations other than the wind-down of its
Isis and Neumobility segments and no representation is made, nor is any
intended, that the Company will be able to carry on future business activities
successfully. Further, there can be no assurance that the Company will have the
ability to acquire or merge with an operating business, business opportunity or
property that will be of material value to the Company or its shareholders.
4
The Company will not restrict its search to any specific geographical location,
and the Company may participate in a business venture of virtually any kind or
nature. Management anticipates that it may be able to participate in a limited
number of potential business ventures, due primarily to the Company's limited
financing. This lack of diversification should be considered a substantial risk
to the Company.
The Company may seek a business opportunity in the form of firms which have
recently commenced operations, or which wish to utilize the public marketplace
in order to raise additional capital in order to expand into new products or
markets, to develop a new product or service, or for other corporate purposes.
In some instances, a business opportunity may involve the acquisition or merger
with a company which does not need substantial additional cash but which desires
to establish a public trading market for its Common Stock. A company which seeks
the Company's participation in attempting to consolidate its operations through
a merger, reorganization, asset acquisition, or some other form of combination
may desire to do so to avoid what it may deem to be adverse consequences of
undertaking a public offering itself.
The Company anticipates that the selection of a business opportunity in which to
participate will be complex and extremely risky. Because of general economic
conditions, rapid technological advances being made in some industries, and
shortages of available capital, management believes that there are numerous
firms seeking even the limited additional capital which the Company will have
and/or the benefits of a publicly traded corporation. Such perceived benefits of
a publicly traded corporation may include facilities or improving the terms on
which additional equity financing may be sought, providing liquidity for the
principals of a business, creating a means for providing incentive stock options
or similar benefits to key employees, providing liquidity (subject to
restrictions of applicable statutes) for all shareholders, and other factors.
Potentially available business opportunities may occur in many different
industries and at various stages of development, all of which will make the task
of comparative investigation and analysis of such business opportunities
extremely difficult and complex.
The Company has limited capital with which to provide the owners of business
opportunities with any significant cash or other assets. There may be
significant post-merger or acquisition registration costs in the event such
persons wish to register a portion of their shares for subsequent sale. The
Company may also incur significant legal and accounting costs in connection with
the acquisition of a business opportunity including the costs of preparing Form
8-K's and/or SEC registration statements, agreements and related reports and
documents.
Evaluation of Opportunities
The analysis of new business opportunities will be undertaken by or under the
supervision of the Company's Chairman of the Board and CEO. Management intends
to concentrate on identifying prospective business opportunities which may be
brought to its attention through present contacts of the Company's officers and
directors, such as but not limited to attorneys, accountants, financial
advisors, bankers, businessmen and others. From time to time, such contacts may
refer their clients, acquaintances and others to the Company. In analyzing
prospective business opportunities, management will consider such matters as the
available technical, financial, and managerial resources; working capital and
other financial requirements; history of operation, if any; prospects for the
future; nature of present and expected competition; the quality and experience
of management services which may be available and the depth of that management;
the potential for further research, development, or exploration; specific risk
factors not now foreseeable but which then may be anticipated to impact the
proposed activities of the Company; the potential for growth or expansion; the
potential for profit; the perceived public recognition or acceptance of
products, services, or trades; name identification; and other relevant factors.
Management of the Company will meet personally with management and key personnel
of the firm sponsoring the business opportunity, if such exists, as part of its
investigation, and may visit and inspect material facilities, obtain independent
analysis or verification of certain information provided, check references of
management and key personnel, and take other reasonable investigative measures
to the extent of the Company's limited financial resources and management
expertise.
It may be anticipated that any opportunity in which the Company participates
will present certain risks. Many of these risks cannot be adequately identified
prior to selection of the specific opportunity, and shareholders of the Company
must, therefore, depend on the ability of management to identify and evaluate
such risks. In the case of some of the opportunities available to the Company,
it may be anticipated that the promoters thereof have been
5
unable to develop an economically viable business or that such business is in
its development stage and there is a risk, even after the Company's
participation in the activity and the related expenditure of the Company's
funds, that the combined enterprises will still be unable to become economically
viable or advance beyond the development stage. Certain opportunities may
involve new and untested products, processes, or market strategies which may not
succeed. Such risks will be assumed by the Company and, therefore, its
shareholders.
Acquisition of Opportunities
In implementing a structure for a particular business acquisition, the Company
may become a party to a merger, consolidation, reorganization, joint venture, or
licensing agreement with another corporation or entity. It may also purchase
stock or assets of an existing business. It should be noted that the Company
likely has limited capital with which to make any acquisitions. Accordingly, in
many of the transactions alluded to herein, it is likely that the consideration
utilized to make any acquisitions will consist of equity securities.
In the event that an acquisition transaction is made utilizing primarily equity
securities (as is expected to be the case), the percentage ownership of present
shareholders will be diluted, the extent of dilution depending upon the amount
so issued. Persons acquiring shares in connection with any acquisition of a
business may obtain an amount of equity securities sufficient to control the
Company. In addition, the Company's directors may, as part of the terms of the
acquisition transaction, resign and be replaced by new directors. Any merger or
acquisition effected by the Company can be expected to have a significant
dilutive effect on the percentage of shares held by the Company's shareholders.
Further, if the Company were to issue substantial additional securities in any
acquisition transaction, such issuance might have an adverse effect on the
trading market in the Company's securities in the future.
It is anticipated that any securities issued in any such reorganization would be
issued in reliance on exemptions from registration under applicable federal and
state securities laws. In some circumstances, however, as a negotiated element
of this transaction, the Company may agree to register such securities either at
the time the transaction is consummated, under certain conditions, or at
specified times thereafter. The issuance of substantial additional securities
and their potential sale into any trading market in the Company's securities may
have a depressive effect on such market.
The Company intends to structure a merger or acquisition in such a manner as to
minimize Federal and State tax consequences to the Company and to any target
company. Under Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code"), a statutory merger or consolidation is an exempt transaction and may be
tax-free if effected in accordance with State law. A tax-free reorganization may
require the Company to issue a substantial number of its securities in exchange
for the securities or assets of a target firm. Accordingly, the proportional
interests of the shareholders of the Company prior to such transaction or
reorganization may be substantially less than the proportional interest of such
shareholders in the reorganized entity. Even if a merger or consolidation is
undertaken in accordance with the Code, there is no assurance that Federal and
State tax regulations will not change in the foreseeable future and result in
the Company incurring a significant tax liability.
The manner in which the Company participates in an opportunity will depend on
the nature of the opportunity, the respective needs and desires of the Company
and other parties, the management of the opportunity, and the relative
negotiating strength of the Company and such other management.
The Company will participate in a business opportunity only after the
negotiation and execution of appropriate written agreements. Although the terms
of such agreements cannot be predicted, generally such agreements will require
specific representations and warranties by all of the parties thereto, will
specify certain events of default, will detail the terms of closing and the
conditions which must be satisfied by each of the parties prior to such closing,
will outline the manner of bearing costs if the transaction is not closed, will
set forth remedies on default, and will include miscellaneous other terms.
It is anticipated that the investigation of specific business opportunities and
the negotiation, drafting and execution of relevant agreements, disclosure
documents, and other instruments will require substantial management time and
attention and substantial costs for accountants, attorneys, and others. If a
decision is made not to participate in a specific business opportunity, the
costs theretofore incurred in the related investigation
6
would not be recoverable. Furthermore, even if an agreement is reached for the
participation in a specific business opportunity, the failure to consummate that
transaction may result in the loss to the Company of the related costs incurred.
Further, companies subject to Section 13 or 15(d) of the Exchange Act must
furnish certain information about significant acquisitions, including certified
financial statements for the company or companies acquired covering at least two
years. Consequently, if targeted acquisition prospects do not have, or are
unable to obtain, the requisite certified financial statements, such
acquisitions by the Company would appear to be inappropriate.
Competition
The Company is aware that there are many other public companies with limited
assets that are also searching for operating businesses and other business
opportunities as potential acquisition or merger candidates. The Company will be
in direct competition with these other public companies in its search for
business opportunities. In addition, the Company expects to encounter
substantial competition in its efforts to attract business opportunities from
business development companies, venture capital partnerships and corporations,
venture capital affiliates of large industrial and financial institutions, small
business investment companies and wealthy individuals. Competition in the search
for business opportunities is principally based upon experience in connection
with identifying and effecting business acquisitions, financial and personnel
resources and technical expertise. Many of these entities have significantly
greater experience, financial and personnel resources, and managerial and
technical capabilities than the Company and in all likelihood will be in a
better position than the Company to obtain access to attractive business
opportunities. In view of the Company's limited financial resources and
personnel, the Company will be at a significant competitive disadvantage in
identifying possible business opportunities and successfully completing a
business combination.
Regulation
Although the Company is subject to regulation under the Exchange Act, management
believes the Company will not be subject to regulation under the Investment
Company Act of 1940, insofar that the Company will not be engaged in the
business of investing or trading in securities. Such Act defines an "investment
company" as an issuer which is or holds itself out as being engaged primarily in
the business of investing, reinvesting or trading of securities. Although
management believes that the Company will not be subject to regulation under
such Act insofar that the Company does not intend to engage in such activities,
the Company has obtained no formal determination as to the status of the Company
under such Act. The Company could be expected to incur significant registration
and compliance costs if required to register under the Investment Company Act of
1940. Accordingly, management will continue to review the Company's activities
from time to time with a view toward reducing the likelihood the Company could
be classified as an "investment company".
In the event the Company acquires or merges with a business or business
opportunity in certain industries, the Company expects that its business will be
subject to various regulations. For example, the telecommunications industry is
subject to the provisions of the Telecommunications Act of 1996 and Federal
Communication Commission ("FCC") regulations there under, as well as applicable
laws and regulations of the various states administered by the relevant state
authorities. Certain aspects of the Internet industry are also subject to the
Telecommunications Act of 1996 and regulations of the FCC. There can be no
assurance that the Company would be able to comply with any such regulations. In
addition, regulations may be enacted in the future which may have a material
adverse effect on the business of the Company.
Product Development
For the years ended December 31, 2002, 2001 and 2000, the Company incurred
research and development expenditures of $1.5 million, $1.8 million and $1.5
million, respectively. The Company ceased research and development efforts in
November 2002 with the announcement that it would stop development efforts on
its Neumobility product line.
Sales, Marketing and Distribution
The Company currently has no sales and marketing personnel as all personnel
previously employed in its Neumobility division or Isis subsidiary were
terminated in late 2002.
7
Proprietary Rights
The Company currently owns 14 issued United States patents relating to its
products. The Company's strategy has been to protect its technology and other
proprietary rights through patents, copyrights, trademarks, nondisclosure
agreements, license agreements and other forms of protection. The Company has
been active in pursuing patent protection for technology and processes involving
its products that it believes to be proprietary and to provide a potential
competitive advantage for the Company. In addition, the Company has also
licensed patents from third parties in an effort to maintain flexibility in the
development and use of its technology. The Company also attempts to protect its
proprietary rights through the use of nondisclosure agreements with its
employees and consultants, and license agreements with customers, which contain
restrictions on disclosure, use and transfer of proprietary information. The
Company further employs various physical security measures to protect its
software source codes, technology and other proprietary rights. See also
"Business Risks -- Proprietary Rights" below.
Employees
As of February 28, 2003, the Company had 4 employees. None of the Company's
employees are covered by a collective bargaining agreement. The Company believes
that its relations with its employees are good. The Company may find it
necessary to periodically hire part-time clerical help on an as-needed basis.
See also "Business Risks -- Dependence on Personnel" below.
Business Risks
The Company operates in a dynamic and rapidly changing business environment that
involves substantial risk and uncertainty. The following discussion addresses
some of the risks and uncertainties that could cause, or contribute to causing,
actual results to differ materially from those expressed or implied in this
report or any other disclosures or statements, oral or written, made by or on
behalf of the Company. Readers should pay particular attention to the
descriptions of risks and uncertainties described below.
NO CURRENT BUSINESS OPERATIONS: With no current business operations other than
to complete the wind-down of its Isis subsidiary and its Neumobility division,
the Company's principal business purpose at this time is to locate and
consummate a merger or acquisition. There is no assurance the Company's intended
merger or acquisition activities will be successful, result in revenue or profit
to the Company or result in an increase in the value of its stock. The
likelihood of success of the Company must be considered in light of the risks,
expenses, difficulties and delays frequently encountered in connection with the
operation and development of a new business. There is nothing at this time upon
which to base an assumption that any business or business opportunity the
Company acquires will prove successful, and there is no assurance that it will
be able to operate profitably.
HISTORY OF NET LOSSES; ACCUMULATED DEFICIT: The Company incurred net losses of
approximately $5.5 million in 2002 and forecasts spending approximately $1.2
million in 2003 with no revenue. As of December 31, 2002, the Company had an
accumulated deficit of $26 million, the majority of which accumulated during the
three years ended December 31, 1998. With the announcements in late 2002 of the
closures of the Isis subsidiary and Neumobility division, the Company has no
current operations. Since then, the Company has been focusing on other business
opportunities in its attempt to locate and consummate a merger or acquisition.
There can be no assurance, however, that the Company will be able to acquire any
business or business opportunity or that any business or business opportunity
the Company acquires will prove successful or will be able to operate
profitably. There can be no assurance that the Company's operations will be
profitable on a quarterly or annual basis in the future. Past revenue levels
should not be considered indicative of future operating results. Operating
results for future periods are subject to numerous risks and uncertainties,
including those specified elsewhere in this report. If the Company is not
successful in addressing such risks and uncertainties, the Company's business,
financial condition and results of operations will be materially adversely
affected.
NEED FOR ADDITIONAL FINANCING: The Company's needs for additional financing will
depend upon a number of factors, including, but not limited to, the timing and
success of potential strategic alliances or acquisitions of businesses,
technologies or assets. The Company believes that existing cash reserves will
provide sufficient cash to fund its operations for at least the next two years.
However, if the Company is unable to
8
achieve positive cash flow or achieves sales growth requiring working capital
beyond current amounts, the Company may be required to seek additional financing
sooner than currently anticipated or may be required to curtail some of its
activities. There can be no assurance that additional financing will be
available on acceptable terms, or at all. The Company's failure to obtain such
additional financing, if needed, could have a material adverse effect on the
Company's business, financial condition and results of operations. See also
"Nasdaq Listing Requirements" below.
VOLATILITY OF STOCK PRICE; LIMITED TRADING MARKET: The market for the Company's
common stock is highly volatile and has had limited trading volumes in recent
quarters. The trading price of the Company's common stock has been and could
continue to be subject to wide fluctuations in response to investors' perception
of the Company's ability to make an acquisition, changes in the Company's stock
market listing status, as well as other events or factors. See "Business Risks
- -- No Current Business Operations" above and "Nasdaq Listing Requirements"
below. Statements or changes in opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the markets in which the
Company has competed have resulted, and could in the future result, in an
adverse effect on the market price of the Company's common stock. In addition,
the stock market has from time to time experienced extreme price and volume
fluctuations which often have been unrelated to the operating performance of
specific companies. These broad market fluctuations may adversely affect the
market price of the Company's common stock.
Only a limited trading market for the Company's common stock currently exists.
The market price of the common stock, which currently is listed on the Nasdaq
SmallCap Market under the symbol CTSC, has, in the past, fluctuated
substantially over time and may in the future be highly volatile. In addition,
the Company believes that relatively few market makers make a market in the
Company's common stock. The actions of any of these market makers could
substantially impact the volatility of the Company's common stock.
NASDAQ LISTING REQUIREMENTS: 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 ("SCM"), 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 market value of the Company's common shares has recently traded below $1.00,
a violation of the listing requirements of the Nasdaq SCM. On November 1, 2002
the Company received a notice from Nasdaq giving the Company a 180-day period,
until April 30, 2003, in which to demonstrate compliance. If the deficiency is
not corrected, Nasdaq will provide delisting notification to the Company, which
may then go through an appeals process. A delisting of the Company's shares from
Nasdaq SCM 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.
PENNY STOCK RULES: The Company's common stock is currently listed on the Nasdaq
SmallCap Market. If the stock is delisted from that market, the stock would
trade on the OTC Bulletin Board. If that occurred, the stock may be subject to
other rules including an SEC rule that imposes additional sales practice
requirements on broker/dealers who sell such securities to persons other than
established customers and accredited investors (generally institutions with
assets in excess of $5,000,000 or individuals with net worth in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their
spouses). For transactions covered by the rule, the broker/dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written agreement to the transaction prior to the sale.
Consequently, the rule may affect the ability of shareholders to sell their
shares in the secondary market. In addition, SEC rules impose additional sales
practice requirements on broker/dealers who sell penny securities. These rules
require a summary of certain essential items. The items include the risk of
investing in penny stocks in both public offerings and secondary marketing;
terms important to an understanding of the function of the penny stock market,
such as "bid" and "offer" quotes, a dealers "spread" and broker/dealer
compensation; the broker/dealer compensation, the broker/dealer's duties to its
customers, including the disclosures required by any other penny stock
disclosure rules; the customer's rights
9
and remedies in cases of fraud in penny stock transactions; and the NASD's toll
free telephone number and the central number of the North American Securities
Administrators Association, for information on the disciplinary history of
broker/dealers and their associated persons. The additional burdens imposed upon
broker/dealers by such requirements may discourage broker/dealers from effecting
transactions in the common stock, which could severely limit the market for the
Company's common stock
COMPETITION FOR BUSINESS OPPORTUNITIES: The Company is aware that there are many
other companies with limited assets that are also searching for operating
businesses and other business opportunities as potential acquisition or merger
candidates. The Company will be in direct competition with these other companies
in its search for business opportunities. In addition, the Company expects to
encounter substantial competition in its efforts to attract business
opportunities from business development companies, venture capital partnerships
and corporations, venture capital affiliates of large industrial and financial
institutions, small business investment companies and wealthy individuals.
Competition in the search for business opportunities is principally based upon
experience in connection with identifying and effecting business acquisitions,
financial and personnel resources and technical expertise. Many of these
entities have significantly greater experience, financial and personnel
resources, and managerial and technical capabilities than the Company and may be
in a better position than the Company to obtain access to attractive business
opportunities. In view of the Company's limited financial resources and
personnel, the Company will continue to be at a significant competitive
disadvantage in identifying possible business opportunities and successfully
completing a business combination and there can be no assurance the Company will
be able to acquire a business opportunity on terms favorable to the Company.
STRATEGIC RELATIONSHIPS AND PARTNERSHIPS: The Company may need to establish and
maintain strategic relationships including joint ventures with respect to
technology, joint sales and marketing relationships and alliances for new
product development and for the creation of new markets. The Company's success
may depend on strategic relationships to offer products and services to a larger
customer base than can be reached through its direct sales efforts. The Company
cannot be assured that it will be able to expand or enter into new relationships
or that the relationships will be on commercially reasonable terms. If the
Company is unable to develop strategic relationships, it could lose the benefits
anticipated from such relationships.
GOVERNMENT REGULATION; LEGAL UNCERTAINTIES; WEBSITE INFORMATION; PERSONAL DATA:
Although the Company is subject to regulation under the Exchange Act, management
believes the Company will not be subject to regulation under the Investment
Company Act of 1940, insofar that the Company will not be engaged in the
business of investing or trading in securities. Such Act defines an "investment
company" as an issuer which is or holds itself out as being engaged primarily in
the business of investing, reinvesting or trading of securities. Although
management believes that the Company will not be subject to regulation under
such Act insofar that the Company does not intend to engage in such activities,
the Company has obtained no formal determination as to the status of the Company
under such Act. The Company could be expected to incur significant registration
and compliance costs if required to register under the Investment Company Act of
1940. Accordingly, management will continue to review the Company's activities
from time to time with a view toward reducing the likelihood the Company could
be classified as an "investment company".
Although the Company's operations are not currently directly regulated, future
operations of the Company may become subject to a variety of United States and
foreign governmental laws, regulations and other requirements. The terms of any
existing laws, regulations or other requirements, or any changes thereto, may
inhibit the growth certain industries, limit the number of potential customers
for the Company's future products and services and/or impede the Company's
ability to offer competitive services to its chosen marketplaces or otherwise
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company may be subject to claims relating to information available on its
website, or from information or content accessible from the Company's websites
through links to other websites or through content and materials posted in chat
rooms or bulletin boards. The Company's commercial liability insurance may not
provide adequate protection against these types of claims.
Any new legislation or regulation, or the application of laws or regulations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
10
TAXATION: In any acquisition or merger the Company may undertake, attention will
be focused upon federal and state tax consequences to both the Company and the
"target" company. Presently, under Section 368 of the Internal Revenue Code of
1986, as amended, a statutory merger or consolidation is an exempt transaction
and may be tax-free if effected in accordance with State law. While the Company
expects to undertake any merger or acquisition so as to minimize federal and
state tax consequences to both the Company and the "target" company, there is no
assurance that such business combination will meet the statutory requirements of
a reorganization or that the parties will obtain the intended tax-free treatment
upon a transfer of stock or assets. Additionally, there can be no assurance that
the Company's net operating loss carryforwards will be fully available to offset
any future taxable income generated by the Company. A nonqualifying
reorganization could result in the imposition of both federal and state taxes
which may have substantial adverse effect on the Company.
POSSIBLE USE OF DEBT FINANCING; DEBT OF AN ACQUIRED BUSINESS: There are
currently no limitations relating to the Company's ability to borrow funds to
increase the amount of capital available to the Company to effect a business
combination or otherwise finance the operations of an acquired business. The
amount and nature of any borrowings by the Company will depend on numerous
considerations, including the Company's capital requirements, the Company's
perceived ability to meet debt service on such borrowings, and then-prevailing
conditions in the financial markets, as well as general economic conditions.
There can be no assurance that debt financing, if required or otherwise sought,
will be available on terms deemed to be commercially acceptable and in the best
interest of the Company. The inability of the Company to borrow funds required
to effect or facilitate a business combination, or to provide funds for an
additional infusion of capital into an acquired business, may have a material
adverse effect on the Company's financial condition and future prospects.
Additionally, to the extent that debt financing ultimately proves to be
available, any borrowings may subject the Company to various risks traditionally
associated with incurring of indebtedness, including the risks of interest rate
fluctuations and insufficiency of cash flow to pay principal and interest.
Furthermore, an acquired business may already have previously-incurred debt
financing and, therefore, the risks inherent thereto, as discussed above.
ISSUANCE OF SHARES IN MERGER OR ACQUISITION: Any acquisition effected by the
Company may result in the issuance of additional Common Stock or Preferred Stock
without shareholder approval and may result in substantial dilution in the
percentage of the Company's securities held by the Company's then-shareholders.
Moreover, the Common Stock or Preferred Stock issued in any such merger or
acquisition transaction may be valued on an arbitrary or non arm's-length basis
by management of the Company, resulting in an additional reduction in the
percentage of securities held by the Company's then-shareholders.
DEPENDENCE ON PERSONNEL; ADEQUATE STAFFING LEVELS AND MANAGEMENT OF GROWTH: The
Company's future success depends in large part on its ability to continue to
attract, motivate and retain highly qualified personnel, particularly the
members of its senior management and certain other employees who may be
difficult to replace. Competition for such personnel is intense and there can be
no assurance that the Company will be successful in attracting, motivating and
retaining key personnel. The Company also believes stock options are a critical
component for motivating and retaining its key personnel. The decline in the
Company's stock price during the past several years has made stock options
previously granted with higher exercise prices less valuable to the Company's
current employees. The inability to hire and retain qualified personnel or the
loss of the services of key personnel could have a material adverse effect upon
the Company's business, financial condition and results of operations. The
Company does not maintain any key-man life insurance policies on any of its
employees.
The Company's accounting and financial requirements have been complex and will
continue to be so in the near future while the Company is winding down its Isis
business. The Company's failure to adequately recruit, hire, train and retain
sufficient qualified staff to enable proper financial and accounting control of
the Company's finances and assets could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISK OF SYSTEM FAILURE AND RISK OF NETWORK SECURITY FAILURE: The Company
operates and maintains internal computers and telecommunication equipment. The
Company's operations are dependent upon its ability to maintain such equipment
and systems in effective working order and to protect them against damage from
fire,
11
natural disaster, power loss, communications failure, unauthorized entry or
other events. Although the Company provides back up for substantially all of its
systems, these measures do not eliminate the risk to the Company's operations
from a system failure. In addition to its own systems, the Company relies on
certain equipment, systems and services from third parties that are also subject
to risks, including risks of system failure. There can be no assurance that the
Company's property and business interruption insurance will be adequate to
compensate the Company for any losses that may occur in the event of a system
failure. Any damage, failure or delay that causes interruptions in the Company's
operations could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's systems may be vulnerable to security risks or service disruptions
that could harm the Company's business. Potential unauthorized access to the
Company's systems could result in technical difficulties including delays, loss
of data, and inability to process user requests or network downtime causing
business interruption. Such events could be very expensive to remedy and could
damage the Company's reputation. Any major disruption could have a material
adverse effect on the Company's business, financial condition and results of
operations.
INTERNATIONAL OPERATIONS: To the extent that the Company acquires or merges with
an entity which pursues sales opportunities for its products and services in
international markets, the Company is and will remain subject to all the risks
inherent in international sales activities, such as lengthy sales cycles, high
costs of sales, changes in export, import, tariff and other trade regulations,
currency exchange rates, foreign tax laws and other legal, economic and
political conditions. There can be no assurance that the occurrence of any of
the foregoing will not have a material adverse effect on the Company's business,
financial condition and results of operations. Further, the laws of certain
foreign countries do not protect the Company's intellectual property to the same
extent as the laws of the United States. See "Business Risks -- Uncertainty
Regarding Proprietary Rights." In certain international markets, the Company may
need to modify its products or develop new or additional products to adapt to
the different standards utilized in such markets. There can be no assurance that
the Company's marketing efforts and technological enhancements will result in
successful commercialization or market acceptance or penetration in such
international markets. If the Company is unable to adequately anticipate and
respond to marketing or technological requirements in the international
marketplace, the Company's business, financial condition and results of
operations could be materially adversely affected.
PROPRIETARY RIGHTS: In past years the Company has depended in part on its
ability to protect its technology, processes, trade secrets and other
proprietary rights from unauthorized disclosure and use and operate the same
without infringing the proprietary rights of third parties. The Company's
strategy has been to protect its technology and other proprietary rights through
patents, copyrights, trademarks, nondisclosure agreements, license agreements
and other forms of protection.
Patents issued and patent applications filed relating to products used in the
Company's prior markets are numerous, and the patent positions of companies in
these industries, including the Company, are generally uncertain and involve
complex legal and factual issues. Accordingly, there can be no assurance that
any pending or future patent application of the Company or its licensors will
result in issuance of a patent or that, when a patent is issued, that the scope
of protection of the patent will be sufficiently broad to protect the Company's
technology or provide a competitive advantage for the Company. There can be no
assurance that any issued patent will not be challenged, invalidated or
circumvented. Litigation or regulatory proceedings, which could result in
substantial cost and uncertainty to the Company, may be necessary to enforce
patent or other proprietary rights of the Company or to determine the scope and
validity of a third-party's proprietary rights. There can be no assurance that
the Company will succeed or will have the resources necessary to succeed in any
such litigation or regulatory proceedings.
Although the Company believes that the technology in its prior products was
independently developed and that its products did not infringe patents known to
be valid or violate other proprietary rights of third parties, it is possible
that such infringement of existing or future patents or violation of proprietary
rights may occur. There can be no assurance that the Company is aware of all
third-party proprietary rights that may materially affect the Company's past
products and services. United States patent applications, for example, are
confidential while pending at the United States Patent and Trademark Office, and
the laws of many foreign countries do not protect
12
proprietary rights to the same extent as the laws of the United States. There
can be no assurance that third parties will not assert infringement claims with
respect to the Company's past products or services, or that any such claims will
not result in litigation or regulatory proceedings or require the Company to
modify its products or enter into licensing arrangements, regardless of the
merits of such claims. See "Business Risks -- Risk of Litigation" below. No
assurance can be given that the Company will have the resources necessary to
successfully defend against any such infringement claims or that any necessary
licenses could be obtained in a timely manner, upon commercially reasonable
terms, or at all. The Company's failure to successfully defend against any such
claims or obtain any such license could result in substantial cost and
uncertainty to the Company and have a material adverse effect on the Company's
business, financial condition or results of operations.
RISK OF LITIGATION: 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. See also "Item 3 -- Legal Proceedings"
below.
Item 2. Properties
The Company leases approximately 10,000 square feet of general office space in
Seattle, Washington for its corporate offices under a three-year non-cancelable
operating lease that expires in September 2003. The lease contains renewal
options and provides for the pass-through to the Company of increases in
operating and other costs. Additionally, the Company's Isis Telecommunications,
Inc. subsidiary has two lease arrangements in connection with its prepaid
phonecard operations consisting of a one-year renewable lease for approximately
1,700 square feet of general office space in Boston, Massachusetts currently
expiring in November 2003 and a three-year lease for approximately 1,700 square
feet of general office space in Los Angeles, California, expiring in March 2003.
The two Isis leases will not be renewed at their expiration dates.
Item 3. 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 agreement included a
two-year earn-out with a maximum contingent total payout of $1.5 million. 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
There were no matters submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year covered by this Annual Report.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The following table sets forth, for each quarter during fiscal 2001 and during
the period from January 1, 2002 through June 13, 2002 the reported high and low
sales prices of the Company's Common Stock on The Nasdaq Stock Market (National
Market System) (Symbol: "CTSC"), and for each quarter from the period from June
14, 2002 through December 31, 2002 and for the period from January 1, 2003
through March 14, 2003 the reported high and low sales prices of the Company's
Common Stock on The Nasdaq Stock Market (SmallCap System) ("SCM").
Sales Price
-----------
High Low
---- ---
2001
----
First Quarter $7.00 $2.31
Second Quarter 5.00 2.25
Third Quarter 3.44 2.07
Fourth Quarter 3.76 1.99
2002
----
First Quarter 2.46 1.91
Second Quarter 2.35 1.11
Third Quarter 1.24 0.67
Fourth Quarter 1.56 0.56
2003
----
First Quarter through
March 14, 2003 0.87 0.66
As of March 14, 2003, the number of holders of record of the Company's Common
Stock was 203, and the number of beneficial shareholders was estimated to be in
excess of 4,000. There were no dividends paid or other distributions made by the
Company with respect to its Common Stock during 2002 or 2001 and the Company has
no plans for any such payments in the future.
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 2002 the Company applied for listing on the Nasdaq SCM, was accepted
and began trading on the Nasdaq SCM 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 market value of the Company's common shares has recently traded below $1.00
for longer than 30 days, a violation of the listing requirements of the Nasdaq
SCM. On November 1, 2002 the Company received a notice from Nasdaq giving the
Company a 180-day period, until April 30, 2003, in which to demonstrate
compliance by having the share price of its common stock valued at over $1.00
for ten consecutive trading sessions. If the deficiency is not corrected, Nasdaq
will provide delisting notification to the Company, which the Company may
contest through an appeals process. A delisting of the Company's shares from
Nasdaq SCM 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.
14
Item 6. Selected Consolidated Financial Data (1)
Year Ended December 31,
Statement of Operations Data: (In 000's, except per share amounts)
-----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Revenues $11,771 $20,146 $25,973 $10,241 $ 11,955
Net Income (Loss) (5,476) 611 2,552 2,599 (10,860)
Basic Earnings (Loss) Per Share(2) (2.39) 0.27 1.12 1.14 (4.76)
Diluted Earnings (Loss) Per Share(2) (2.39) 0.27 1.09 1.13 (4.76)
Weighted Average Shares Outstanding:
Basic 2,292 2,292 2,287 2,282 2,281
Diluted 2,292 2,302 2,339 2,292 2,281
Cash Dividends Declared -- -- -- -- --
December 31,
Balance Sheet Data: (In 000's)
-----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Cash $ 3,315 $ 6,353 $ 4,529 $ 4,787 $ 1,567
Working Capital 3,252 6,523 5,443 3,621 596
Long Term Investment -- 1,754 1,758 1,000 --
Total Assets 4,144 9,990 9,774 10,202 8,102
Total Stockholders' Equity 3,403 8,879 8,268 5,673 3,072
- ----------
(1) Certain reclassifications have been made to the prior year financial
statements to conform to the current period's presentation.
(2) Per share amounts and weighted average shares outstanding have been
retroactively adjusted to give effect to the one-for-ten reverse stock
split effective January 5, 1999. In years where the Company incurred a net
loss, common equivalent shares were not used in calculating diluted
earnings per share, as the effect would be anti-dilutive.
15
Item 7. 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 Annual Report on Form 10-K 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 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 A in the Notes to the Consolidated
Financial Statements in Item 15 of this Annual Report on Form 10-K. Actual
results may differ from these estimates under different assumptions or
conditions.
Basis of Accounting
On November 9, 2002, the Company ceased development efforts of Neumobility, and
on December 11, 2002 adopted a plan to wind down the operations of Isis and
liquidate the related net assets. As a result, as of December 31, 2002 the
Company has no business other than to wind-down the operations of Isis which
management anticipates will be completed in 2003. Management has no plan to
liquidate the Company and distribute the remaining assets to stockholders.
Further, management believes that its cash balances as of December 31, 2002 of
approximately $3.3 million are sufficient to fund its current cash flow
requirements through at least the next twelve months.
Based on management plans, these financial statements have been prepared under
the "going concern" assumption which presumes that the Company will continue its
existence for the foreseeable future and is not subject to imminent liquidation.
16
Revenue Recognition
Historically, the Company has generated revenues through three sources: (1)
prepaid phonecard sales, (2) systems revenues, consisting primarily of bundled
hardware and software products, and (3) services revenues, consisting primarily
of hardware and software maintenance and related support services. There were no
systems revenues recognized after December 31, 2000, and no service revenues
recognized after December 31, 2001.
Phonecard revenues are recognized upon shipment, net of estimated returns. Costs
of goods sold for phonecards include related shipping and handling costs.
Phonecard revenues are recorded on a gross basis, with costs payable to card
providers included in the costs of the phonecards, in accordance with EITF Issue
No. 99-19, because the Company is the primary obligor in the arrangement, bears
inventory and credit risk, has discretion over pricing, and is involved in the
determination of the products to be marketed.
Systems revenues are recognized when all of the following conditions are met:
(i) persuasive evidence of an arrangement exists; (ii) delivery has occurred
(including satisfaction of contract criteria with no additional undelivered
elements essential to the functionality of the delivered products); (iii) the
amount is fixed and determinable; and (iv) collectability is probable.
Service revenues are recognized ratably over the period that maintenance
coverage is provided. Prepaid or allocated maintenance and services are recorded
as deferred revenues.
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.
The Company also reduces cost of goods sold and increases inventory by the
estimated costs of the sales returns. The Company estimated its direct sales
margin at approximately 3% in 2002 and 5% in 2001, reflecting lower margins on
its sales in 2002. If the historical data the Company uses to calculate these
estimates does not properly reflect future returns, reported revenue could be
overstated.
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.
Inventory
The Company records its inventories at the lower of cost or market. In assessing
the ultimate realization of inventories, the Company makes judgments as to
future demand requirements and compares 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.
Goodwill and Intangible Impairment
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired in business acquisitions. Until January 1, 2002, goodwill was
being amortized over the estimated useful life of four years.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 142 - Goodwill and Intangible Assets. Under SFAS 142,
goodwill is considered to have an indefinite life and is subject to periodic
tests for impairment rather than amortization. To test goodwill for impairment,
the carrying value of a reporting unit containing goodwill is compared to its
fair value. If the carrying value is higher, loss on
17
impairment is measured as the difference between the actual carrying amount of
goodwill and the implied amount, determined as if the reporting unit were
acquired on the date of the test. Impairment losses are recognized immediately.
As of January 1, 2002, the date the Company performed the initial impairment
test upon adoption of SFAS 142, it had goodwill with a net book value of
approximately $100,000 related to the acquisition of New England Telecom, Inc.,
in August 2000. For the purpose of testing goodwill for impairment, the Company
used a fair value of Isis based on the forecasted cash flows. As a result of the
test and the measurement process of the impairment loss, the Company determined
it had no implied goodwill. Accordingly, as of January 1, 2002, it recognized an
impairment loss of $100,000. As permitted by SFAS 142, impairment losses
recognized upon the initial application of the standard are presented as the
cumulative effect of an accounting change in the statement of operations. During
the years ended December 31, 2001 and 2000, the Company did not record any
impairment losses related to goodwill and other intangible assets.
Long-Term Investment
The Company accounts for its investment 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 the declines in fair value of its investment are
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. When the Company determines the fair value of
the investment had an other-than-temporary decline, an impairment write-down is
recorded.
Overview
The Company has developed, marketed, distributed and supported a diversified mix
of products and services for the telecommunications industry. Over the past 14
years, the Company 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, geo-location
wireless software applications and sales of prepaid long-distance phonecard
products.
On November 9, 2002, CTS ceased development efforts of Neumobility, and on
December 11, 2002 adopted a plan to wind down the operations of Isis. As a
result, as of December 31, 2002 CTS has no current business other than to
complete the wind-down of the operations of Isis. Management anticipates that
all remaining assets of Isis will be realized, and liabilities settled during
2003. Management currently has no plan to liquidate the Company and distribute
the remaining assets to stockholders. During 2002 and 2003, management has been
and will be evaluating alternative businesses and acquisitions. There is no
assurance that such alternative businesses and acquisitions can be identified
before CTS spends all of its remaining cash balances, that CTS will be able to
raise money at acceptable terms, if at all, to fund the acquisitions and/or the
operating activities of the businesses it may acquire, and that the acquired
businesses will represent viable business strategies and/or will be consistent
with the expectations and risk profiles of CTS' stockholders.
Management expects that during of 2003 the Company will incur costs of
approximately $1.2 million, primarily related to remaining non-cancelable office
leases, employee compensation, costs of maintaining the business as a public
entity, and insurance. The Company does not have any current source of revenue
and has de minimis operations. Accordingly, management believes that its cash
balances as of December 31, 2002 of approximately $3.3 million are sufficient to
fund its current cash flow requirements through at least the next twelve months.
18
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 the fourth quarter of 1999. Through its majority-owned
subsidiary, Isis Tele-Communications, Inc., the Company marketed and distributed
branded prepaid long-distance phonecards in denominations generally ranging from
$5 to $20 per card. Isis also marketed prepaid wireless phones and phonecards.
Isis specialized in targeted marketing programs and featured local and toll-free
access numbers and aggressive domestic and international long-distance rates.
Isis distributed cards through regional and national multi-level distribution
channels, using direct sales, third party distributors and telemarketing. Due to
continuing losses from declining margins and increased competition in this
marketplace, the Company decided to close the Isis business in December 2002. At
December 31, 2002, the Company was in the process of winding down its Isis
operations.
Geo-Location Wireless Applications Investment and Product Development
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 wire-line 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. In January 2001 the Company
formed a division called Neumobility(TM) for this product line. The Company
ceased its development efforts of the Neumobility platform and applications in
November 2002 due to postponement by the FCC of its original implementation
deadlines for the wireless E-911 rollout and slow market development, resulting
in low future revenue projections which did not justify continued investment at
that time.
The 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 2002, the Company generated revenue through sales of its Isis pre-paid
phonecard products. During 2001 and 2000, the Company generated revenue through
two sources: (i) Isis pre-paid phonecard product sales and (ii) Blackbird
service revenue.
Prepaid phone-card revenue is comprised of wholesale and retail sales of prepaid
local, long-distance and wireless products. The revenue is recognized at
shipment of product, net of reserves for estimated returns. The Company
maintains an allowance for sales returns for 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.
19
Service revenue is 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 currently deployed product base. Service revenue is recognized ratably
over the period that the service is provided. Hardware and software maintenance
generally begins after system acceptance. Prepaid or allocated maintenance and
services are recorded as deferred revenue. There was no service revenue in 2002.
Systems revenues are recognized when all of the following conditions are met:
(i) persuasive evidence of an arrangement exists; (ii) delivery has occurred
(including satisfaction of contract criteria with no additional undelivered
elements essential to the functionality of the delivered products); (iii) the
amount is fixed and determinable; and (iv) collectability is probable. There
were no systems revenues during 2001 or 2002.
Costs and Expenses
Costs of phonecards, services and systems are primarily comprised of the costs
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 ongoing hardware maintenance service activities.
Sales and marketing expenditures include the costs of salaries, commissions and
employee-related expenses and certain variable marketing expenses, including
promotional costs, public relations costs, marketing collateral and trade show
expenses.
General and administrative expenditures include the costs of executive, human
resource, finance and administrative support functions, provisions for
uncollectible accounts and costs of legal and accounting professional services.
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 products and services.
Year ended December 31, 2002 compared to year ended December 31, 2001
Overview
Total revenues decreased 42% to $11,771,000 in 2002 from $20,416,000 in 2001.
Net loss was $5,476,000 or $2.39 per diluted share in 2002, compared to net
income of $611,000, or $0.27 per diluted share in 2001. The decrease in
consolidated revenues was a result of lower revenue from both the Company's
Blackbird Platform products and its prepaid phonecard segment (Isis) as
described below under "Revenue".
The $6.1 million decrease in net income for 2002 in comparison to 2001 is due to
several factors:
o Total gross margin decreased by $4.1 million from the 2001 year to the
2002 year. Gross margin from sales of its Blackbird Platform products
was $4.0 million in 2001 comprised of revenue of $5.3 million and costs
to provide the services of $1.3 million. There were no revenues or
costs related to Blackbird Platform products in 2002. Isis gross margin
decreased by $0.1 million as revenue declined by $3.4 million and costs
were reduced by $3.3 million.
o Operating expenses decreased $1.1 million due to $0.3 million of
reduced research and development spending for the Company's Neumobility
product line, $0.2 million reduced sales and marketing expense and $0.6
million reduced general and administrative spending.
20
o Other income decreased $2.7 million as the Company recognized a $1.7
million write-down on a long-term investment in TruePosition during the
2002 period compared to the recognition of a one-time net arbitration
settlement (excluding interest) resulting in a gain of approximately
$0.9 million during 2001 related to Blackbird Platform products.
Revenue
Prepaid phonecard revenue decreased 22% to $11,771,000 in 2002, from $15,148,000
in 2001. The decrease is due to reduced demand for the Company's current product
offerings, lower sales and marketing headcount in Isis and the decision by the
Company to exit the prepaid phonecard business at the end of 2002.
Service and systems revenue decreased to zero in 2002 from $5,268,000 in 2001.
All of the 2001 service revenue was derived from Blackbird Platform Products.
There was no Blackbird revenue in 2002 as the Company's customer contracts for
periods after December 2001 were not renewed.
Costs and expenses
Cost of phonecards, services and systems decreased by $4,548,000 to $11,551,000
in 2002 from $16,099,000 in 2001 due primarily to the cessation of Blackbird
business and decline of Isis business. As a percent of total revenue, the costs
were 98% and 79% for the 2002 and 2001 periods, respectively. Blackbird gross
margins were 76% for 2001, whereas there were none in 2002. Isis gross margins
were 2% for both periods.
Sales and marketing expenses decreased 15% to $1,052,000 in 2002 from $1,241,000
in 2001. As a percent of total revenue, the costs were 9% and 6% for 2002 and
2001, respectively. The decrease in sales and marketing expenses is attributable
to headcount reductions for Isis in 2002 compared to 2001 and a decrease in
sales and marketing expenditures for the Blackbird Platform and Neumobility
products.
General and administrative expenses decreased 30% to $1,351,000 in 2002 from
$1,917,000 in 2001, primarily due to significant headcount and overhead
reductions as compared to the prior year.
Research and development costs decreased 17% to $1,522,000 in 2002 from
$1,841,000 in 2001. The decrease was attributable to decreased spending on new
product development in the geo-location application technology area due to a
decision to cease funding the product in November 2002.
Other Income (Expense), net
Net other income (expense) decreased to an expense of $1,754,000 in 2002 from
income of $974,000 in 2001. The 2002 period included a non-cash write-down of
$1,754,000 of the Company's long term investment in TruePosition. The 2001
period included a non-recurring net arbitration settlement (excluding interest)
resulting in a gain of approximately $900,000 related to the Blackbird Platform
products. Other income also includes gains or losses from sales of equipment and
other miscellaneous income items.
Interest Income and Expense
Net interest income decreased to $77,000 in 2002 from $308,000 in 2001. This
decrease is attributable to lower interest rates earned on invested cash
balances in the current year compared to prior year, lower cash balances on
which interest was earned, and the interest included in the arbitration
settlement in 2001.
Income Tax Benefit
The Company recognized an income tax benefit of $6,000 in 2002 compared to
$11,000 in 2001, which represents net recoverable federal alternative minimum
taxes and state income taxes.
21
Year ended December 31, 2001 compared to year ended December 31, 2000
Overview
Total revenues decreased 21% to $20,416,000 in 2001 from $25,973,000 in 2000.
Net income was $611,000, or $0.27 per diluted share in 2001, compared to net
income of $2,552,000, or $1.09 per diluted share in 2000. The decrease in
consolidated revenues was a result of lower systems and service revenue from
both the Company's Blackbird Platform products and prepaid phonecard segment as
described below under "Revenue".
The $1.9 million decrease in net income for 2001 in comparison to 2000 is due to
several factors:
o Total gross margin decreased by $1.1 million from the 2000 year to the
2001 year. Gross margin from sales of the Blackbird Platform products
decreased by $1.4 million as revenue declined by $2.7 million and costs
to provide the services were reduced by $1.3 million. Isis gross margin
increased by $0.3 million as revenue declined by $2.9 million and costs
were reduced by $3.2 million.
o Operating expenses increased $0.1 million due to $0.4 million of
increased research and development spending for the Company's
Neumobility product line, partially offset by $0.1 million reduced
sales and marketing and $0.2 million reduced general and administrative
spending.
o Other income decreased $0.7 million as the Company recognized a
one-time net arbitration settlement (excluding interest) of
approximately $0.9 million during 2001 related to the Blackbird
Platform products, compared to a one-time net payment from settlement
of litigation in the amount of approximately $1.5 million during 2000
related to Isis. Additionally, there was approximately $0.1 million in
asset sales in 2000.
Revenue
Prepaid phonecard revenue decreased 16% to $15,148,000 in 2001, from $18,033,000
in 2000. The decrease is due to reduced demand for the Company's current product
offerings, lower headcount in Isis and the closure of the Company's New York and
Chicago offices during 2001.
Service and systems revenue decreased 34% to $5,268,000 in 2001 from $7,940,000
in 2000. All of the 2001 and 2000 service revenue was derived from Blackbird
Platform products. There was no systems revenue in 2001, a decrease from
$708,000 recognized in 2000 when the Company recognized revenue from certain
systems upgrades. The service revenue decrease is due to fewer cell sites under
contract during 2001 as compared to 2000.
Costs and expenses
Cost of phonecards, services and systems decreased by $4,433,000 to $16,099,000
in 2001 from $20,532,000 in 2000. As a percent of total revenue, the costs were
79% for both the 2001 and 2000 periods. Blackbird gross margins were 76% and 67%
for 2001 and 2000, respectively. Isis gross margins were 2% and 0% for 2001 and
2000, respectively. Isis recorded approximately $0.4 million in inventory
reserves in cost of sales during 2001, and approximately $1.4 million during
2000, including approximately $1.3 million related to the bankruptcies of three
of its suppliers.
Sales and marketing expenses decreased 10% to $1,241,000 in 2001 from $1,373,000
in 2000. As a percent of total revenue, the costs were 6% and 5% for 2001 and
2000, respectively. The decrease in sales and marketing expenses is attributable
to headcount reductions and office closures for Isis in 2001 compared to 2000
and a decrease in sales and marketing expenditures for the Blackbird Platform
products, offset by increased spending for Neumobility products.
22
General and administrative expenses decreased 7% to $1,917,000 in 2001 from
$2,063,000 in 2000, primarily due to headcount and overhead reductions as
compared to the prior year.
Research and development costs increased 24% to $1,841,000 in 2001 from
$1,480,000 in 2000. The increase was attributable to increased spending on new
product development in the geo-location application technology area.
Other Income, net
Net other income decreased to $974,000 in 2001 from $1,669,000 in 2000. The 2001
period included a net arbitration settlement (excluding interest) of
approximately $900,000 related to the Blackbird Platform products. The 2000
period included a net litigation settlement of approximately $1,500,000 related
to the prepaid phonecard business segment. Other income also includes gains or
losses from sales of equipment and other miscellaneous income items.
Interest Income and Expense
Net interest income decreased to $308,000 in 2001 from $416,000 in 2000. This
decrease is attributable to lower interest rates earned on invested cash
balances in the current year compared to the prior year, which included interest
earned on a note with KSI, Inc. that was outstanding during the prior year,
offset by pre-award interest received on an arbitration settlement in 2001.
Income Tax Benefit (Provision)
The Company recognized a tax benefit of $11,000 in 2001 primarily attributable
to refunds of federal alternative minimum taxes, net of state income taxes, as
compared to a tax expense of $58,000 in 2000, which included federal alternative
minimum taxes and state income taxes.
Liquidity and Capital Resources
The Company's capital requirements have historically consisted primarily of
funding hardware and software research and 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. The Company's working capital decreased to
$3.3 million at December 31, 2002 from $6.5 million at December 31, 2001.
Net Cash used in operating activities amounted to $3.0 million in 2002, compared
to net cash provided by operating activities of $1.9 million in 2001 and $1.1
million in 2000. Over the past few years operating cash flow has been impacted
by the contractual timing of customer payments related to Blackbird sales
agreements. Operating cash flow for 2002 was positively impacted by decreases in
inventories, offset by the Company's $5.5 million net loss and decreases in
liabilities. Operating cash flow for 2001 was positively impacted by the
Company's $0.6 million in net income and by decreases in receivables,
inventories, prepaid assets and an increase in payables, offset by decreases in
payroll-related liabilities and deferred revenue. Operating cash flow for the
comparable 2000 period was positively impacted by the Company's $2.6 million in
net income, non-cash expenses and balance sheet changes.
Net cash used in investing activities totaled $8,000, $55,000 and $1,431,000 in
2002, 2001 and 2000, respectively. In 2000 the Company made an additional
investment in TruePosition, Inc. of $0.8 million and purchased $0.7 million in
equipment and leasehold improvement capital expenditures. At December 31, 2002,
the Company had no commitments for capital expenditures.
Net cash provided by financing activities resulting from the exercise of stock
options was $43,000 during 2000 and $0 in 2002 and 2001.
23
Off-Balance Sheet Arrangements, Aggregate Contractual Obligations, Certain
Trading Activities and Transactions with Related and Certain Other Parties
The Company has no disclosed or undisclosed off-balance sheet arrangements. The
Company has future operating lease commitments of $0.3 million due in 2003
relating primarily to office leases. The Company has no purchase obligations,
long-term debt or liabilities, capital lease obligations, operating leases or
other long-term liabilities. The Company has not engaged in any trading
activities involving non-exchange traded commodity contracts. The Company has no
material transactions with related parties or other parties able to negotiate
terms that would be more favorable than those available to clearly independent
third parties.
Operating Trends
The Company lost $5.5 million in the year ended December 31, 2002, compared to
earnings of $0.6 million and $2.6 million for the years ended December 31, 2001
and December 31, 2000, respectively. As of December 31, 2002, the Company had an
accumulated deficit of $26.6 million, which primarily accumulated during the
three years ended December 31, 1998. In 2002, revenue from prepaid phonecards
represented all of the Company's revenue. In 2001, revenue from prepaid
phonecards represented 74% of total revenue, and revenue from Blackbird Platform
Products represented 26% of the Company's total revenue.
The Company's Blackbird customer contracts were not renewed for 2002, and the
Company does not anticipate any revenue from any Blackbird products after
December 31, 2001. Further, on November 9, 2002, CTS ceased development efforts
of its Neumobility division, and on December 11, 2002 had committed to a plan to
wind down the operations of Isis. As a result, as of December 31, 2002 CTS has
no business other than to complete the wind-down of the operations of Isis and
anticipates this will be completed during 2003. Management has no plan to
liquidate the Company and distribute the remaining assets to stockholders.
During 2002 and 2003, management has been and will be evaluating alternative
businesses and strategic acquisitions. There is no assurance that such
alternative businesses and strategic acquisitions can be identified before CTS
spends all of its remaining cash balances, that CTS will be able to raise money
at acceptable terms, if at all, to fund the acquisitions and/or the operating
activities of the businesses it may acquire, and that the acquired businesses
will represent viable business strategies and/or will be consistent with the
expectations and risk profiles of CTS' stockholders.
Management expects that during most or all of 2003 the Company will incur costs
of approximately $1.2 million, primarily related to remaining non-cancelable
office leases, employee compensation, costs of maintaining the business as a
public entity, and insurance. The Company is not expected to have any
significant revenues or operations after the wind-down of Isis is complete.
Accordingly, subject to a potential acquisition or other investment, management
believes that its cash balances as of December 31, 2002 of approximately $3.3
million are sufficient to fund its current cash flow requirements through at
least the next twelve months.
There can be no assurance that the Company's operations will be profitable on a
quarterly basis in the future or that past revenue levels can be achieved,
sustained or enhanced. Past and existing revenue levels should not be considered
indicative of future operating results. Non-recurring, other income items
favorably impacted results for calendar years 2000 and 2001. The Company does
not anticipate any such items will occur in future periods. The Company will use
its cash and cash flow to cover operating expenses for general and
administrative activities; potential acquisitions that may arise; and for other
general corporate purposes.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company believes that all such risks are immaterial.
24
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by this item are
included in Part IV as indexed at Item 15(a)(1) and (a)(2).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Identification of Directors and Executive Officers
The name, age, position with the Company and other information with respect to
each of its directors and executive officers is as set forth below.
Year First Term of
Name Age Position with Company Elected Office
- --------------------- --- ----------------------------------------- --------- ------
Stephen Katz 59 Chairman of the Board of Directors, Chief Executive Officer 1988 2003
and Acting President
Lawrence Schoenberg 70 Director 1996 2005
Joshua J. Angel 66 Director 2001 2004
Henry B. Ellis 53 Director 2001 2004
Bruce R. York 48 Vice President, Chief Financial Officer and Secretary -- --
Business Experience
Stephen Katz, Chairman of the Board of Directors, was Acting Chief
Executive Officer and Acting President from November 1992 until February 1994,
at which time he became Chief Executive Officer. Mr. Katz was re-appointed as
Acting President in September 1998. Mr. Katz has been Chairman of the Board and
a director of the Company since its inception and a member of the Management
Committee of the predecessor partnership during the entire period of its
existence. From September 1984 until September 1995, Mr. Katz was Chairman of
the Board, Chief Executive Officer and until September 1993, President of
Nationwide Cellular Service, Inc., which was the Company's majority stockholder
until May 1992 and its largest stockholder, owning 34% of its outstanding
shares, until September 1995. At that time such shares were distributed to
Nationwide's stockholders, immediately prior to Nationwide's merger with MCI
Communications Corp. In May 1996, Mr. Katz was appointed Vice-Chairman of the
Board and Chief Executive Officer of Global Payment Technologies, Inc. (formerly
Coin Bill Validator, Inc.) whose business is currency validation. Mr. Katz
served as Chief Executive Officer of Global Payment Technologies, Inc. from
September 1996 through March 2003 and as Chairman of the Board since September
1996.
Lawrence Schoenberg has been a director in September 1996. Mr.
Schoenberg also serves as Director of Government Technology Services, Inc.,
Merisel, Inc., and Sunguard Data Services, Inc. Former directorships include
Systems Center, Inc. (which was sold to Sterling Software, Inc.), SoftSwitch,
Inc. (which was sold to Lotus/IBM Corp.), Forecross Corporation, Image Business
Systems, Inc., and Penn America Group, Inc. Mr. Schoenberg founded AGS
Computers, Inc. in 1967 and served as Chief Executive Officer until 1991. The
company was sold to NYNEX in 1988. The microcomputer segment subsequently became
a part of Merisel, Inc.
Joshua J. Angel has been a director of the Company since June 2001. Mr.
Angel is Founder and Senior Managing Shareholder of Angel & Frankel, P.C., a New
York based law firm specializing in commercial insolvency and creditors' rights.
Mr. Angel serves as a director of Dynacore Holdings Corporation. Mr. Angel has a
B.S. from N.Y.U. and an L.L.B. from Columbia University.
Henry B. Ellis has been a director of the Company since February 2001.
Since 1992 Mr. Ellis has been President and Chief Executive Officer of Bassett
California Company, a family-owned real estate holding company
25
located in El Paso, Texas. From June 1992 to February 1994 Mr. Ellis served as
Chairman of the Board and Chief Executive Officer of Grayson County State Bank,
located in Sherman, Texas. Since 1992 Mr. Ellis has served as a member of the
Board of Directors of Bluebonnet Savings Bank, a savings and loan institution
located in Dallas Texas. Mr. Ellis is also a director of Global Payment
Technologies, Inc.
Bruce R. York joined the Company in April 1999 as Vice President and
Chief Financial Officer. Mr. York has also served as Secretary since August
2000. Prior to joining the Company, Mr. York was the Director of Finance of Cell
Therapeutics, Inc., a biopharmaceutical company, from February 1998 to February
1999. From May 1987 to January 1998, Mr. York held various positions with Physio
Control International Corporation, a manufacturer of external defibrillators, in
Seattle and London, including Director of Business Planning, Director of Finance
- - Europe, Director of Finance and Corporate Controller, and Finance Manager.
From September 1978 to April 1987, Mr. York held several positions with Price
Waterhouse in Seattle and New York, including Senior Tax Manager. Mr. York is a
C.P.A. and has an A.B. and an M.B.A. from Dartmouth College.
The Company's Board of Directors is divided into three classes. The Board is
composed of two Class I directors, Mr. Angel and Mr. Ellis, one Class II
director, Mr. Schoenberg, and one Class III director, Mr. Katz. The terms of the
Class I, Class II and Class III directors expire on the dates of the 2004, 2005
and 2003 annual meetings, respectively. At each annual meeting, successors to
the class of directors whose term expires at that annual meeting are elected for
a three-year term. Officers are elected annually at the discretion of the Board
of Directors and serve at the discretion of the Board.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
Company's definitive proxy statement relating to its 2003 Annual Meeting of
Stockholders under the caption "Executive Compensation and Related Information."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
Company's definitive proxy statement relating to its 2003 Annual Meeting of
Stockholders under the caption "Security Ownership."
Equity Compensation Plan Information
The following table provides information about the Company's equity compensation
plans as of December 31, 2002.
Plan Category A B C
Number of securities to Weighted average exercise Number of securities remaining
be issued upon exercise price of outstanding options, available for future issuance under
of outstanding options, warrants and rights securities equity compensation plans (excluding
warrants and rights reflected in column (A) securities reflected in column (A))
Equity compensation plans 240,009 $8.17 148,951
approved by security
holders
Equity compensation plans 35,000 -- 75,000
not approved by security
holders
----------------------- ------------------------------ ------------------------------------
Total 275,009 -- 223,951
On June 6, 2002, the Board adopted the 2002 Stock Incentive Plan and issued
restricted shares to its non-management directors subject to stockholder
approval. This Plan will be submitted for stockholder approval at the 2003
annual meeting.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
Company's definitive proxy statement relating to its 2003 Annual Meeting of
Stockholders under the caption "Certain Relationships and Related Transactions."
26
PART IV
Item 14. Controls and Procedures
Within the 90 days prior to the filing of this report, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of disclosure controls and procedures. Based
upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that such disclosure controls and procedures were effective in
alerting them on a timely basis to material information relating to the Company
required to be included in the Company's periodic filings under the Exchange
Act.
There have been no significant changes in the Company's internal controls, or in
factors that could significantly affect internal controls, subsequent to the
date of the evaluation.
Item 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) 1. Financial Statements:
The following financial statements of Cellular Technical Services Company, Inc.
are included as required to be filed by Item 8.
Report of Ernst & Young LLP, Independent Auditors............................................................. 29
Consolidated Balance Sheets at December 31, 2002 and 2001..................................................... 30
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000.................... 31
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000.......... 32
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000.................... 33
Notes to Consolidated Financial Statements.................................................................... 34
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts............................................................... 48
All other schedules have been omitted because they are inapplicable, not
required, or the information is included in the financial statements or notes
thereto.
3. Exhibits:
3.1 Restated Certificate of Incorporation of the Registrant, as amended (1)
3.2 Amendment to Restated Certificate of Incorporation of the Registrant (5)
3.3 By-Laws of the Registrant (1)
3.4 Amendment I to By-Laws of the Registrant, dated October 28, 1993 (3)
4.1 Specimen Certificate for Common Stock of Registrant (1)
7.1 1991 Qualified Stock Option Plan (as amended as of November 30, 1993) (+)(2)
7.2 Amendment to 1991 Qualified Stock Option Plan dated July 11, 1996 (+)(5)
7.3 1991 Non-Qualified Stock Option Plan (as amended as of November 30, 1993) (+)(2)
7.4 Amendment to 1991 Non-Qualified Stock Option Plan dated July 11, 1996 (+)(5)
7.5 1993 Non-Employee Director Stock Option Plan (+)(3)
7.6 Amendment to 1993 Non-Employee Director Stock Option Plan dated July 11, 1996 (+)(5)
7.7 Amendment to 1993 Non-Employee Director Stock Option Plan dated April 22, 1999 (+)(6)
7.8 1996 Stock Option Plan (+)(4)
7.9 Amendment to 1996 Stock Option Plan dated December 14, 1998 (+)(4)
10.1 Lease Agreement between Registrant and ASA Properties, Inc. dated July 11, 2000 (7)
21.1 Subsidiaries of the Registrant (8)
23.1 Consent of Ernst & Young LLP, independent auditors (8)
99.1 Certification to Section 906 of the Sarbanes-Oxley Act of 2002 (8)
27
- ---------------------
(+) Management contract or compensation plan or arrangement required to be
noted as provided in Item 14(a)(3).
(1) Incorporated by reference to Registration Statement on Form S-1 declared
effective on August 6, 1991 (File No.33-41176).
(2) Incorporated by reference to Registration Statement on Form S-8 filed on
March 7, 1994 (File No. 33-76128).
(3) Incorporated by reference to Annual Report on Form 10-K filed on March 30,
1994 for the year ended December 31, 1993 (File No. 0-19437).
(4) Incorporated by reference to Quarterly Report on Form 10-Q filed on August
8, 1995 for the quarter ended June 30, 1995 (File No. 0-19437).
(5) Incorporated by reference to Annual Report on Form 10-K filed on March 30,
1999 for the year ended December 31, 1998 (File No. 0-19437).
(6) Incorporated by reference to Annual Report on Form 10-K filed on March 29,
2000 for the year ended December 31, 1999 (File No. 0-19437).
(7) Incorporated by reference to Annual Report on Form 10-K filed on March 29,
2001 for the year ended December 31, 2000 (File No. 0-19437).
(8) Filed herewith.
(b) Reports on Form 8-K
The following Form 8Ks were filed during the fourth quarter of 2002 or
thereafter through the date of this report:
i. The Company filed a Current Report on Form 8-K, dated November 8, 2002, and
under Item 5 of such Report, announced its third quarter financial results
and announced that it would cease development efforts related to its
Neumobility LBS platform and applications division. The press release was
attached as exhibit 99.1 to such Report. No financial statements were
included in such Report.
ii. The Company filed a Current Report of Form 8-K, dated January 7, 2003, and
under Item 2 of such Report, announced the transfer of certain assets of
its Isis Tele-Communications, Inc., subsidiary to GTS Prepaid, Inc. The
agreement between the Company and GTS Prepaid, Inc. was attached as exhibit
10.1 to such Report. Pro forma financial statements were included under
Item 7 of such Report.
28
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cellular Technical Services Company, Inc.
We have audited the accompanying consolidated balance sheets of Cellular
Technical Services Company, Inc. as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2002. Our
audits also included the consolidated financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Cellular Technical Services Company, Inc. at December 31, 2002 and 2001, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002, in conformity with auditing
standards generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note B to the financial statements, in 2002 the Company changed
its method of accounting for goodwill and other intangible assets in connection
with the adoption of Statement of Financial Accounting Standards No. 142.
ERNST & YOUNG LLP
Seattle, Washington
February 14, 2003
29
CELLULAR TECHNICAL SERVICES COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In 000's, except per share amounts)
December 31,
------------------------------
2002 2001
-------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,315 $ 6,353
Accounts receivable, net of reserves of $233 in 2002 and $259 in 2001 525 670
Employee receivable, net of reserves of $0 in 2002 and $13 in 2001 7 16
Inventories 95 531
Prepaid expenses, deposits and other current assets 51 64
-------- --------
Total Current Assets 3,993 7,634
PROPERTY AND EQUIPMENT, net 151 477
LONG TERM DEPOSIT -- 25
GOODWILL -- 100
LONG TERM INVESTMENT, net of valuation adjustment of $1,754 -- 1,754
in 2002
-------- --------
TOTAL ASSETS $ 4,144 $ 9,990
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 644 $ 847
Payroll-related liabilities 68 180
Customers' deposits and deferred revenue 29 84
-------- --------
Total Current Liabilities 741 1,111
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value per share, 5,000 shares authorized, none
issued and outstanding
Common Stock, $.001 par value per share, 30,000 shares authorized,
2,292 shares issued and outstanding in 2002 and 2001 29,999 29,999
Accumulated deficit (26,596) (21,120)
-------- --------
Total Stockholders' Equity 3,403 8,879
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,144 $ 9,990
======== ========
The accompanying footnotes are an integral part of these consolidated financial
statements.
30
CELLULAR TECHNICAL SERVICES COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000's, except per share amounts)
Year Ended December 31,
-------------------------------------------------
2002 2001 2000
--------------- ---------------- --------------
REVENUES
Phonecards $ 11,771 $ 15,148 $ 18,033
Services -- 5,268 7,232
Systems -- -- 708
--------------- ---------------- --------------
Total Revenues 11,771 20,416 25,973
COSTS AND EXPENSES
Cost of phonecards 11,551 14,812 17,975
Cost of services -- 1,287 2,545
Cost of systems -- -- 12
Sales and marketing 1,052 1,241 1,373
General and administrative 1,351 1,917 2,063
Research and development 1,522 1,841 1,480
--------------- ---------------- --------------
Total Costs and Expenses 15,476 21,098 25,448
--------------- ---------------- --------------
INCOME (LOSS) FROM OPERATIONS (3,705) (682) 525
OTHER INCOME (EXPENSE), net (1,754) 974 1,669
INTEREST INCOME 77 308 416
--------------- ---------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE (5,382) 600 2,610
INCOME TAX BENEFIT (PROVISION) 6 11 (58)
--------------- ---------------- --------------
INCOME (LOSS) BEFORE THE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (5,376) 611 2,552
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (100) -- --
--------------- ---------------- --------------
NET INCOME (LOSS) $ (5,476) $ 611 $ 2,552
=============== ================ ==============
BASIC AND DILUTED SHARE DATA:
Basic
Income (loss) before the effect of a change in accounting principle $ (2.35) $ .27 $ 1.12
Cumulative effect of a change in accounting principle (0.04) -- --
--------------- ---------------- --------------
EARNINGS (LOSS) PER SHARE $ (2.39) $ .27 $ 1.12
=============== ================ ==============
Diluted
Income (loss) before the effect of a change in accounting principle $ (2.35) $ .27 $ 1.09
Cumulative effect of a change in accounting principle (0.04) -- --
--------------- ---------------- --------------
EARNINGS (LOSS) PER SHARE $ (2.39) $ .27 $ 1.09
=============== ================ ==============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 2,292 2,292 2,287
Diluted 2,292 2,302 2,339
The accompanying footnotes are an integral part of these consolidated financial
statements.
31
CELLULAR TECHNICAL SERVICES COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In 000's)
Common Stock Additional
--------------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
---------------- -------------- ----------------- ------------------- --------------
Balance, January 1, 2000 2,282 $ 23 $ 29,933 $ (24,283) $ 5,673
Exercise of stock options 10 -- 43 -- 43
Net income -- -- -- 2,552 2,552
---------------- -------------- ----------------- ------------------- --------------
Balance, December 31, 2000 2,292 $ 23 $ 29,976 $ (21,731) $ 8,268
Net income -- -- -- 611 611
---------------- -------------- ----------------- ------------------- --------------
Balance, December 31, 2001 2,292 $ 23 $ 29,976 $ (21,120) $ 8,879
Net loss -- -- -- (5,476) (5,476)
---------------- -------------- ----------------- ------------------- --------------
Balance, December 31, 2002 2,292 $ 23 $ 29,976 $ (26,596) $ 3,403
================ ============== ================= =================== ==============
The accompanying footnotes are an integral part of these consolidated financial
statements.
32
CELLULAR TECHNICAL SERVICES COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000's)
Year Ended December 31,
--------------------------------------------
2002 2001 2000
--------------- ------------- -------------
OPERATING ACTIVITIES
Net income (loss) $ (5,476) $ 611 $ 2,552
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization of property and equipment 237 544 516
Amortization of software development costs -- -- 178
Amortization or write-down of goodwill 100 30 --
Write-down of long-term investment 1,754 -- --
Loss (gain) on disposal of assets 97 (25) (36)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, net 145 123 1,854
Decrease (increase) in employee receivable, net 9 44 (60)
Decrease (increase) in inventories 436 565 (504)
Decrease (increase) in prepaid expenses, deposits and other current
assets 13 407 (347)
Decrease (increase) in long term deposit 25 (25) --
Increase (decrease) in accounts payable and accrued liabilities (203) 297 (402)
Increase (decrease) in payroll-related liabilities (112) (381) 36
Decrease in deferred revenue and customers' deposits (55) (311) (2,657)
--------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (3,030) 1,879 1,130
INVESTING ACTIVITIES
Purchase of property and equipment (11) (72) (684)
Proceeds from sale of assets 3 39 115
Long-term investment -- 4 (758)
Cash paid for the acquisition of New England Telecom -- (26) (104)
--------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (8) (55) (1,431)
NET CASH PROVIDED BY FINANCING ACTIVITIES (Stock option exercises)
-- -- 43
--------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,038) 1,824 (258)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,353 4,529 4,787
--------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,315 $ 6,353 $ 4,529
=============== ============= =============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ -- $ -- $ --
=============== ============= =============
Income taxes $ -- $ 19 $ 45
=============== ============= =============
Supplemental schedule of non-cash investing activities
Conversion of note receivable to common stock investment $ -- $ -- $ 1,000
=============== ============= =============
- -----------------------------------------------------------------------------------------------------------------------------
The accompanying footnotes are an integral part of these consolidated financial
statements.
33
CELLULAR TECHNICAL SERVICES COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION AND LIQUIDITY:
Until December 11, 2002 Cellular Technical Services Company, Inc. ("CTS" or the
"Company") through its majority-owned subsidiary, Isis Tele-Communications, Inc.
("Isis"), operated as a distributor and a reseller of prepaid long distance and
wireless products, primarily in Boston and Los Angeles metropolitan areas. In
addition, until November 9, 2002, CTS, through its Neumobility division, was
engaged in the development of geo-location wireless software applications.
Neumobility was in the development stage throughout all years presented and had
no revenue or customers. Through December 31, 2001, CTS was also involved in
design, development, marketing, installation and support of integrated
information processing and information management systems for the domestic
wireless communications industry. On November 9, 2002, CTS ceased development
efforts of Neumobility, and on December 11, 2002 had adopted a plan to wind down
the operations of Isis and sell the related net assets.
As a result, as of December 31, 2002 CTS has no current business other than to
complete the wind down of the operations of Isis. Management anticipates that
all remaining assets of Isis will be realized, and liabilities settled, by
approximately March 31, 2003 (see Note N). Management currently has no plan to
liquidate the Company and distribute the remaining assets, after settling the
liabilities, to stockholders. During 2002 and 2003, management has been and will
be evaluating alternative businesses and acquisitions. There is no assurance
that such alternative businesses and acquisitions can be accomplished before CTS
spends all of its remaining cash balances, that CTS will be able to raise money
at acceptable terms, if at all, to fund the acquisitions and/or the operating
activities of the businesses it may acquire, and that the acquired businesses
will represent viable business strategies and/or will be consistent with the
expectations and risk profiles of CTS' stockholders.
Management expects that during 2003 the Company will incur costs of
approximately $1.2 million, primarily related to remaining non-cancelable office
leases, employee compensation, costs of maintaining the business as a public
entity, and insurance. The Company does not expect to have any current source of
revenues and has de minimis operations. Accordingly, management believes that
its cash balances as of December 31, 2002 of approximately $3.3 million are
sufficient to fund its current cash flow requirements through at least the next
twelve months.
Based on management plans, these financial statements have been prepared under
the "going concern" assumption which presumes that the Company will continue its
existence.
Nasdaq requires a minimum $1.00 bid price for continued listing on the Nasdaq
SmallCap Market System. On November 1, 2002 the Company's closing stock price
was $0.71 and the Company received a notice from Nasdaq indicating that because
the Company's stock price had not traded at over $1.00 for 30 days, Nasdaq will
have the right to delist its stock if the Company fails to increase its stock
price to at least $1.00 for 10 consecutive trading days before April 30, 2003.
If a determination is made that its stock be delisted, the Company would have
the right to request a hearing to appeal this determination. There is no
assurance that the Company would prevail in such a hearing. If the Company's
stock were delisted, the delisting would most likely have a material adverse
effect on the price of the Company's common stock, would adversely affect the
liquidity of the shares held by its shareholders, and could severely restrict
any ability the Company may have to raise additional capital.
Unless the context otherwise requires, all references to the "Company" herein
include Cellular Technical Services Company, Inc. and any entity over which it
has control.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
34
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All inter-company accounts and transactions have been
eliminated in consolidation.
Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. The Company has used estimates in determining the carrying value of
its long term investment, property and equipment, reserves for inventories and
uncollectible accounts receivable, deferred revenues, and certain other
provisions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
Fair Values of Financial Instruments
At December 31, 2002, the Company has the following financial instruments: cash
and cash equivalents, accounts receivable, long-term stock investment, accounts
payable and accrued liabilities. The carrying value of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximates their fair value based on the liquidity of these financial
instruments or based on their short-term nature. The estimated fair value of the
stock investment was determined based on a review by members of senior
management of qualitative and quantitative factors, including periodic financial
statements of the investee and an appraisal performed by an independent
appraiser, and is approximately equal to its carrying value after an impairment
write-down in 2002.
Diversification of Credit Risk
The Company is subject to concentrations of credit risk primarily from cash
investments and accounts receivable. Credit risk from cash investments is
managed by diversification of cash investments among institutions and by the
purchase of investment-grade commercial paper securities. The estimated fair
values of the securities approximate cost. Credit risk associated with trade
receivables is subject to ongoing credit evaluations. The Company does not
typically require collateral for receivables. Reserves for potential losses, if
any, are maintained where appropriate.
Inventories
Phonecard inventories are stated at the lower of cost or market value, with cost
determined on a first-in, first-out basis. The Company monitors inventory for
obsolescence and considers factors such as turnover, technical obsolescence and
pricing. Reserves for slow-moving and obsolete inventory are maintained where
appropriate.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost,
less accumulated depreciation and amortization. Depreciation and amortization
commences at the time assets are placed into service and is computed using the
straight-line method over the shorter of estimated useful lives of the assets of
two to five years or terms of the associated leases. The Company capitalizes
expenditures that significantly increase the life of the related assets, while
maintenance and repairs are charged to operations. Gain or loss is reflected in
results of operations upon the retirement or sale of assets.
The Company reviews property and equipment held for use for impairment whenever
events or changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. These assets are assessed
35
for impairment based on estimated undiscounted future cash flows from these
assets. If the carrying value of the assets exceeds the estimated future
undiscounted cash flows, a loss is recorded for the excess of the asset's
carrying value over the fair value determined by reference to prices of the
similar assets.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired in business acquisitions. Until January 1, 2002, goodwill was
being amortized over the estimated useful life of four years.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 142 -- Goodwill and Intangible Assets. Under SFAS 142,
goodwill is considered to have an indefinite life and is subject to periodic
tests for impairment rather than amortization. To test goodwill for impairment,
the carrying value of a reporting unit containing goodwill is compared to its
fair value. If the carrying value is higher, loss on impairment is measured as
the difference between the actual carrying amount of goodwill and the implied
amount, determined as if the reporting unit were acquired on the date of the
test. Impairment losses are recognized immediately.
As of January 1, 2002, the date the Company performed the initial impairment
test upon adoption of SFAS 142, it had goodwill with a net book value of
approximately $100,000 related to the acquisition of New England Telecom, Inc.,
in August 2000. For the purposes of testing goodwill for impairment, the Company
used a fair value of Isis based on the forecasted cash flows. As a result of the
test and the measurement process of the impairment loss, the Company determined
that the goodwill had no value. Accordingly, as of January 1, 2002 it recognized
an impairment loss of $100,000. As permitted by SFAS 142, impairment losses
recognized upon the initial application of the standard are presented as the
cumulative effect of an accounting change in the statement of operations. The
following table summarizes the effects of SFAS 142 on net loss had it been
applied retroactively to 2001 and 2000:
(in $000 except per share amounts) Year ended Year ended Year ended
December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- -----------------
Net income (loss): $(5,476) $611 $2,552
Goodwill amortization -- 30 --
--------- -------- --------
Adjusted net income (loss): $(5,476) $641 $2,552
========= ======== ========
Adjusted earnings (loss) per share--basic ($2.39) $0.28 $1.12
--------- -------- --------
Adjusted earnings (loss) per share--diluted ($2.39) $0.28 $1.09
--------- -------- --------
Long-Term Investment
The Company accounts for its investment 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 the declines in fair value of its investment are
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
and appraisal information 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. When the Company
determines the fair value of the investment had an other-than-temporary decline,
an impairment write-down is recorded. (See Note E)
Revenue Recognition
Historically, the Company has generated revenues through three sources: (1)
prepaid phonecard sales, (2) systems revenues, consisting primarily of bundled
hardware and software products, and (3) services revenues,
36
consisting primarily of hardware and software maintenance and related support
services. There were no systems revenues recognized after December 31, 2000,
and no service revenues recognized after December 31, 2001.
Phonecard revenues are recognized upon shipment, net of estimated returns. Costs
of goods sold for phonecards include related shipping and handling costs.
Phonecard revenues are recorded on a gross basis, with costs payable to card
providers included in the costs of the phonecards, in accordance with EITF Issue
No. 99-19, because the Company is the primary obligator in the arrangement,
bears inventory and credit risk, has discretion over pricing, and is involved in
the determination of the products to be marketed.
Systems revenues are recognized when all of the following conditions are met:
(i) persuasive evidence of an arrangement exists; (ii) delivery has occurred
(including satisfaction of contract criteria and that there are no additional
undelivered elements essential to the functionality of the delivered products.
Revenues are deferred for undelivered non-essential elements based on vendor
specific objective evidence of the fair value for all elements of the
arrangement); (iii) the amount is fixed and determinable; and (iv)
collectability is probable.
Service revenues are recognized ratably over the period that maintenance
coverage is provided. Prepaid or allocated maintenance and services are recorded
as deferred revenues.
Advertising and Marketing Expense
All costs related to marketing and advertising of the Company's products are
expensed in the periods incurred. Advertising expense was approximately $38,000,
$133,000, and $23,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
Research and Development Costs
Research and development expenses consist principally of payroll and related
expenses for design and development of the Company's technologies. Research and
development costs are expensed as incurred.
Segment Reporting
The Company's operations have consisted of two segments, (i) telecom
hardware/software integrated information processing and information management
systems for the wireless communications industry, including anti-fraud and
geo-location wireless applications, and (ii) phone-card distribution.
Income Taxes
The Company follows the liability method of accounting for income taxes whereby
deferred tax assets and liabilities are determined based on differences between
financial reporting basis and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse. The Company provides a valuation
allowance for deferred tax assets that cannot be currently recognized due to the
cumulative losses incurred by the Company.
Net Earnings or Loss Per Share
Basic earnings or loss per share is computed by dividing net earnings or loss by
the weighted average number of common shares outstanding for the period. Diluted
earnings or loss per share reflects the potential dilution of securities by
including other common stock equivalents (i.e. stock options) in the weighted
average number of common shares outstanding for a period, if dilutive. In 2002,
common stock equivalents were excluded from the computation as their effect
would have been anti-dilutive.
Other Comprehensive Income
The Company has no items of other comprehensive income or loss.
37
Stock-Based Compensation
As provided for by SFAS No. 123 - Accounting for Stock-Based Compensation, the
Company has chosen to measure stock-based compensation cost under the
intrinsic-value method prescribed under Accounting Principles Board Opinion No.
25 and has adopted only the disclosure provisions of SFAS 123. As the Company
issues options with exercise prices equal to market value on the date of grant,
compensation expense is not recognized. Stock compensation expense for options
granted to non-employees has been determined in accordance with SFAS 123 and
Emerging Issues Task Force ("EITF") Issue No. 96-18 as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. The fair value of options granted to
non-employees is periodically re-measured as the underlying options vest.
The pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS 123, which has been updated by SFAS No. 148 -
Accounting for Stock-Based Compensation - Transition and Disclosure, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of those statements. In that regard, the fair value
for options granted during 2002, 2001 and 2000 was estimated at the date of
grant using a Black-Scholes option-pricing model with the following
weighted-average assumptions for 2002, 2001 and 2000:
2002 2001 2000
-------------- ------------- -------------
Risk-free interest rate 2.1% 4.2% 5.5%
Dividend yield 0.0% 0.0% 0.0%
Volatility factor 1.72 1.61 1.56
Expected life of the options (years) 4.0 5.0 5.0
Fair value of options granted during the year $1.04 $2.65 $7.70
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in 000's, except per share amounts):
2002 2001 2000
------------ ------------ ----------
Net Income (loss) as reported $ (5,476) $ 611 $ 2,552
Add: Stock-based compensation as reported 0 0 0
----------- ---------- ----------
Deduct: Total stock-based compensation expense determined 259 355 342
under fair value method for all awards, net of taxes
----------- ---------- ----------
Net income (loss) - pro forma $ (5,735) $ 256 $ 2,210
=========== ========== ==========
Basic earnings (loss) per share - as reported $ (2.39) $ .27 $ 1.12
Basic earnings (loss) per share - pro forma $ (2.50) $ .11 $ 0.97
Diluted earnings (loss) per share - as reported $ (2.39) $ .27 $ 1.09
Diluted earnings (loss) per share - pro forma $ (2.50) $ .11 $ 0.95
There was no compensation expense related to stock option grants recorded by the
Company during the years 2000, 2001 and 2002.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143 - Accounting for Obligations
Associated with the Retirement of Long-Lived Assets. The provisions of SFAS 143
apply to all entities that incur obligations associated with the retirement of
tangible long-lived assets. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. This accounting
pronouncement is not expected to have a significant impact on the Company's
financial position or results of operations.
38
In April 2002, the FASB issued SFAS No. 145 - Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS 145 rescinds and amends certain previous standards related primarily to
debt and leases. The most substantive amendment requires sale-leaseback
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. The provisions of SFAS 145 related to
the rescission of SFAS 4 are effective for financial statements issued for
fiscal years beginning after May 15, 2002. The provisions of SFAS 145 related to
the rescission of SFAS 13 became effective for transactions occurring after May
15, 2002. All other provisions of SFAS 145 are effective for financial
statements issued on or after May 15, 2002. This accounting pronouncement is not
expected to have a significant impact on the Company's financial position or
results of operations.
In June 2002, the FASB issued SFAS No. 146 - Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3. This SFAS requires that a liability for a cost associated
with an exit or disposal activity be recorded at fair value when the liability
is incurred. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. This accounting pronouncement is not expected
to have a significant impact on the Company's financial position or results of
operations.
Risks and Uncertainties
Management of the Company believes that the risks and uncertainties discussed
below, whether viewed individually or in combination, will not result in a
significant unfavorable impact to the Company. However, there can be no
assurance that any unfavorable outcome of the risks and uncertainties discussed
below will not have a material adverse effect on the Company's financial
position, results of operations or liquidity.
Wind-down of past business segments; Future business plans: The Company has
ceased its development efforts of geo-location wireless software platform and
applications and has committed to a plan to wind down the operations of its Isis
prepaid phonecard business. There can be no assurance that the Company will find
profitable replacement businesses, which could have a material adverse effect on
the Company.
Legal proceedings: From time to time, the Company is involved with or could be
subject to involvement with legal actions and claims which arise in the ordinary
course of business which management believes will be resolved without a material
adverse effect on the Company's business, financial condition or results of
operations.
Reclassifications
Certain reclassifications have been made to the prior year financial statements
to conform to the current period's presentation.
NOTE C - INVENTORIES:
Inventory reflects phonecards sold through the Company's phonecard business.
Included in gross phonecard inventory at December 31, 2002 and 2001 is
approximately $30,000 and $80,000, respectively, of items which have been
transferred to customers and are being accounted for as consignments, and
approximately $49,000 and $143,000, respectively, related to estimated sales
returns. Inventory consists of the following (in 000's):
December 31,
------------------------------
2002 2001
-------------- --------------
Phonecards $ 164 $ 578
Less reserves (69) (47)
-------------- --------------
$ 95 $ 531
============== ==============
As of December 31, 2002, the Company adopted a plan to wind down the operations
of its Isis phone card business and to liquidate the related net assets. As part
of the plan, the Company consigned its remaining
39
inventories as of January 7,2003 to a third party for sales in the ordinary
course of business. Net proceeds from sales to the Company are expected to be
approximately equal to the cost of these inventories. (See also Note N)
NOTE D - PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in 000's):
December 31,
--------------------------------
2002 2001
-------------- ---------------
Computer equipment and software $ 256 $ 1,050
Furniture, fixtures and office equipment 96 367
Leasehold improvements 247 254
-------------- ---------------
599 1,671
Less accumulated depreciation and amortization (448) (1,194)
-------------- ---------------
$ 151 $ 477
============== ===============
During 2002 and 2001 the Company reduced cost and accumulated depreciation
amounts of property and equipment by approximately $983,000 and $2,355,000,
respectively, in connection with the retirement of certain fully depreciated
assets. In connection with the decision to cease the Company's development
efforts of its Neumobility division and the plan to wind down the Isis
operations the Company determined that the related property and equipment was
impaired and certain assets were designated as held for sale. An impairment loss
of approximately $97,000 was recorded in the fourth quarter of 2002. The
carrying value of the assets held for sale was approximately $15,000 at December
31, 2002.
NOTE E -LONG TERM INVESTMENT:
In November 1999, the Company invested in a one-year, $1.0 million 10%
convertible note of KSI, Inc. ("KSI"). The Company also received warrants to
purchase KSI common stock in connection with this investment. All of the
outstanding stock of KSI, Inc. was acquired by TruePosition, Inc. (a subsidiary
of Liberty Media Corporation, "Liberty Media") in August 2000. Prior to the
acquisition, the convertible note was exchanged for KSI common stock. The
Company exercised warrants and purchased additional KSI common stock for
approximately $754,000. The Company's investment in KSI common stock was
exchanged for TruePosition common stock on the date of the acquisition. The
Company accounts for the investment in TruePosition using the cost method. In
December 2002 the Company received certain valuation information from
TruePosition, indicating a range of values for TruePosition. Based upon its
review of available information and communications with Liberty Media, the
Company concluded there had been an other-than-temporary decline in estimated
fair value of its investment, and reduced the recorded carrying value of this
investment from its cost basis of $1,754,000 to zero, representing its best
estimate of the current fair value of the Company's investment in the net equity
of TruePosition. TruePosition's operations have required significant infusions
of cash by Liberty Media to date, and have not generated significant revenues.
The Company's investment in TruePosition common stock has been diluted by these
advances, which have recently been converted to preferred stock. It is possible
that in the future the Company may receive proceeds from sale of this investment
but no such amount can be estimated at this time.
NOTE F - COMMITMENTS AND CONTINGENCIES:
The Company leases office space under non-cancelable operating leases with
expiration dates in 2003. In addition, the Company leases equipment under
various rental agreements with the initial terms of up to one year.
Amounts charged to operations under all lease and rental agreements totaled
approximately $400,000, $400,000 and $400,000 in 2002, 2001 and 2000,
respectively. Future minimum annual lease payments at December 31, 2002 are
$300,000, all of which will be payable in 2003.
See also Note L.
40
NOTE G - EMPLOYEE RETIREMENT SAVINGS PLAN:
The Company has adopted an Employee Retirement Savings Plan covering
substantially all employees who have been employed for at least one month and
meet certain age and eligibility requirements. Each eligible employee may
contribute up to 15% of his or her compensation per year, subject to a maximum
limit imposed by federal tax law, into various funds. Under current plan
provisions, matching contributions are made by the Company equaling two-thirds
of the employee's contribution, subject to a maximum of 6% of compensation
contribution by the employee. Company contributions charged to costs and
expenses totaled approximately $42,000, $43,000 and $0 during 2002, 2001 and
2000, respectively.
NOTE H - OTHER INCOME AND EXPENSE:
During the fourth quarter of 2002 the Company recorded a write-down of its
long-term investment of $1,754,000. During the second quarter of 2001 the
Company received a net arbitration settlement (excluding interest) resulting in
a gain of approximately $0.9 million related to early termination of a contract
by a former customer of its Blackbird product line. During the second quarter of
2000 the Company received a net litigation settlement resulting in a gain of
approximately $1.5 million related to the Isis phonecard business segment.
NOTE I - INCOME TAXES:
At December 31, 2002, the Company had available for federal income tax purposes
net operating loss carryforwards of approximately $51.9 million which begin to
expire in 2007, and research and development tax credits of approximately $1.3
million that begin to expire in 2003. A portion of the net operating loss
carryforward (approximately $28 million) is attributed to the stock option
deduction, the tax effect of which will be credited to additional paid-in
capital when realized. Certain net operating loss carryforwards of the Company
are subject to limitations imposed by Section 382 of the Internal Revenue Code
because there was an ownership change of greater than 50% in the Company during
1991.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows (in 000's):
December 31, December 31,
2002 2001
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 17,700 $ 16,464
Research and development credits 1,251 1,203
AMT credits 53 53
Depreciation on tax returns lower than financial statements, net 135 98
--------- --------
Total deferred tax assets 19,139 17,818
Valuation allowance (19,139) (17,818)
--------- --------
Net deferred tax assets $ -- $ --
========= ========
The Company paid Alternative Minimum Tax (AMT) in 2000 and 1999. This created an
AMT credit of approximately $53,000 to be utilized in future tax periods to the
extent the regular tax liability exceeds the AMT liability. The Company has
provided a valuation allowance of 100% of the net deferred tax asset related to
the operating loss carryforward, tax credits and temporary differences. The net
changes in the valuation allowance for deferred tax assets were approximately
$1.3 million, ($0.2) million and ($1.3) million in 2002, 2001 and 2000,
respectively, and were primarily attributable to the net loss in 2002 and
utilization of net operating loss carryforwards in 2001 and 2000.
41
The reconciliation of income tax computed at the U.S. federal statutory tax rate
to income tax expense is as follows (in 000's):
Year Ended December 31,
----------------------------------
2002 2001 2000
-------- ------- ------
Income tax provision (benefit) at statutory rate of 34% $(1,861) $ 207 $ 874
Utilization of net operating loss carryforwards -- (207) (874)
Losses producing no current tax benefit 1,861 -- --
Alternative minimum tax provision (refunds) -- (32) 38
State income taxes (6) 21 20
------- ------ -----
Income taxes provision (benefit), current $ (6) $ (11) $ 58
======= ====== =====
NOTE J - STOCKHOLDERS' EQUITY:
Stock Options
Pursuant to the Company's 1991 Qualified Stock Option and 1991 Non-Qualified
Stock Option Plans, as amended, the Company was authorized to grant options to
purchase up to (i) 280,000 shares of Common Stock to its officers and key
employees, at a price not less than the fair market value per share of Common
Stock on the date of grant; and (ii) 120,000 shares of Common Stock to its
directors, officers, key employees and others who rendered services to the
Company at such price as fixed by the Compensation and Stock Option Committee.
Options granted under both the 1991 Qualified Plan and 1991 Non-Qualified Plan
generally vest to the respective option holders at the rate of 20% per year
commencing on the first anniversary date of the grant. No new grants may be made
under the 1991 Plans.
The Company's 1993 Non-Employee Director Stock Option Plan allows the Company to
grant options to purchase up to 70,000 shares of Common Stock. Each non-employee
director is to be granted options to purchase: (i) 2,000 shares of Common Stock
upon initial appointment as a director of the Company; and (ii) an additional
1,200 shares, in recurring annual increments, at a price equal to the fair
market value per share of Common Stock on the date of grant. Options under the
Non-Employee Director Plan vest to the respective option holder after one year
and have a term of ten years.
The Company's 1996 Stock Option Plan authorizes the grant of both incentive
("ISO") and non-qualified stock options up to a maximum of 335,000 shares of the
Company's Common Stock to employees (including officers and directors who are
employees) of and consultants to the Company. The exercise price, term and
vesting provision of each option grant is fixed by the Compensation and Stock
Option Committee with the provision that the exercise price of an ISO may not be
less than the fair market value of the Company's Common Stock on the date of
grant, and the term of an ISO may not exceed ten years.
Information with respect to the Company's stock options is as follows (in 000's,
except per share amounts):
Shares Under Option Weighted Ave.
Option Prices Exercise Price
============ ======================= ================
Balance, January 1, 2000 209 $ 1.91 - $ 188.75 $ 34.07
Granted 187 6.56 - 13.75 8.29
Exercised (10) 2.63 - 5.00 4.28
Canceled (85) 2.63 - 178.75 23.78
------------
Balance, December 31, 2000 301 1.91 - 188.75 21.96
Granted 89 2.63 - 5.38 2.83
42
Canceled (51) 2.75 - 109.38 9.01
------------
Balance, December 31, 2001 339 1.91 - 188.75 18.88
Granted 75 0.99 - 2.42 1.13
Canceled (178) 0.99 - 109.38 25.60
------------
Balance, December 31, 2002 236 $ 0.99 - $ 188.75 $ 8.17
============
Exercisable at December 31, 2002 123
============
Available for grant at December 31, 2002 153
============
Common Stock reserved for future issuance 389
============
The following table summarizes information concerning outstanding and
exercisable stock options as of December 31, 2002 (in 000's except per share
amounts):
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Number Contractual Average Number Average
Range of Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------- ------------------------------
$ 0.99 - $ 1.91 36 9.25 $ 1.12 3 $ 1.91
2.06 - 5.38 81 7.94 2.99 45 3.16
8.00 - 8.00 102 7.47 8.00 58 8.00
8.38 - 11.34 11 7.21 10.98 11 10.98
18.75 - 188.75 6 4.30 107.90 6 107.90
--------- --------
$ 0.99 - $188.75 236 7.80 $ 8.17 123 $ 11.72
========= ========
Shares under options that were exercisable at December 31, 2001 and 2000 were
141,050 and 102,225, respectively.
NOTE K - EARNINGS (LOSS) PER SHARE
The calculation of basic and diluted earnings (loss) per share is as follows (in
000's, except per share amounts):
Year Ended December 31,
--------------------------------------------
2002 2001 2000
------------ ---------- ----------
Net income (loss) (A) $ (5,476) $ 611 $ 2,552
========= ======== =========
Weighted average number of shares outstanding (B) 2,292 2,292 2,287
Stock options -- 10 52
--------- -------- ---------
Weighted average number of shares outstanding (C) 2,292 2,302 2,339
========= ======== =========
Earnings (loss) per share:
Basic (A)/(B) $ (2.39) $ 0.27 $ 1.12
========= ======== =========
Diluted (A)/(C) $ (2.39) $ 0.27 $ 1.09
========= ======== =========
Outstanding stock options of 236,409, 329,674 and 249,825 at December 31, 2002,
2001 and 2000, respectively, were excluded from the computation of dilutive
earnings per share because their effect was anti-dilutive.
NOTE L - ACQUISITION OF NEW ENGLAND TELECOM, INC.
On August 10, 2000, the Company announced the acquisition of substantially all
of the assets of New England Telecom, Inc. ("NET") through Isis. The agreement
included the purchase of approximately $135,000 in inventory of prepaid
phonecards, an employment agreement with the principal NET shareholder, and a
two-year earn-out period. The earn-out is calculated on a quarterly basis
whereby the former shareholder can earn up to
43
50% of net profits of the former business, as defined in the agreement, with a
maximum contingent total payout of $1.5 million. The transaction was accounted
for using the purchase method of accounting, and, accordingly, the results of
NET's operations have been included in the Company's consolidated financial
statements from the date of acquisition. The cash purchase price was equal to
the value of the inventory assets purchased. There were no liabilities assumed
in the transaction. The agreement also provided for 20,000 stock options of Isis
to be granted to the former NET shareholder for his employment services with the
Company, with a three-year vesting period. Any additional purchase price
payments made based on net profit during the earn-out period, as defined in the
agreement, have been capitalized as goodwill. Through December 31, 2001, a total
of $130,000 was capitalized. During June 2001, employment of the former
shareholder was terminated for breach of his employment contract. At that time
all options granted to him were cancelled, as they had not yet vested. In
October 2001, the former shareholder filed a claim against the Company alleging,
among other things, that the Company breached the purchase agreement and the
employment contract. The case is currently in the discovery phase and the
Company is therefore unable to assess its likely outcome, however the Company
believes its actions were appropriate and intends to continue to vigorously
defend itself. An unfavorable outcome could have a material adverse effect on
the Company's financial position, results of operations and liquidity.
NOTE M - SEGMENT INFORMATION
The Company has had 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 includes 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
geo-location wireless software applications; and (ii) the Company's prepaid
long-distance phonecard business, which was conducted through Isis. Management
evaluates segment performance based upon segment profit or loss before income
taxes. There were no inter-company sales of products between the segments.
In the first quarter of 2002, the Company recorded an impairment write-down of
$100,000 related to 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 SFAS 142. In the
year ended December 31, 2001 the Company recorded $30,000 of goodwill
amortization associated with its phone card segment. The value of goodwill
recorded for the Company's phone card segment was $100,000 at December 31, 2001
and $0 at December 31, 2002.
During the quarter ended December 31, 2002, the Company recognized impairment
losses of $76,000 related to property and equipment of Neumobility and $21,000
related to property and equipment of Isis. Also during the quarter ended
December 31, 2002 the Company wrote down the value of its long-term investment
in TruePosition by $1,754,000. The investment in TruePosition is included in the
telecom hardware/software segment.
During the quarter ended December 31, 2002, the Company ceased the development
efforts of its Neumobility division and committed to a plan to wind down the
operations of Isis.
Year ended December 31, 2002
-------------------------------------------------- Segments
(In 000's) ----------------------------------------- Consolidated
Telecom HW/SW Phonecards Totals
Revenue from external customers -- $11,771 $11,771
Depreciation and amortization expense $211 26 237
Pretax segment loss (4,390) (992) (5,382)
Income tax expense (benefit) (9) 3 (6)
Expenditures for segment assets 11 -- 11
Segment assets 3,380 764 4,144
44
Year ended December 31, 2001
--------------------------------------------------
(In 000's) ----------------------------------------- Consolidated
Telecom HW/SW Phonecards Totals
Revenue from external customers $5,268 $15,148 $20,416
Depreciation and amortization expense 519 55 574
Pretax segment profit (loss) 1,966 (1,366) 600
Income tax expense (benefit) (11) -- (11)
Expenditures for segment assets 48 24 72
Segment assets 8,432 1,558 9,990
Year ended December 31, 2000
--------------------------------------------------
(In 000's) ----------------------------------------- Consolidated
Telecom HW/SW Phonecards Totals
Revenue from external customers $7,940 $18,033 $25,973
Depreciation and amortization expense 681 13 694
Pretax segment profit (loss) 2,876 (266) 2,610
Income tax expense 58 -- 58
Expenditures for segment assets 623 61 684
Segment assets 7,707 2,067 9,774
NOTE N - TERMINATION OF NEUMOBILITY DEVELOPMENT AND WIND-DOWN OF OPERATIONS OF
ISIS
During the fourth quarter of 2002 the Company made the decision to cease
development efforts of the Neumobility platform and applications division. This
was due to the uncertainty in both timing and magnitude of future revenue
streams combined with the large continuing investment required to sustain,
market and support the products. As a result of this decision, the Company
recorded an impairment loss on property and equipment of Neumobility of
approximately $76,000, has written off prepaid software maintenance contracts of
approximately $26,000, and has terminated all 13 employees of Neumobility.
Termination benefits were approximately $80,000 and were all paid before
December 31, 2002. Neumobility was a part of the Company's telecom
hardware/software segment. There were no revenues reported from the Neumobility
platform in any of the years 2002, 2001 and 2000. Net earnings (losses) before
tax of the telecom hardware and software segment, including the operations prior
to Neumobility, were a loss of $4.4 million and earnings of $2.0 million and
$2.9 million in 2002, 2001 and 2000, respectively.
On December 11, 2002, the Company and GTS Prepaid, Inc. ("GTS"), entered into an
agreement whereby the Company agreed to (i) transfer to GTS on a consignment
basis a portion of its inventory of pre-paid phone cards and (ii) authorize GTS
to act as its agent to collect certain accounts receivable. The transaction
closed on January 7, 2003. GTS and the Company have agreed that GTS will pay to
the Company an agreed upon sales price for each of the prepaid phone cards it
has sold and all accounts receivable collected in installments. The aggregate
proceeds from the sales of inventory that the Company will receive if all the
prepaid phone cards are sold is $46,193. The total amount that the Company will
receive if all the accounts receivable assigned for collection to GTS are
collected is $512,797. To date, GTS owes the Company $461,547. GTS will keep all
amounts it receives from the sale of the prepaid phone cards that exceeds the
agreed upon sales price for such cards. Subsequent to December 31, 2002, the
Company and GTS have decided not to extend the agreement with respect to
remaining inventory and uncollected accounts receivable. The Company does not
intend to produce or sell prepaid phone cards in the future. As a result of this
decision, in December 2002 the Company has recorded an impairment loss on
property and equipment of Isis of approximately $21,000 and has terminated all 5
employees of Isis. Termination benefits were insignificant and were all paid
before December 31, 2002. Revenues of Isis were approximately $11.8 million,
$15.1 million and $18.0 million in 2002, 2001 and 2000, respectively. Net losses
before tax of Isis were $0.9 million, $1.4 million and $0.3 million in 2002,
2001 and 2000, respectively.
NOTE O - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth the Company's unaudited quarterly financial
information for the years ended December 31, 2002 and 2001 (in thousands, except
per share date):
45
2002 March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Net sales $2,358 $3,331 $3,728 $2,354
Gross profit (loss) 87 (15) 83 65
(Loss) before the effect of a change
in accounting principle (883) (998) (783) (2,712)
Net (loss) (983) (998) (783) (2,712)
Net (loss) per share:
Basic $(0.43) $(0.44) $(0.34) $(1.18)
Diluted $(0.43) $(0.44) $(0.34) $(1.18)
2001 March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Net sales $5,561 $5,568 $5,370 $3,917
Gross profit 1,207 828 1,199 1,083
Net income (loss) (50) 504 81 76
Earnings (loss) per share:
Basic $(0.02) $0.22 $0.04 $0.03
Diluted $(0.02) $0.22 $0.04 $0.03
-------------------------------------- -------------- --------------- ---------------- ------------------
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ Stephen Katz
----------------------------------------
Stephen Katz, Chairman of the Board
of Directors and Chief Executive Officer
March 28, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Stephen Katz /s/ Henry B. Ellis
- ----------------------------------------------------- ----------------------------------------------------
Stephen Katz, Chairman of the Board of Directors and Chief Henry B. Ellis, Director
Executive Officer March 28, 2003
(Principal Executive Officer)
March 28, 2003
/s/ Bruce R. York /s/ Joshua J. Angel
- ----------------------------------------------------- -------------------
Bruce R. York Joshua J. Angel, Director
Vice President, Chief Financial Officer and Secretary March 28, 2003
(Principal Financial and Accounting Officer)
March 28, 2003
/s/ Lawrence Schoenberg
- ----------------------------------------------------
Lawrence Schoenberg, Director
March 28, 2003
47
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
In connection with the filing of the Annual Report on Form 10-K for the Year
Ended December 31, 2002 (the "Report") by Cellular Technical Services Company,
Inc. ("Registrant"), I, Bruce R. York, certify that:
1. I have reviewed this annual report on Form 10-K of Cellular Technical
Services Company, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 15 and 15d - 15) for the registrant
and we have: a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is
being prepared; b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to
the filing date of this report (the "Evaluation Date"); and c)
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function): a) all significant deficiencies in
the design or operation of internal controls which could adversely
affect the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and b) any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
By: /s/ Bruce R. York
-------------------
Bruce R. York
Vice President and Chief Financial Officer
March 28, 2003
48
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
In connection with the filing of the Annual Report on Form 10-K for the Year
Ended December 31, 2002 (the "Report") by Cellular Technical Services Company,
Inc. ("Registrant"), I, Stephen Katz, certify that:
1. I have reviewed this annual report on Form 10-K of Cellular Technical
Services Company, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 15 and 15d - 15) for the registrant
and we have: a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is
being prepared; b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to
the filing date of this report (the "Evaluation Date"); and c)
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function): a) all significant deficiencies in
the design or operation of internal controls which could adversely
affect the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and b) any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
By: /s/ Stephen Katz
------------------
Stephen Katz
Chief Executive Officer
March 28, 2003
49
CELLULAR TECHNICAL SERVICES COMPANY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In 000's)
Balance at Balance at
Beginning of End of
Period Additions Deductions Period
------------- --------------- -------------- -------------
INVENTORY RESERVES
Year ended December 31, 2000 $ 997 $ 426 $ 1,396 $ 27
============= =============== ============== =============
Year ended December 31, 2001 $ 27 $ 387 $ 367 $ 47
============= =============== ============== =============
Year ended December 31, 2002 $ 47 $ 203 $ 181 $ 69
============= =============== ============== =============
SALES AND RECEIVABLE ALLOWANCES
Year ended December 31, 2000 $ 5 $ 618 $ 205 $ 418
============= =============== ============== =============
Year ended December 31, 2001 $ 418 $ 173 $ 332 $ 259
============= =============== ============== =============
Year ended December 31, 2002 $ 259 $ 95 $ 121 $ 233
============= =============== ============== =============
50
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as........................ 'TM'
The registered trademark symbol shall be expressed as............. 'r'