SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarterly period ended Commission File Number 0-19437
MARCH 31, 2003 -------
--------------
CELLULAR TECHNICAL SERVICES COMPANY, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 11-2962080
-------------------------------- -------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2815 SECOND AVENUE. SUITE 100, SEATTLE, WASHINGTON 98121
--------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (206) 443-6400
--------------
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes X No
2,291,770 Common Shares were outstanding as of May 7, 2003.
CELLULAR TECHNICAL SERVICES COMPANY, INC.
TABLE OF CONTENTS FOR FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.................................................3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........15
ITEM 4. CONTROLS AND PROCEDURES.............................................15
PART II. OTHER INFORMATION...................................................16
ITEM 1. LEGAL PROCEEDINGS...................................................16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................16
2
CELLULAR TECHNICAL SERVICES COMPANY, INC.
-----------------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in 000's, except per share amounts)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,732 $ 3,315
Accounts receivable, net of reserves of $195 in 2003 and $233 in 2002 32 525
Amounts due from GTS Prepaid, Inc. (Note B) 362 --
Inventories 63 95
Prepaid expenses, deposits and other current assets 169 58
-------- --------
Total Current Assets 3,358 3,993
PROPERTY AND EQUIPMENT, net 109 151
LONG-TERM INVESTMENT, net of valuation adjustment of $1,754 in 2002 and 2003 -- --
-------- --------
TOTAL ASSETS $ 3,467 $ 4,144
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 349 $ 644
Payroll related liabilities 71 68
Customers' deposits and deferred revenue 19 29
-------- --------
Total Current Liabilities 439 741
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, 2,292 shares
issued and outstanding in 2003 and 2002 29,999 29,999
Accumulated deficit (26,971) (26,596)
-------- --------
Total Stockholders' Equity 3,028 3,403
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,467 $ 4,144
======== ========
----------
The accompanying notes are an integral part of these consolidated
financial statements.
3
CELLULAR TECHNICAL SERVICES COMPANY, INC.
-----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(in 000's, except per share amounts)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
REVENUES
Phonecards $ 158 $ 2,358
------- -------
Total Revenues 158 2,358
COSTS AND EXPENSES
Cost of phonecards 203 2,271
Sales and marketing 28 291
General and administrative 331 307
Research and development -- 404
------- -------
Total Costs and Expenses 562 3,273
------- -------
LOSS FROM OPERATIONS (404) (915)
OTHER INCOME, net 16 3
INTEREST INCOME, net 13 29
------- -------
LOSS BEFORE THE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $ (375) $ (883)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE -- (100)
------- -------
NET LOSS $ (375) $ (983)
======= =======
BASIC AND DILUTED SHARE DATA:
Loss before the effect of a change in accounting principle $ (0.16) $ (0.39)
Cumulative effect of a change in accounting principle -- (0.04)
------- -------
Net Loss $ (0.16) $ (0.43)
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 2,292 2,292
----------
The accompanying notes are an integral part of these consolidated
financial statements.
4
CELLULAR TECHNICAL SERVICES COMPANY, INC.
-----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000's)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
OPERATING ACTIVITIES
Net loss $ (375) $ (983)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment 32 62
Impairment of goodwill -- 100
Gain on disposal of assets (9) --
Changes in operating assets and liabilities:
Decrease in accounts receivable, net 131 61
Decrease in inventories, net 32 58
Increase in prepaid expenses and deposits (111) (239)
Decrease in accounts payable, accrued liabilities and taxes other than
payroll or income (295) (156)
Increase in payroll related liabilities 3 11
Decrease in deferred revenue and customers' deposits (10) --
------- -------
NET CASH USED IN OPERATING ACTIVITIES (602) (1,086)
INVESTING ACTIVITIES
Proceeds from sale of assets 19 --
------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES 19 --
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (583) (1,086)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,315 6,353
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,732 $ 5,267
======= =======
----------
The accompanying notes are an integral part of these consolidated
financial statements.
5
CELLULAR TECHNICAL SERVICES COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
NOTE A - BASIS OF PRESENTATION AND LIQUIDITY:
The accompanying unaudited consolidated financial statements of Cellular
Technical Services Company, Inc. ("CTS" or the "Company"), including the
December 31, 2002 balance sheet which has been derived from audited financial
statements, have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The operating results for the three-month
period ended March 31, 2003 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2003. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2002
and in the Company's other filings with the Securities and Exchange Commission.
Unless the context otherwise requires, all references to "CTS" or the "Company"
herein include Cellular Technical Services Company, Inc. and any entity over
which it has or shares operational control.
Until December 11, 2002 CTS, 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 the 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 adopted
a plan to wind down the operations of Isis and sell the related net assets.
As a result, during the quarter ended March 31, 2003 CTS had no current business
other than to complete the wind down of the operations of Isis. Management
anticipates that most of the remaining assets of Isis will be realized, and
liabilities settled, in 2003 (see Note B). Management currently has no plan to
liquidate the Company and distribute the remaining assets, after settling the
liabilities, to stockholders. During 2002 and 2003, management has been and will
be evaluating alternative businesses and acquisitions. There is no assurance
that such alternative businesses and acquisitions can be accomplished before CTS
spends all of its remaining cash balances, that CTS will be able to raise money
at acceptable terms, if at all, to fund the acquisitions and/or the operating
activities of the businesses it may acquire, and that the acquired businesses
will represent viable business strategies and/or will be consistent with the
expectations and risk profiles of CTS' stockholders.
Management expects that during the remainder of 2003 the Company will incur
costs of approximately $0.8 million, primarily related to remaining
non-cancelable office leases, employee compensation, costs of maintaining the
business as a public entity, and insurance. The Company does not expect to have
any current source of revenues and has de minimis operations. Accordingly,
management believes that its cash and receivable balances as of March 31, 2003
of approximately $3.1 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.
6
Nasdaq requires a minimum $1.00 bid price for continued listing on the Nasdaq
SmallCap Market System. On November 1, 2002 the Company's closing stock price
was $0.71 and the Company received a notice from Nasdaq indicating that because
the Company's stock price had not traded at over $1.00 for 30 days, Nasdaq will
have the right to delist its stock if the Company fails to increase its stock
price to at least $1.00 for 10 consecutive trading days before April 30, 2003.
On May 1, 2003 the Company received a notice from Nasdaq that since the Company
has not regained compliance with the minimum $1.00 closing bid price per share
requirement as set forth in Marketplace Rule 4310(c)(4) that 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 is currently in the process of winding down its
previous businesses and has de minimis other operations. After reviewing its
options, the Company's management and directors have determined that the Company
will not seek a hearing to appeal this determination nor seek a reverse stock
split of its shares at this time. It is anticipated that the Company's shares
will become over the counter securities trading on an over the counter exchange
and will retain the symbol CTSC. When the Company's stock is delisted, the
delisting will most likely have a material adverse effect on the price of the
Company's common stock, may 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.
NOTE B - 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, during 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 13 employees
of Neumobility. Termination benefits were approximately $80,000 and were all
paid before December 31, 2002. Neumobility was a part of the Company's telecom
hardware/software segment. There were no revenues reported from the Neumobility
platform in the three years ended December 31, 2002. Net earnings (losses)
before tax of the telecom hardware/software segment, including the operations
prior to Neumobility, were a loss of $4.4 million and earnings of $2.0 million
and $2.9 million in 2002, 2001 and 2000, respectively.
On December 11, 2002, the Company and GTS Prepaid, Inc. ("GTS"), entered into an
agreement whereby the Company agreed to (i) transfer to GTS on a consignment
basis a portion of its inventory of pre-paid phone cards and (ii) authorize GTS
to act as its agent to collect certain accounts receivable. The transaction
closed on January 7, 2003. GTS and the Company 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. Payments by GTS related
to inventories it sold and receivables it collected were $40,266 during the
quarter ended March 31, 2003, and amounts receivable from GTS as of March 31,
2003 were $362,081. On April 8, 2003 GTS and the Company entered into an
agreement, in accordance with which GTS will 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 is secured by a
second lien on GTS' assets. At March 31, 2003 GTS held on consignment basis
$59,133 of prepaid phonecard inventories owned by the Company. These inventories
will be sold, with the proceeds to be remitted to the Company, or will be
returned to the Company if not sold by June 3, 2003. To date, all payments due
from GTS have been received by the Company on a timely basis. The balances owed
by GTS to the Company comprise a large concentration of risk to the Company and
the ability of the Company to fully collect the amounts owed will depend on the
future profitability and cash flow of GTS.
7
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 $11.8 million, $15.1 million and $18.0 million in 2002, 2001 and
2000, respectively. Net losses before tax of Isis were $0.9 million, $1.4
million and $0.3 million in 2002, 2001 and 2000, respectively. Revenues of Isis
were approximately $158,000 for the quarter ended March 31, 2003 and were
primarily composed of inventory liquidation transactions, including
approximately $94,000 sold by GTS.
NOTE C - INVENTORIES:
Inventory reflects phonecards sold through the Company's phonecard business.
Included in gross phonecard inventory at March 31, 2003 and December 31, 2002 is
approximately $18,000 and $30,000, respectively, of items which have been
transferred to customers and are being accounted for as consignments,
approximately $19,000 and $49,000, respectively, related to estimated sales
returns and $59,000 and zero, respectively, of items held on consignment at GTS.
Inventory consists of the following (in 000's):
MARCH 31, DECEMBER 31,
2003 2002
------------------ ------------------
Inventory $ 119 $ 164
Less reserves (56) (69)
------------------ ------------------
$ 63 $ 95
================== ==================
NOTE D - CONTINGENCIES:
From time to time, the Company may be a party to legal proceedings, which may or
may not be in the ordinary course of business and which may have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company is currently involved in one commercial litigation case.
On October 25, 2001, New England Telecom, Inc. and Paul Gregory, a former
employee, filed a claim in the Superior Court of Massachusetts against the
Company and its Chairman alleging, among other things, that the Company breached
a purchase agreement and a related employment contract. The 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 E - LOSS PER SHARE:
The calculation of basic and diluted loss per share is as follows (in 000's,
except per share amounts):
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---- ----
Net loss (A) $ (375) $ (983)
=============================
Weighted average number of
shares outstanding (B) 2,292 2,292
-----------------------------
Weighted average number of shares
and common share equivalents outstanding (C) 2,292 2,292
=============================
Basic loss per share (A)/(B) $ (0.16) $ (0.43)
=============================
Diluted loss per share (A)/(C) $ (0.16) $ (0.43)
=============================
8
Outstanding stock options of 209,137 and 330,062 at March 31, 2003 and 2002,
respectively, were excluded from the computation of diluted earnings per share
because their effect was anti-dilutive.
NOTE F - STOCK OPTIONS
As provided for by FAS 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 FAS 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 FAS 123 and
Emerging Issues Task Force ("EITF") Issue No. 96-18 as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. The fair value of options granted to
non-employees is periodically re-measured as the underlying options vest.
The pro forma information regarding net income (loss) and earnings (loss) per
share is required by FAS 123, which has been updated by FAS 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 the periods ended March 31, 2003 and March 31, 2002 was
estimated at the date of grant using a Black-Scholes option-pricing model with
the following weighted-average assumptions:
THREE MONTHS THREE MONTHS
ENDED MARCH 31, 2003 ENDED MARCH 31, 2002
-------------------- --------------------
Risk-free interest rate 2.4% 3.7%
Dividend yield 0.0% 0.0%
Volatility factor 1.71 1.67
Expected life of the options (years) 4.0 4.0
Fair value of options granted
during the period $0.62 $2.17
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in 000's, except per share amounts):
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
Net loss $ (375) $ (983)
Add: Stock-based compensation
as reported 0 0
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards, net of taxes (38) (80)
---------- ----------
Net loss - pro forma $ (413) $ (1,063)
========== ==========
Basic and diluted loss
per share - as reported $ (0.16) $ (0.43)
Basic loss per share - pro forma $ (0.18) $ (0.46)
Stockholders will decide whether to approve the Company's 2002 Stock Incentive
Plan (the "Plan") at the June 5, 2003 Annual Meeting. If the Plan is approved,
the Company has agreed to issue 68,000 shares of restricted stock vesting in
2003 and 2004 to its directors. Upon issuance, the Company will determine
related compensation expense, which will be equal to the fair value of the stock
on the date of stockholder approval and which will be recognized over the stock
vesting period.
9
NOTE G - SEGMENT INFORMATION:
The Company historically has had two reportable business segments offering
distinctive products and services marketed through different channels: (i) a
telecom hardware/software segment including the Company's Blackbird(R) Platform
product line, which included the Blackbird(R) Platform, PreTect(TM)
cloning-fraud prevention application, No Clone Zone(TM) roaming-fraud prevention
service, and related application products and services and development of 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 FAS 142 - Goodwill
and Intangible Assets. The value of goodwill recorded for the Company's phone
card segment was $0 at December 31, 2002 and March 31, 2003.
During the quarter ended December 31, 2002, the Company ceased the development
efforts of its Neumobility division and adopted 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.
THREE MONTHS ENDED MARCH 31, 2003
---------------------------------
(in 000's) Segments
---------------------------------- Consolidated
TELECOM HW/SW PHONE CARDS TOTALS
------------- ----------- ------
Revenue from external customers -- $ 158 $ 158
Inter-segment revenue -- -- --
Pretax segment loss $ (319) (56) (375)
Expenditures for segment assets -- -- --
Segment assets (at March 31, 2003) 3,085 382 3,467
THREE MONTHS ENDED MARCH 31, 2002
---------------------------------
(in 000's) Segments
---------------------------------- Consolidated
TELECOM HW/SW PHONE CARDS TOTALS
------------- ----------- ------
Revenue from external customers -- $ 2,358 $ 2,358
Inter-segment revenue -- -- --
Pretax segment loss before the effects of a
change in accounting principle $ (706) (177) (883)
Expenditures for segment assets -- -- --
Segment assets (at March 31, 2002) 7,482 1,380 8,862
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. The discussion should be read in
conjunction with the financial statements and notes thereto. Unless the context
otherwise requires, all references to the "Company" herein include Cellular
Technical Services Company, Inc. and any entity over which it has or shares
operational control.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 that
reflect the Company's views with respect to future events and financial
performance. The Company uses words and phrases such as "anticipate," "expect,"
"intend," "the Company believes," "future," and similar words and phrases to
identify forward-looking statements. Reliance should not be placed on these
forward-looking statements. These forward-looking statements are based on
current expectations and are subject to risks, uncertainties and assumptions
that could cause, or contribute to causing actual results to differ materially
from those expressed or implied in the applicable statements. Readers should pay
particular attention to the descriptions of risks and uncertainties described in
this report and in the Company's other filings with the Securities and Exchange
Commission. All forward-looking statements included in this report are based on
information available to the Company on the date of this report. The Company
assumes no obligation or duty to update any such forward-looking statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these consolidated financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to revenue recognition, product returns,
bad debts, inventories, investments, intangible assets, contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. A more detailed discussion on the application of these and other
accounting policies can be found in Note B in the Notes to the Consolidated
Financial Statements in Item 15 of the Company's 2002 Annual Report on Form
10-K. Actual results may differ from these estimates under different assumptions
or conditions.
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. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
ALLOWANCE FOR SALES RETURNS: The Company has maintained 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
11
recorded. These estimates are based on historical sales returns, analysis of
credit memo data and other known factors. If the historical data the Company
uses to calculate these estimates does not properly reflect future returns,
revenue could be overstated.
INVENTORY: The Company is required to state its inventories at the lower of cost
or market. In assessing the ultimate realization of inventories, the Company is
required to make judgments as to future demand requirements and compare that
with the current or committed inventory levels. An allowance for obsolete
inventory has been maintained to reflect the expected un-saleable inventory
based on an evaluation of slow moving products. It is possible that changes in
required inventory reserves may occur in the future.
GOODWILL AND INTANGIBLE IMPAIRMENT: In assessing the recoverability of the
Company's goodwill and other intangibles the Company must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. On January 1, 2002 the Company adopted Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," and was required to analyze its goodwill for impairment issues in
accordance with the transition rules of FAS 142. In the three-month period ended
March 31, 2002 the Company recorded an impairment write-down of $100,000 related
to the writedown of goodwill associated with its phone card segment. The
impairment loss was presented in the statement of operations as a cumulative
effect of a change in accounting principle in accordance with the transitional
rules of FAS 142. The Company has no goodwill recorded on its books at March 31,
2003.
LONG-TERM INVESTMENT: The Company accounts for its minority investment in
TruePosition, Inc, (a subsidiary of Liberty Media Corporation, "Liberty Media"),
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. 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 at December 31, 2002, and reduced the recorded
carrying value of this investment from its cost basis of $1,754,000 to zero at
that time, representing its best estimate of the current fair value of the
Company's investment in the net equity of TruePosition. TruePosition's
operations have required significant infusions of cash by Liberty Media to date,
and have not generated significant revenues. The Company's investment in
TruePosition common stock has been diluted by these advances, which have
recently been converted to preferred stock. It is possible that in the future
the Company may receive proceeds from sale of this investment but no such amount
can be estimated at this time.
OVERVIEW
The Company has developed, marketed, distributed and supported a diversified mix
of products and services for the telecommunications industry. Over the past 14
years, the Company developed expertise in real-time wireless call processing and
has created technologically advanced solutions for this industry, focusing
primarily in the area of wireless communications fraud management, geo-location
wireless software applications and sales of prepaid long-distance phonecard
products.
On November 9, 2002, CTS ceased development efforts of Neumobility, and on
December 11, 2002 adopted a plan to wind down the operations of Isis. As a
result, during the quarter ended March 31, 2003, CTS had no current business
other than to complete the wind-down of the operations of Isis. Management
anticipates that most of the remaining assets of Isis will be realized, and all
12
liabilities settled, during 2003. Management currently has no plan to liquidate
the Company and distribute the remaining assets to stockholders. During 2002 and
2003, management has been and will be evaluating alternative businesses and
acquisitions. There is no assurance that such alternative businesses and
acquisitions can be identified before CTS spends all of its remaining cash
balances, that CTS will be able to raise money at acceptable terms, if at all,
to fund the acquisitions and/or the operating activities of the businesses it
may acquire, and that the acquired businesses will represent viable business
strategies and/or will be consistent with the expectations and risk profiles of
CTS' stockholders.
Management expects that during the remaining nine months of 2003 the Company
will incur costs of approximately $0.8 million, primarily related to remaining
non-cancelable office leases, employee compensation, costs of maintaining the
business as a public entity, and insurance. The Company does not have any
current source of revenue and has de minimis operations. Accordingly, management
believes that its cash and receivable balances as of March 31, 2003 of
approximately $3.1 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, the Company marketed and distributed branded prepaid
long-distance phonecards in denominations generally ranging from $5 to $20 per
card. Isis also marketed prepaid wireless phones and phonecards. Isis
specialized in targeted marketing programs and featured local and toll-free
access numbers and aggressive domestic and international long-distance rates.
Isis distributed cards through regional and national multi-level distribution
channels, using direct sales, third party distributors and telemarketing. Due to
continuing losses from declining margins and increased competition in this
marketplace, the Company decided to close the Isis business during December
2002. At March 31, 2003, the Company was in the process of completing the
wind-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.
REVENUE AND EXPENSE
REVENUE : During the first three months of 2003 and 2002, the Company generated
revenue through sales of its Isis pre-paid phonecard products. Phonecard revenue
is comprised of wholesale and retail sales of prepaid local, long-distance and
wireless products. Revenue is recognized at shipment of product, net of any
reserves for estimated returns. The Company maintains an allowance for sales
returns of prepaid phonecards (based on estimated returns) in accordance with
FAS 48 - Revenue Recognition When Right of Return Exists. Estimated returns,
along with their costs, have been reflected as a reduction in sales and cost of
goods sold, respectively, and reflected as a reduction in accounts receivable
and an increase in inventory, respectively.
13
COSTS AND EXPENSES: Costs of phonecards are primarily comprised of purchased
prepaid phonecard costs.
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.
General and administrative expenditures include the costs of executive, human
resources, finance and administrative support functions, provisions for
uncollectible accounts and costs of legal and accounting professional services.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
OVERVIEW: Total revenue decreased 93% to $158,000 in 2003 from $2,358,000 in
2002. Net loss was ($375,000), or ($0.16) per diluted share, in 2003 compared to
($983,000), or ($0.43) per diluted share, in 2002. Gross margin decreased by
$132,000 as phonecard revenue decreased $2,200,000 and cost of phone cards
decreased $2,068,000. Operating expenses decreased by $643,000 due to:
reductions of $404,000 in research and development and $263,000 in sales and
marketing expenses; offset by an increase of $24,000 in general and
administrative expenses. The reduction in operating expenses reflected the
cessation of the Neumobility research and development program and Isis sales
efforts. The general and administrative increase resulted from that area
receiving 100% of facility and other expenses that had been allocated throughout
the Company in prior periods.
REVENUE : Prepaid phone card revenue decreased 93% to $158,000 in 2003, from
$2,358,000 in 2002 due to the closure of the Isis business at the end of 2002.
The 2003 revenue was due primarily to inventory reduction transactions.
COSTS AND EXPENSES: Costs of phone cards decreased by $2,068,000 to $203,000 in
first quarter of 2003, from $2,271,000 in the same period of 2002. The decrease
is volume related. Costs as a percentage of revenues were higher in 2003 due to
discounted sales to reduce final inventories.
Sales and marketing expenses decreased 90% to $28,000 in 2003 from $291,000 in
2002. The decrease in sales and marketing expenses is attributable to headcount
decreases and closure of both the Isis segment and the Neumobility program.
General and administrative expenses increased 7% to $331,000 in 2003 from
$307,000 in 2002, due to 100% allocation of rent and other costs to general and
administrative departments that had been partially allocated to research and
development and sales and marketing areas in the previous year.
Research and development costs decreased to $0 in 2003 from $404,000 in 2002.
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.
OTHER INCOME, NET: Net other income was $16,000 in 2003 compared to $3,000 in
2002. Other income includes gains or losses from sales of equipment and other
miscellaneous income items.
INTEREST INCOME AND EXPENSE: Net interest income decreased to $13,000 in 2003
from $29,000 in 2002. This decrease is attributable to both lower interest rates
earned on invested cash in the 2003 period compared to the 2002 period and lower
average cash balances on hand in the 2003 period.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have historically consisted of funding
software and hardware product development, property and equipment requirements,
working capital and the Company's operating expenses. The Company historically
has funded these requirements through the sale of common stock (including
proceeds from the exercise of warrants and options) and from operating profits
in certain periods. On March 31, 2003, the Company's cash balance was $2.7
million as compared to $3.3 million on December 31, 2002. The Company's working
capital decreased to $2.9 million at March 31, 2003 from $3.3 million at
December 31, 2002.
Net cash used in operating activities amounted to $0.6 million in the first
three months of 2003, compared to $1.1 million in the comparable 2002 period.
The largest factors in this change in 2003 compared to 2002 were the $0.6
million reduction in net loss and changes in balance sheet accounts in the
reporting periods. At March 31, 2003, the Company had no commitments for capital
expenditures.
Management expects that during the last nine months of 2003 the Company will
incur costs of approximately $0.8 million, primarily related to remaining
non-cancelable office leases, employee compensation, costs of maintaining the
business as a public entity, and insurance. The Company is not expected to have
any significant revenues or operations after the wind-down of Isis is complete.
There can be no assurance that the Company's operations will be profitable on a
quarterly or annual basis in the future or that past revenue levels can be
enhanced or sustained. Past and existing revenue levels should not be considered
indicative of future operating results. Accordingly, subject to a potential
acquisition or other investment, management believes that its cash balances as
of March 31, 2003 are sufficient to fund its current cash flow requirements
through at least the next twelve months, however unanticipated changes may
require additional financing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates that
could adversely affect the value of the Company's investments. The Company does
not use derivative financial instruments for speculative or trading purposes.
The Company maintains a short-term investment portfolio consisting of interest
bearing securities with maturities of less than ninety days. These securities
are classified as cash equivalents. These securities are interest bearing and
thus subject to interest rate risk and may fall in value if market interest
rates increase. Because the Company has the ability to hold its fixed income
investments until maturity, the Company does not expect its operating results or
cash flows to be affected to any significant degree by a sudden change in market
interest rates on its securities portfolio. The Company has operated primarily
in the United States and all revenues to date have been in U.S. dollars.
Accordingly, the Company does not have material exposure to foreign currency
rate fluctuations. The Company has not entered into any foreign exchange
contracts to hedge any exposure to foreign currency rate fluctuations because
such exposure is immaterial.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, 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 its
disclosure controls and procedures pursuant to the Exchange Act Rule 13a-14.
Based upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in Company reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out this evaluation.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may be a party to legal proceedings, which may or
may not be in the ordinary course of business and which may have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company is currently involved in one commercial litigation case.
On October 25, 2001, New England Telecom, Inc. and Paul Gregory, a former
employee, filed a claim in the Superior Court of Massachusetts against the
Company and its Chairman alleging, among other things, that the Company breached
a purchase agreement and a related employment contract. The 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 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
--------
Exhibit 99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
B) REPORTS ON FORM 8-K
-------------------
The following Form 8Ks were filed during the first quarter of 2003 or
thereafter through the date of this report:
i. The Company filed a Current Report of Form 8-K, dated January 7, 2003,
and under Item 2 of such Report, announced the transfer of certain
assets of its Isis Tele-Communications, Inc., subsidiary to GTS
Prepaid, Inc. The agreement between the Company and GTS Prepaid, Inc.
was attached as exhibit 10.1 to such Report. Pro forma financial
statements were included under Item 7 of such Report.
ii. The Company filed a Current Report of Form 8-K, dated May 2, 2003, and
under Item 5 of such Report, announced that it had entered into an
agreement whereby the Company loaned to GTS Prepaid, Inc the unpaid
portion of (i) the accounts receivable collected by GTS Prepaid, Inc.,
and (ii) the portion of the consigned inventory of phonecards sold by
GTS Prepaid, Inc., the aggregate of which totaled $353,484.45. Such
obligation bears interest at the rate of 15% per annum and is to be
paid to the Company in 49 weekly installments. The agreement between
the Company and GTS Prepaid, Inc. was attached as exhibit 10.1 to such
Report.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELLULAR TECHNICAL SERVICES COMPANY, INC.
By: /S/BRUCE R. YORK
----------------
Bruce R. York
Vice President and Chief Financial Officer
May 7, 2003
16
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 2003 (the "Report") by Cellular Technical Services
Company, Inc. ("Registrant"), I, Bruce R. York, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cellular
Technical Services Company, Inc.;
2. based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. the registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant
and we have: a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared; b) evaluated the effectiveness of the
registrant's disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report (the "Evaluation
Date"); and c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. the registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function): a) all significant deficiencies in
the design or operation of internal controls which could adversely
affect the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and b) any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. the registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
By: /S/BRUCE R. YORK
----------------
Bruce R. York
Vice President and Chief Financial Officer
May 7, 2003
17
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 2003 (the "Report") by Cellular Technical Services
Company, Inc. ("Registrant"), I, Stephen Katz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cellular
Technical Services Company, Inc.;
2. based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. the registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant
and we have: a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared; b) evaluated the effectiveness of the
registrant's disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report (the "Evaluation
Date"); and c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. the registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function): a) all significant deficiencies in
the design or operation of internal controls which could adversely
affect the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and b) any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. the registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
By: /S/STEPHEN KATZ
---------------
Stephen Katz
Chief Executive Officer
May 7, 2003
18