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, 2003
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) 733-8180
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 December 31, 2003, there were 2,449,770 shares of Common Stock, $.001 par
value outstanding. As of December 31, 2003 the aggregate market value of the
Registrant's Common Stock, $.001 par value, held by non-affiliates was
approximately $1.5 million. The aggregate market value of the Company's stock
was calculated using $0.72, the closing price for its Common Stock on
December 31, 2003 as reported on the over-the-counter bulletin board.
Documents incorporated by reference in Part III: The Company's definitive proxy
statement to be filed in connection with the 2004 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
ITEM 9A. CONTROLS AND PROCEDURES.............................................25
PART III......................................................................26
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................26
ITEM 11. EXECUTIVE COMPENSATION..............................................27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................27
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES..............................27
PART IV.......................................................................28
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....28
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 15
years, the Company developed expertise in real-time wireless call processing and
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, CTS
has no current business other than to complete the wind-down of the operations
of Isis. Management currently has no plan to liquidate the Company and
distribute the remaining assets to stockholders. During 2002, 2003 and to date,
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 or seek to acquire, and that any 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 2004 the Company will incur costs of
approximately $0.5 million, primarily related to employee compensation and
severance, 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, 2003 of approximately $2.6 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 2003
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
3
margins and increased competition in this marketplace, the Company decided to
close the Isis business in December 2002. At December 31, 2003, the Company had
nearly completed the process of winding down its Isis operations including
having sold all remaining inventory and collected all non-reserved receivables.
Isis revenue accounted for 100 % of consolidated revenue for 2003 and 2002.
Location-Based Services: TruePosition, Inc. Investment and Neumobility'TM'
Division: The Federal Communications Commission ("FCC") is in the process of
requiring 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 profits. The
Company's investment in TruePosition common stock has been diluted by these
advances, which were converted to preferred stock in late 2002. 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 completing the
wind-down of its Isis segment 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. To
date, the Company has not succeeded in concluding any such future business
partnership and there can be no assurance that the Company will be successful in
doing so during 2004.
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. The Company anticipates that it may only be able to participate in a
limited number of potential business ventures, due primarily to its limited
financing. This lack of diversification should be considered a substantial risk
to the Company.
The Company may seek a business opportunity with one or more 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. A
business opportunity may involve the acquisition of or by, 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 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. The Company 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, the Company 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, it
is likely that the consideration utilized to make any acquisitions will
primarily 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 likely 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.
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 as 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. 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 thereunder, 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, 2003, 2002 and 2001, the Company incurred
research and development expenditures of zero, $1.5 million and $1.8 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
former 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 March 1, 2004, the Company had 2 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, 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, $1.0 million in 2003 and forecasts spending
approximately $0.5 million in 2004 with no revenue. As of December 31, 2003, the
Company had an accumulated deficit of $27.6 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 achieve positive cash
8
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 Over The
Counter bulletin board under the symbol CTSC.OB, 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. During 2002 the market value of the Company's common
shares continued to trade 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. On May 1, 2003 the Company received a notice from Nasdaq
that since the Company had not regained compliance with the minimum $1.00
closing bid price per share requirement as set forth in Marketplace Rule
4310(c)(4), its securities would be delisted from the Nasdaq SmallCap Market at
the opening of business on May 12, 2003. Nasdaq additionally noted that its
Staff may have otherwise determined to delist the Company's shares under
Marketplace Rules 4300 and 4330(a)(3) since the Company was currently in the
process of winding down its previous businesses and had de minimis other
operations. After reviewing its options, the Company's management and directors
determined that the Company would not seek a hearing to appeal this
determination nor seek a reverse stock split of its shares. Effective May 12,
2003, the Company's shares began trading as over the counter securities on the
OTCBB under the symbol CTSC.OB. The delisting of the Company's common stock
could adversely affect the liquidity of the shares held by its stockholders and
could severely restrict any ability the Company may have to raise additional
capital.
PENNY STOCK RULES: The Company's common stock currently trades on the OTCBB. 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;
9
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 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 direct sales efforts. The Company
cannot give assurance that it will be able to expand or enter into new
relationships or that any such 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 as 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. 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 of 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 arising out of 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 new applications of existing 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. 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 inability to hire and retain qualified
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 may
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, 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
11
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 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
12
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 1,000 square feet of general office space in
Seattle, Washington for its corporate offices under a verbal month-to-month
arrangement.
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 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"), for each quarter during the period from June 14, 2002 through
December 31, 2002 and for each quarter during the period from January 1, 2003
through May 9, 2003 the reported high and low sales prices of the Company's
Common Stock on The Nasdaq Stock Market (SmallCap System) ("SCM") and for each
quarter from the period from May 12, 2003 through December 31, 2003 and for the
period from January 1, 2004 through March 19, 2004 the reported high and low
sales prices of the Company's Common Stock on the Over The Counter Bulletin
Board ("OTC") (Symbol: "CTSC.OB").
Sales Price
-------------
High Low
----- -----
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 0.87 0.65
Second Quarter 0.82 0.52
Third Quarter 0.80 0.60
Fourth Quarter 0.84 0.66
2004
First Quarter through
March 19, 2004 0.78 0.66
As of March 19, 2004, 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 3,000. There were no dividends paid or other distributions made by the
Company with respect to its Common Stock during 2003 or 2002 and the Company has
no plans for any such payments in the future.
On June 10, 2003, the Company issued an aggregate of 27,000 shares of its common
stock to Lawrence Schoenberg, 26,000 shares to Joshua Angel, 15,000 shares to
Barry Beil and 90,000 shares to Stephen Katz, directors of the Company, in
consideration of board services provided to the Company. No sales commissions
were paid in connection with these transactions. The shares were issued in
reliance upon the exemption from registration provided by Section 4 (2) of the
Securities Act.
14
Item 6. Selected Consolidated Financial Data (1)
Year Ended December 31,
Statement of Operations Data: (In 000's, except per share amounts)
----------------------------------------------
2003 2002 2001 2000 1999
------ ------- ------- ------- -------
Revenues $ 231 $11,771 $20,146 $25,973 $10,241
Net Income (Loss) (967) (5,476) 611 2,552 2,599
Basic Earnings (Loss) Per Share(2) (0.42) (2.39) 0.27 1.12 1.14
Diluted Earnings (Loss) Per Share(2) (0.42) (2.39) 0.27 1.09 1.13
Weighted Average Shares Outstanding:
Basic 2,292 2,292 2,292 2,287 2,282
Diluted 2,292 2,292 2,302 2,339 2,292
Cash Dividends Declared -- -- -- -- --
December 31,
Balance Sheet Data: (In 000's)
-------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ -------
Cash $2,651 $3,315 $6,353 $4,529 $ 4,787
Working Capital 2,499 3,252 6,523 5,443 3,621
Long Term Investment -- -- 1,754 1,758 1,000
Total Assets 2,681 4,144 9,990 9,774 10,202
Total Stockholders' Equity 2,505 3,403 8,879 8,268 5,673
- ----------
(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, the Company currently has no
business other than to wind-down the operations of Isis which was nearly
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, 2003 of approximately $2.6 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.
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. 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 has maintained 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.
Inventory
The Company recorded its inventories at the lower of cost or market. In
assessing the ultimate realization of inventories, the Company made judgments as
to future demand requirements and compared that with the current or committed
inventory levels. An allowance for obsolete inventory was 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 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
17
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 year ended December 31, 2001, 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 15
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, 2003 CTS has no current business other than to
complete the wind-down of the operations of Isis. Management currently has no
plan to liquidate the Company and distribute the remaining assets to
stockholders. During 2002, 2003 and to date, 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 2004 the Company will incur costs of
approximately $0.5 million, primarily related to employee compensation and
severance, 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, 2003 of approximately $2.6 million are sufficient to fund its
current cash flow requirements through at least the next twelve months.
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
18
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,
2003, the Company had nearly completed the winding down of 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 2003 and 2002, the Company generated revenue through sales of its Isis
pre-paid phonecard products. During 2001, 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
maintained an allowance for sales returns for prepaid phonecards based on
estimated returns in accordance with SFAS 48. Estimated returns, along with
their costs, were 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.
Service revenue was derived primarily from hardware and software maintenance
programs, No Clone Zone roaming fraud prevention service, Blackbird Platform
Monitoring service and related professional services provided in support of the
Company's currently deployed product base. Service revenue was recognized
ratably over the period that the service is provided. Hardware and software
maintenance generally began after system acceptance. Prepaid or allocated
maintenance and services are recorded as deferred revenue. There was no service
revenue in 2003 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
19
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, 2003 compared to year ended December 31, 2002
Overview
Total revenues decreased 98% to $231,000 in 2003 from $11,771,000 in 2002. Net
loss was $967,000 or $0.42 per share, compared to a net loss of $5,476,000 or
$2.39 per share in 2002. The decrease in consolidated revenues was a result of
the wind-down of the Company's prepaid phonecard segment (Isis) as described
below under "Revenue".
The $4.5 million decrease in net loss for 2003 in comparison to 2002 is due to
several factors:
o Total gross margin decreased by $0.2 million from the 2002 year to the
2003 year.
o Operating expenses decreased $2.8 million due to $1.5 million of
reduced research and development expenses, $1.0 million reduced sales
and marketing expenses and $0.2 million reduced general and
administrative expenses as described more fully below.
o Net other income (expense) increased by $1.8 million as the Company
recognized a $1.7 million write-down on a long-term investment in
TruePosition during the 2002 period.
o The Company recognized an expense of $0.1 million as the cumulative
effect of a change in accounting principle in 2002.
Revenue
Prepaid phonecard revenue decreased to $231,000 in 2003, from $11,771,000 in
2002. The decrease is due to the closure of the phonecard business in late 2002.
The sales in 2003 were completed in order to transition previous customers to
new vendors and to sell inventory on hand.
Costs and expenses
Cost of phonecards, services and systems decreased to $182,000 in 2003 from
$11,551,000 in 2002 and was primarily volume-related due to the wind-down of the
Isis business.
Sales and marketing expenses decreased to $9,000 in 2003 from $1,052,000 in
2002. The decrease in sales and marketing expenses is attributable to headcount
reductions for Isis in 2003 compared to 2002 and a decrease in sales and
marketing expenditures for the cessation of the Neumobility development program.
20
General and administrative expenses decreased 18% to $1,109,000 in 2003 from
$1,351,000 in 2002, primarily due to significant headcount and overhead
reductions as compared to the prior year, partially offset by 100% allocation of
overhead to general and administrative areas due to the wind-down of R&D and
sales and marketing.
Research and development costs decreased to zero in 2003 from $1,522,000 in
2002. The decrease was attributable to the decision to cease funding the
Neumobility development program in November 2002.
Other Income (Expense), net
Net other income (expense) increased to income of $46,000 in 2003 from an
expense of $1,754,000 in 2002. The 2002 period included a non-cash write-down of
$1,754,000 of the Company's long term investment in TruePosition. Other income
also includes gains or losses from sales of equipment and other miscellaneous
income items.
Interest Income, net
Net interest income decreased to $57,000 in 2003 from $77,000 in 2002. This
decrease is attributable to lower interest rates earned on invested cash
balances in the current year compared to prior year and lower cash balances on
which interest was earned.
Income Tax Benefit
The Company recognized income tax expense of $1,000 in 2003, compared to an
income tax benefit of $6,000 in 2002.
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.
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.
21
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 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 and services 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, net
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.
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
22
proceeds from the exercise of warrants and options) and from operating profits
in certain periods. The Company's working capital decreased to $2.5 million at
December 31, 2003 from $3.3 million at December 31, 2002.
Net Cash used in operating activities amounted to $0.7 million in 2003, compared
to $3.0 million in 2002 and net cash provided by operating activities of $1.9
million in 2001. Operating cash flow for 2003 was positively impacted by
decreases in inventories and collection of accounts receivable, offset by the
Company's net loss and reductions in payables. 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.
Net cash provided by (used in) investing activities totaled $40,000, ($8,000)
and ($55,000) in 2003, 2002 and 2001, respectively. The 2003 amount related
primarily to proceeds from sales of assets. At December 31, 2003, the Company
had no commitments for capital expenditures.
Net cash provided by financing activities was zero during each of 2003, 2002 and
2001.
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 no future operating lease commitments. 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 approximately $1.0 million in the year ended December 31, 2003,
compared to a loss of approximately $5.5 million for the year ended December 31,
2002 and income of approximately $0.6 million for the year ended December 31,
2001. As of December 31, 2003, the Company had an accumulated deficit of $27.6
million, which primarily accumulated during the three years ended December 31,
1998. In 2003 and 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 at the end of 2001,
and the Company does not anticipate any future revenue from any Blackbird
products. 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, the Company currently has no business
other than to complete the wind-down of the operations of Isis which was nearly
completed during 2003. Management has no plan to liquidate the Company and
distribute the remaining assets to stockholders. During 2002, 2003 and to date,
the Company 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 2004 the Company will incur costs of
approximately $0.5 million, primarily related to employee compensation and
severance, 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
23
Isis is complete. Accordingly, subject to a potential acquisition or other
investment, management believes that its cash balances as of December 31, 2003
of approximately $2.6 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 year 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.
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
The Company has had no disagreements with its independent accountants during the
periods ended December 31, 2003, 2002 or 2001. On August 28, 2003, the Company
reported on Form 8K, Item 4 that Ernst & Young LLP ("E&Y") was resigning as the
Company's independent auditor. On November 10, 1003 the Company reported on Form
8K, Item 4 that the Audit Committee of its Board of Directors (the "Audit
Committee") had appointed Stonefield Josephson, Inc. ("Stonefield") as its new
independent auditor.
On August 28, 2003 the Company was advised orally by E&Y that E&Y was resigning
as the Company's independent auditor, and on September 2, 2003 the Company
received a letter from E&Y in which E&Y confirmed such resignation. The decision
to change independent auditors was not recommended or approved by the Audit
Committee.
The reports of E&Y on the consolidated financial statements of the Company as of
and for the fiscal years ended December 31, 2001 and 2002 contained no adverse
opinion or disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principles, except that the report of E&Y
for the year ended December 31, 2002 contained an explanatory paragraph that 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. In connection with its audit for the fiscal year ended
December 31, 2001 and December 31, 2002, and during the subsequent interim
period, there were no disagreements with E&Y on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedure which if not resolved to the satisfaction of E&Y, would have caused
E&Y to make reference to the matter in their report on the consolidated
financial statements for such year.
On November 10, 2003 the Company engaged Stonefield as its independent auditors
for the fiscal year ending December 31, 2003. The decision to engage Stonefield
was approved by the Board of Directors of the Company.
During the years ended December 31, 2002 and December 31, 2001 and subsequent
interim periods through the date of E&Y's resignation, the Company did not
consult with Stonefield regarding the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements, or any
matter that was the subject of a disagreement or a reportable event as defined
in the regulations of the Securities and Exchange Commission.
24
Stonefield has reviewed the disclosures contained in this Form 10-K. The Company
has advised Stonefield that it has the opportunity to furnish the Company with a
letter addressed to the Securities and Exchange Commission concerning any new
information, clarifying the Company's disclosures herein, or stating any reason
why Stonefield does not agree with any statements made by the Company in this
report. Stonefield has advised the Company that nothing has come to its
attention which would cause it to believe that any such letter was necessary.
Item 9A. Controls and Procedures
As of the end of the fiscal year ended December 31, 2003, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective, as of such date, to ensure that required information
will be disclosed on a timely basis in its reports under the Exchange Act.
There were no changes in the Company's internal control over financial reporting
during the last quarter that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
25
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 60 Chairman of the Board of Directors, Chief Executive 1988 2006
Officer and Acting President
Lawrence Schoenberg 71 Director 1996 2005
Joshua J. Angel 67 Director 2001 2004
Barry J. Beil 57 Director 2003 2005
Bruce R. York 49 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. Mr. Katz served as Chief Executive Officer of Global
Payment Technologies, Inc. (formerly Coin Bill Validator, Inc.) from May 1996
through March 2003 and as its Chairman of the Board from September 1996 to April
2003. Global Payment Technologies is engaged in the business of currency
validation.
Lawrence Schoenberg has been a director since 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.
Barry J. Beil has been a director of the Company since April 2003. From 1980 to
1998 he was President and Chief Executive Officer of Sheldon Electric Co., Inc.,
a New York City based electrical contractor. Since 1985 he has been President of
Hampton Hills Operating Corp. and Managing Partner of Hampton Hills Associates
which collectively own and operate the Hampton Hills Golf & Country Club. Since
1996 he has been the Managing Member of Rugby Recreational Group LLC which owns
and operates the Fox Hill Golf & Country Club. Since 1988 he has been Vice
President and Secretary of M&M Beach Properties, Inc., a developer and builder
of residential properties.
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
26
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 one Class I director, Mr. Angel, two Class II directors, Mr.
Schoenberg and Mr. Beil, 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 2006 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 2004 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 2004 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, 2003.
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
approved by security
holders 188,900 $11.46 203,620
Equity compensation plans
not approved by security
holders -- -- --
--------------------------------------------------------------------------------------------------
Total 188,900 -- 203,620
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 2004 Annual Meeting of
Stockholders under the caption "Certain Relationships and Related Transactions."
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the
information under the caption "Information About Our Independent Accountants" in
the Proxy Statement relating to its 2004 Annual Meeting of Stockholders.
27
PART IV
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 Stonefield Josephson, Inc., Independent Auditors............................................... 30
Report of Ernst & Young LLP, Independent Auditors........................................................ 31
Consolidated Balance Sheets at December 31, 2003 and 2002................................................ 32
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001............... 33
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001..... 34
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001............... 35
Notes to Consolidated Financial Statements............................................................... 36
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts.......................................................... 51
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)
7.10 2002 Stock Incentive Plan (7)
14 Code of Ethics Pursuant to Section 406 of the Sarbanes-Oxley Act of 2002 (8)
21.1 Subsidiaries of the Registrant (8)
23.1 Consent of Stonefield Josephson, Inc., independent auditors (8)
23.2 Consent of Ernst & Young LLP, independent auditors (8)
31.1 Rule 13a-14(a)/15d-14(a) Certification by CFO (8)
31.2 Rule 13a-14(a)/15d-14(a) Certification by CEO (8)
32.1 Section 1350 Certifications
99.1 Certification to Section 906 of the Sarbanes-Oxley Act of 2002 (8)
- ----------
(+) 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).
28
(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 Proxy Statement filed May 7, 2003 (File No.
0-19437).
(8) Filed herewith.
(b) Reports on Form 8-K
The following Form 8Ks were filed during the fourth quarter of 2003 or
thereafter through the date of this report:
i. The Company filed a Current Report of Form 8-K, dated November 10,
2003, under Item 4 of such Report. No financial statements were
included.
ii. The Company filed a Current Report of Form 8-K, dated December 1,
2003, under Item 12 of such Report. No financial statements were
included.
29
REPORT OF STONEFIELD JOSEPHSON, INC., INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cellular Technical Services Company, Inc.
We have audited the accompanying consolidated balance sheet of Cellular
Technical Services Company, Inc. as of December 31, 2003 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 2003. Our audit also included the consolidated
financial statement schedule listed in the Index at Item 15(a) for the year
ended December 31, 2003. 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 audit.
We conducted our audit 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 audit provides 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, 2003, and the
consolidated results of their operations and their cash flows for the year ended
December 31, 2003, 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.
STONEFIELD JOSEPHSON, INC.
Santa Monica, California
January 15, 2004
30
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 sheet of Cellular
Technical Services Company, Inc. as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 2002 and December 31, 2001. Our audits also
included the consolidated financial statement schedules listed in the Index at
Item 15(a) for the years ended December 31, 2002 and 2001. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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 the
consolidated results of its operations and its cash flows for the years ended
December 31, 2002 and December 31, 2001, in conformity with auditing standards
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, 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
31
CELLULAR TECHNICAL SERVICES COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In 000's, except share and per share amounts)
December 31,
-------------------
2003 2002
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................................................ $ 2,651 $ 3,315
Accounts receivable, net of reserves of $0 in 2003 and $233 in 2002 .............. 11 525
Employee receivable .............................................................. -- 7
Inventories ...................................................................... -- 95
Prepaid expenses, deposits and other current assets .............................. 13 51
-------- --------
Total Current Assets .......................................................... 2,675 3,993
PROPERTY AND EQUIPMENT, net ......................................................... -- 136
LONG TERM ASSETS HELD FOR SALE ...................................................... 6 15
LONG TERM INVESTMENT, net of valuation adjustment
of $1,754 in 2003 and 2002 ....................................................... -- --
-------- --------
TOTAL ASSETS ........................................................................ $ 2,681 $ 4,144
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities ......................................... $ 115 $ 644
Payroll-related liabilities ...................................................... 61 68
Customers' deposits and deferred revenue ......................................... -- 29
-------- --------
Total Current Liabilities ..................................................... 176 741
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,
2,450 and 2,292 shares issued and outstanding in 2003 and 2002 ................ 25 23
Additional Paid-in Capital ....................................................... 30,043 29,976
Accumulated deficit .............................................................. (27,563) (26,596)
-------- --------
Total Stockholders' Equity .................................................... 2,505 3,403
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................................... $ 2,681 $ 4,144
======== ========
The accompanying footnotes are an integral part of these consolidated financial
statements.
32
CELLULAR TECHNICAL SERVICES COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000's, except per share amounts)
Year Ended December 31,
-----------------------------
2003 2002 2001
------- -------- --------
REVENUES
Phonecards ............................................................ $ 231 $ 11,771 $15,148
Services .............................................................. -- -- 5,268
------- -------- -------
Total Revenues ..................................................... 231 11,771 20,416
COSTS AND EXPENSES
Cost of phonecards .................................................... 182 11,551 14,812
Cost of services ...................................................... -- -- 1,287
Sales and marketing ................................................... 9 1,052 1,241
General and administrative ............................................ 1,109 1,351 1,917
Research and development .............................................. -- 1,522 1,841
------- -------- -------
Total Costs and Expenses ........................................... 1,300 15,476 21,098
------- -------- -------
LOSS FROM OPERATIONS ..................................................... (1,069) (3,705) (682)
OTHER INCOME (EXPENSE), net .............................................. 46 (1,754) 974
INTEREST INCOME, net ..................................................... 57 77 308
------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE ..... (966) (5,382) 600
INCOME TAX BENEFIT (PROVISION) ........................................... (1) 6 11
------- -------- -------
INCOME (LOSS) BEFORE THE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ...... (967) (5,376) 611
------- -------- -------
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE .................... -- (100) --
------- -------- -------
NET INCOME (LOSS) ........................................................ $ (967) $ (5,476) $ 611
======= ======== =======
BASIC AND DILUTED SHARE DATA:
Basic
Income (loss) before the effect of a change in accounting principle ... $ (0.42) $ (2.35) $ 0.27
Cumulative effect of a change in accounting principle ................. -- (0.04) --
------- -------- -------
EARNINGS (LOSS) PER SHARE ............................................. $ (0.42) $ (2.39) $ 0.27
======= ======== =======
Diluted
Income (loss) before the effect of a change in accounting principle ... $ (0.42) $ (2.35) $ 0.27
Cumulative effect of a change in accounting principle ................. -- (0.04) --
------- -------- -------
EARNINGS (LOSS) PER SHARE ............................................. $ (0.42) $ (2.39) $ 0.27
======= ======== =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ................................................................. 2,292 2,292 2,292
Diluted ............................................................... 2,292 2,292 2,302
The accompanying footnotes are an integral part of these consolidated financial
statements.
33
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, 2001 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
Restricted stock for services
rendered 158 2 67 -- 69
Net loss -- -- -- (967) (967)
----- --- ------- -------- -------
Balance, December 31, 2003 2,450 $25 $30,043 $(27,563) $ 2,505
===== === ======= ======== =======
The accompanying footnotes are an integral part of these consolidated financial
statements.
34
CELLULAR TECHNICAL SERVICES COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000's)
Year Ended December 31,
-------------------------
2003 2002 2001
------ ------- ------
OPERATING ACTIVITIES
Net income (loss) $ (967) $(5,476) $ 611
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization of property and equipment 129 237 544
Non-cash compensation expense (restricted stock) 69 -- --
Amortization or write-down of goodwill -- 100 30
Write-down of long-term investment -- 1,754 --
Loss (gain) on disposal of assets (24) 97 (25)
Changes in operating assets and liabilities:
Decrease in accounts receivable, net 514 145 123
Decrease in employee receivable, net 7 9 44
Decrease in inventories 95 436 565
Decrease in prepaid expenses, deposits and other current assets 38 13 407
Decrease (increase) in long term deposit -- 25 (25)
Decrease (increase) in accounts payable and accrued liabilities (529) (203) 297
Decrease in payroll-related liabilities (7) (112) (381)
Decrease in deferred revenue and customers' deposits (29) (55) (311)
------ ------- ------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (704) (3,030) 1,879
INVESTING ACTIVITIES
Purchase of property and equipment -- (11) (72)
Proceeds from sale of assets 40 3 39
Long-term investment -- -- 4
Cash paid for the acquisition of New England Telecom -- -- (26)
------ ------- ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 40 (8) (55)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (664) (3,038) 1,824
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,315 6,353 4,529
------ ------- ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $2,651 $ 3,315 $6,353
====== ======= ======
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ -- $ -- $ --
====== ======= ======
Income taxes $ 1 $ -- $ 19
====== ======= ======
- --------------------------------------------------------------------------------
The accompanying footnotes are an integral part of these consolidated financial
statements.
35
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, CTS has no current business other than to complete the wind down of
the operations of Isis. Management currently has no plan to liquidate the
Company and distribute the remaining assets to stockholders. 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.
Based on management plans, these financial statements have been prepared under
the "going concern" assumption which presumes that the Company will continue its
existence.
Management expects that during 2004 the Company will incur costs of
approximately $0.5 million, primarily related to employee compensation and
severance, 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, 2003 of approximately $2.6 million are sufficient to fund its
current cash flow requirements through at least the next twelve months.
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
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.
36
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
Equivalent: For purposes of the statement of cash flows, cash equivalents
include all highly liquid debt instruments with original maturities of
three months or less which are not securing any corporate obligations.
Concentration: The Company maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts.
Fair Values of Financial Instruments
At December 31, 2003 the Company has the following financial instruments: cash
and cash equivalents, long-term stock investment, accounts payable and accrued
liabilities. The carrying value of cash and cash equivalents, 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 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.
37
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:
Year ended Year ended
(in $000 except per share amounts) December 31, 2002 December 31, 2001
----------------- -----------------
Net income (loss): $(5,476) $ 611
Goodwill amortization -- 30
------- -----
Adjusted net income (loss): $(5,476) $ 641
======= =====
Adjusted earnings (loss) per share--
basic ($2.39) $0.28
------- -----
Adjusted earnings (loss) per share--
diluted ($2.39) $0.28
------- -----
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, 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.
38
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.
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 zero,
$38,000 and $133,000 for the years ended December 31, 2003, 2002 and 2001,
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 2003
and 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, and accordingly,
a statement of other comprehensive income has not been presented.
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
39
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 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 2003, 2002 and 2001 was estimated at the date of
grant using a Black-Scholes option-pricing model with the following
weighted-average assumptions for 2003, 2002 and 2001:
2003 2002 2001
----- ----- -----
Risk-free interest rate 2.4% 2.1% 4.2%
Dividend yield 0.0% 0.0% 0.0%
Volatility factor 1.70 1.72 1.61
Expected life of the options (years) 4.0 4.0 5.0
Fair value of options granted during the year $0.62 $1.04 $2.65
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the respective vesting periods. The Company's pro
forma information follows (in 000's, except per share amounts):
2003 2002 2001
------- ------- ----
Net income (loss) $ (967) $(5,476) $611
Add: Stock-based compensation as reported 69 -- --
Deduct: Total stock-based compensation expense determined 163 259 355
under fair value method for all awards, net of taxes
------- ------- ----
Net income (loss) - pro forma $(1,061) $(5,735) $256
======= ======= ====
Basic earnings (loss) per share - as reported $ (0.42) $ (2.39) $.27
Basic earnings (loss) per share - pro forma $ (0.46) $ (2.50) $.11
Diluted earnings (loss) per share - as reported $ (0.42) $ (2.39) $.27
Diluted earnings (loss) per share - pro forma $ (0.46) $ (2.50) $.11
There was no compensation expense related to stock option grants recorded by the
Company during the years 2003, 2002 and 2001. In 2003 the Company recorded
$68,000 in compensation expense related to restricted stock grants.
Stockholders approved the Company's 2002 Stock Incentive Plan at the June 5,
2003 Annual Meeting. The Company has issued 158,000 shares of restricted stock
vesting in 2003 and 2004 to its directors. The fair market value of the stock
issued was $0.66 per share on June 5, 2003. Compensation expense equal to the
fair value of the stock on the measurement date (the date of stockholder
approval) is being recognized over the stock vesting period (one year). Deferred
stock compensation equal to the remaining compensation expense to be recognized
over the stock vesting period has been recognized as Common Stock on the balance
sheet, offset by deferred stock compensation included in additional
paid-in-capital in stockholders' equity.
Recent Accounting Pronouncements
During October 2002, the FASB issued Statement No. 147, "Acquisitions of Certain
Financial Institutions--an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9", which removes acquisitions of financial institutions from
the scope of both Statement 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with Statements No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets. In addition,
this Statement amends SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder
40
intangible assets. The requirements relating to acquisitions of financial
institutions are effective for acquisitions for which the date of acquisition is
on or after October 1, 2002. The provisions related to accounting for the
impairment or disposal of certain long-term customer-relationship intangible
assets are effective on October 1, 2002. The adoption of this Statement did not
have a material impact to the Company's financial position or results of
operations as the Company has not engaged in either of these activities.
During December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure", which amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The transition guidance and annual disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002, with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The
adoption of this statement did not have a material impact on the Company's
financial position or results of operations as the Company has not elected to
change to the fair value based method of accounting for stock-based employee
compensation.
During January 2003, the FASB issued Interpretation No. 46, ("FIN 46")
"Consolidation of Variable Interest Entities." FIN 46 changes the criteria by
which one company includes another entity in its consolidated financial
statements. Previously, the criteria were based on control through voting
interest. Interpretation 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. A company that consolidates a
variable interest entity is called the primary beneficiary of that entity.
During December 2003 the FASB revised certain elements of FIN 46. The FASB also
modified the effective date of FIN 46. For all entities that were previously
considered special purpose entities, FIN 46 will be applied in periods ending
after December 15, 2003. Otherwise, FIN 46 is to be applied for registrants who
file under Regulation SX in periods ending after March 15, 2004, and for
registrants who file under Regulation SB, in periods ending after December 15,
2004. The Company does not expect the adoption to have a material impact on the
Company's financial position or results of operations.
During April 2003, the FASB issued SFAS 149 - "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", effective for contracts entered
into or modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of this Statement should be applied prospectively. The
provisions of this Statement that relate to Statement 133 implementation issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs 7(a) and 23(a), which relate to forward purchases
or sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The Company does not participate in such transactions;
however, it is evaluating the effect of this new pronouncement, if any, and will
adopt FASB 149 within the prescribed time.
During May 2003, the FASB issued SFAS 150 - "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective for public entities at the beginning of the first interim period
beginning after June 15, 2003. This Statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a freestanding financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. Some of the provisions of this Statement are
consistent with the current definition of liabilities in FASB Concepts Statement
No. 6, Elements of Financial Statements. The Company is evaluating the effect of
this new pronouncement and will adopt FASB 150 within the prescribed time.
41
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. 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.
NOTE C - INVENTORIES:
Inventory reflects phonecards sold through the Company's phonecard business.
Included in gross phonecard inventory at December 31, 2002 was approximately
$30,000 of items which had been transferred to customers and were accounted for
as consignments, and approximately $49,000 related to estimated sales returns.
Inventory consists of the following (in 000's):
December 31,
------------
2003 2002
---- ----
Phonecards $-- $164
Less reserves -- (69)
--- ----
$-- $ 95
=== ====
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. All
remaining inventories at that time were sold during 2003. (See also Note N)
NOTE D - PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in 000's):
December 31,
-------------
2003 2002
----- -----
Computer equipment and software $ 107 $ 256
Furniture, fixtures and office equipment 8 96
Leasehold improvements -- 247
----- -----
115 599
Less accumulated depreciation and amortization (109) (448)
----- -----
$ 6 $ 151
===== =====
42
During 2003 and 2002, the Company reduced cost and accumulated depreciation
amounts of property and equipment by approximately $339,000 and $983,000,
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 $6,000 and $15,000
at December 31, 2003 and December 31, 2002, respectively.
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 were converted to preferred stock in late 2002. 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:
As of December 31, 2003, the Company leases office space under a month-to-month,
verbal arrangement, with no future minimum lease payments committed after a
$1,500 payment to be paid in January 2004. Amounts charged to operations under
all lease and rental agreements totaled approximately $200,000, $400,000 and
$400,000 in 2003, 2002 and 2001, respectively. See also Note L.
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 $0, $42,000 and $43,000 in 2003, 2002 and 2001,
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.
43
NOTE I - INCOME TAXES:
At December 31, 2003, the Company had available for federal income tax purposes
net operating loss carryforwards of approximately $53.3 million which begin to
expire in 2007, and research and development tax credits of approximately $1.2
million that began to expire in 2003. Approximately $7,000 of the $1.2 million
expired 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,
2003 2002
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 18,155 $ 17,700
Research and development credits 1,244 1,251
AMT credits 53 53
Depreciation on tax returns lower than
financial statements, net 161 135
-------- --------
Total deferred tax assets 19,613 19,139
Valuation allowance (19,613) (19,139)
-------- --------
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
$0.5 million, $1.3 million and ($0.2) million in 2003, 2002 and 2001,
respectively, and were primarily attributable to the net losses in 2003 and 2002
and utilization of net operating loss carryforwards in 2001.
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,
-----------------------
2003 2002 2001
----- ------- -----
Income tax provision (benefit) at statutory rate of 34% $(329) $(1,861) $ 207
Utilization of net operating loss carryforwards -- -- (207)
Losses producing no current tax benefit 329 1,861 --
Alternative minimum tax provision (refunds) -- -- (32)
State income taxes 1 (6) 21
----- ------- -----
Income taxes provision (benefit), current $ 1 $ (6) $ (11)
===== ======= =====
44
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, 2001 301 $1.91 -- $188.75 $21.96
Granted 89 2.63 -- 5.38 2.83
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
Granted 26 0.66 -- 0.70 0.69
Canceled (73) 0.69 -- 109.38 5.77
----
Balance, December 31, 2003 189 $0.66 -- $188.75 $ 8.09
==== ===== ======= ======
Exercisable at December 31, 2003 113
====
Available for grant at December 31, 2003 167
====
Common Stock reserved for future issuance 356
====
45
The following table summarizes information concerning outstanding and
exercisable stock options as of December 31, 2003 (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
- ------------------------ ----------- ----------- -------------- ----------- --------------
$ 0.66 - $ 0.99 45 8.92 $ 0.83 5 $ 0.99
1.91 - 3.75 52 6.94 2.70 35 2.69
8.00 - 8.38 78 6.46 8.01 59 8.01
11.34 - 29.69 11 5.98 13.31 11 13.31
175.00 - 188.75 3 2.80 180.16 3 180.16
--- ---
$ 0.66 - $188.75 189 7.08 $ 8.09 113 $ 11.46
=== ===
Shares under options that were exercisable at December 31, 2002 and 2001 were
123,465 and 141,050 respectively. Average exercise prices for options that were
exercisable at December 31, 2002 and 2001 were $11.72 and $37.70, 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,
-------------------------
2003 2002 2001
------ ------- ------
Net income (loss) (A) $ (967) $(5,476) $ 611
====== ======= ======
Weighted average number of shares outstanding (B) 2,292 2,292 2,292
Stock options -- -- 10
------ ------- ------
Weighted average number of shares outstanding (C) 2,292 2,292 2,302
====== ======= ======
Earnings (loss) per share:
Basic (A)/(B) $(0.42) $ (2.39) $ 0.27
====== ======= ======
Diluted (A)/(C) $(0.42) $ (2.39) $ 0.27
====== ======= ======
Outstanding stock options of 188,660, 232,192 and 329,674 at December 31, 2003,
2002 and 2001, respectively, were excluded from the computation of dilutive
earnings per share because their effect was anti-dilutive. Weighted average
restricted shares outstanding, net of treasury stock method, of 32,405 for the
year ended December 31, 2003, were excluded from the computation of diluted
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 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
46
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 that offered 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. General and administrative costs have been allocated 100% to
the Telecom hardware/software segment in 2003.
47
Segments
Year ended December 31, 2003 Consolidated
(In 000's) Telecom HW/SW Phonecards Totals
------------- ---------- ------------
Revenue from external customers -- $231 $ 231
Depreciation and amortization expense $ 129 -- 129
Pretax segment loss (1,023) 56 (967)
Income tax expense 1 -- 1
Expenditures for segment assets -- -- --
Segment assets 2,680 1 2,681
Year ended December 31, 2002 Consolidated
(In 000's) 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
Year ended December 31, 2001 Consolidated
(In 000's) 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
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, in the fourth
quarter of 2002 the Company recorded an impairment loss on property and
equipment of Neumobility of approximately $76,000, wrote off prepaid software
maintenance contracts of approximately $26,000 and terminated all 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. No revenues were ever reported from the Neumobility
platform. Net earnings (losses) before tax of the telecom hardware and software
segment, including the operations of Neumobility in the years ended December 31,
2002 and 2001, were losses of $1.0 million and $4.4 million in 2003 and 2002,
respectively, and earnings of $2.0 million in 2001.
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 recorded an
impairment loss on property and equipment of Isis of approximately $21,000 and
terminated the remaining employees of Isis. Termination benefits were
insignificant and were all paid before December 31, 2002. Revenues of Isis were
approximately $0.2 million, $11.8 million and $15.1 million in 2003, 2002 and
2001, respectively. Net earnings (losses) before tax of Isis were approximately
$0.1 million, ($0.9) million and ($1.4) million in 2003, 2002 and 2001,
respectively. Revenues of Isis were approximately $231,000 for the year ended
December 31, 2003 and were primarily composed of inventory liquidation
transactions.
On December 11, 2002, the Company and GTS Prepaid, Inc. ("GTS"), a
non-affiliated company, entered into an agreement whereby the Company agreed to
(i) transfer to GTS on a consignment basis a portion of its inventory
48
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 agreed that GTS would pay to the Company an agreed upon sales price
for each of the prepaid phone cards it sold and all accounts receivable
collected in installments. On April 8, 2003 GTS and the Company entered into an
agreement, in accordance with which GTS would make weekly payments to the
Company of $7,745, including interest at 15% per annum, until the amount owed by
GTS is repaid in full, approximately in March 2004. The obligation was secured
by a second lien on GTS' assets. At December 31, 2003 the note had been paid in
full to CTS and the balance owed by GTS to the Company was zero. At December 31,
2003 GTS did not hold any inventory owned by the Company on a consignment basis
as all inventories previously held by GTS were sold, fully collected and
proceeds were remitted to the Company.
NOTE O - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth the Company's unaudited quarterly financial
information for the years ended December 31, 2003 and 2002 (in thousands, except
per share date):
2003 March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Net sales $ 158 $ 13 $ 25 $ 35
Gross profit (45) (1) 25 70
Net income (loss) (375) (305) (226) (61)
Earnings (loss) per share:
Basic $(0.16) $(0.13) $(0.10) $(0.03)
Diluted $(0.16) $(0.13) $(0.10) $(0.03)
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)
49
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 29, 2004
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/ Barry Beil
- ----------------------------------------------------- -------------------------
Stephen Katz, Chairman of the Board of Directors and Barry Beil, Director
Chief Executive Officer March 29, 2004
(Principal Executive Officer)
March 29, 2004
/s/ Bruce R. York /s/ Joshua J. Angel
- ----------------------------------------------------- -------------------------
Bruce R. York Joshua J. Angel, Director
Vice President, Chief Financial Officer and Secretary March 29, 2004
(Principal Financial and Accounting Officer)
March 29, 2004
/s/ Lawrence Schoenberg
- -----------------------------------------------------
Lawrence Schoenberg, Director
March 29, 2004
50
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, 2001 $ 27 $387 $367 $ 47
==== ==== ==== ====
Year ended December 31, 2002 $ 47 $203 $181 $ 69
==== ==== ==== ====
Year ended December 31, 2003 $ 69 $ 22 $ 91 $ --
==== ==== ==== ====
SALES AND RECEIVABLE ALLOWANCES
Year ended December 31, 2001 $418 $173 $332 $259
==== ==== ==== ====
Year ended December 31, 2002 $259 $ 95 $121 $233
==== ==== ==== ====
Year ended December 31, 2003 $233 $ -- $233 $ --
==== ==== ==== ====
51
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as................................ 'TM'
The registered trademark symbol shall be expressed as..................... 'r'