UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A
(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, 2005
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.
-----------------------------------------------------------
(Name of Small Business Issuer as Specified in Its Charter)
Delaware 11-2962080
- -------------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20 East Sunrise Highway, Suite 200, Valley Stream, NY 11581
-----------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (516) 568-0100
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
-----------------------------
(Title of Class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act [ ]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein in any form, and, no disclosure will 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-KSB
or any amendment to this Form 10-KSB [ X ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [X] No [ ]
The Issuer had no revenue for the fiscal year ended December 31, 2005.
As of March 30, 2006 there were 4,586,757 shares of Common Stock, $.001 par
value outstanding.
As of February 14, 2006 the aggregate market value of the Registrant's Common
Stock, $.001 par value, held by non-affiliates was approximately $11.9 million.
The aggregate market value of the Company's stock was calculated using $2.59,
the closing price for its Common Stock on February 14, 2006 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 2006 Annual Meeting of
Stockholders.
Transitional Small Business Disclosure Format Yes [ ] No [X]
This Form 10KSB/A is being filed to correct the inadvertent omission of a
paragraph relating to Risks and Uncertainties in footnote B to the financial
statements and to correct some dates and data in footnote F, and to make
other immaterial textual changes. There has been no change to the financial
statements previously issued.
CELLULAR TECHNICAL SERVICES COMPANY, INC.
TABLE OF CONTENTS FOR FORM 10-KSB
PART I............................................................................................3
ITEM 1. BUSINESS................................................................................3
ITEM 2. PROPERTIES.............................................................................11
ITEM 3. LEGAL PROCEEDINGS......................................................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................11
PART II..........................................................................................12
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..13
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................18
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...34
ITEM 8A. CONTROLS AND PROCEDURES................................................................34
PART III.........................................................................................35
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....................................35
ITEM 10. EXECUTIVE COMPENSATION.................................................................36
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.........................36
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................................36
ITEM 13 EXHIBITS...............................................................................36
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES.................................................36
2
PART I
Item 1. Description of Business
Unless the context otherwise requires, all references to the "Company" or "CTS"
in this Annual Report on Form 10-KSB 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-KSB 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 (the "SEC"). 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. The Company has
completed the process of winding down its Isis operations including having sold
all remaining inventory and collected all non-reserved receivables. As a result,
CTS has no current business. Management currently has no plan to liquidate the
Company and distribute the remaining assets to stockholders. During 2004, 2005
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 2006 the Company will incur costs of
approximately $0.3 million, primarily related to costs of maintaining the
business as a public entity and insurance. The Company does not have any current
source of revenue and has no operations. Accordingly, management believes that
its cash balances as of December 31, 2005 of approximately $3.5 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 year and Operations through 2005
Prepaid Long-Distance Phonecard Products: The Company expanded into the prepaid
long-distance service arena in the fourth quarter of 1999. Through its
majority-owned subsidiary, Isis Tele-Communications, Inc., the Company marketed
and distributed branded prepaid long-distance phonecards in denominations
generally ranging from $5 to $20 per card. Isis also marketed prepaid wireless
phones and phonecards. Isis specialized in targeted marketing programs and
featured local and toll-free access numbers and aggressive domestic and
international long-distance rates. Isis distributed cards through regional and
national multi-level distribution channels, using direct sales, third party
distributors and telemarketing. Due to continuing losses from declining margins
and increased competition in this marketplace, the Company decided to close the
Isis business in December 2002. Isis revenue accounted for 100 % of consolidated
revenue for 2003.
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
3
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 was received from the Blackbird Platform
product line after that date, nor is any further revenue expected from it.
The Company's Strategy
As a result of the foregoing, the Company currently has no 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 stockholders may experience substantial dilution.
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 stockholders. 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 2006.
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.
4
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 stockholders, 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 Forms
8- K 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 stockholders 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 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 stockholders.
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 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
stockholders 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 stockholders.
Further, if the
5
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 a 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 stockholders of the Company prior to such transaction or
reorganization may be substantially less than the proportional interest of such
stockholders 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 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
6
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 FCC
regulations there under, as well as applicable laws and regulations of the
various states administered by the relevant state authorities. Certain aspects
of the Internet industry are also subject to the Telecommunications Act of 1996
and regulations of the FCC. There can be no assurance that the Company would be
able to comply with any such regulations. In addition, regulations may be
enacted in the future which may have a material adverse effect on the business
of the Company.
Product Development
For the years ended December 31, 2005, and 2004, the Company incurred no
research and development expenditures. 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 at its Neumobility division or Isis subsidiary were
terminated in late 2002.
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 also
actively pursued patent protection for technology and processes involving its
products that it believed 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 attempted 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 December 31, 2005, the Company had one part time employee and no full time
employees. The Company's employee is not covered by a collective bargaining
agreement. The Company may find it necessary to periodically hire part-time
clerical, technical or consulting 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, 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 $$0.2 million in 2005, $0.4 million in 2004 and forecasts spending
approximately $0.3 million in 2006 with no revenue. As of December 31, 2005, the
Company had an accumulated deficit of $28.2 million, the majority of which
accumulated during the three years ended December 31, 1998. Since the closures
in late 2002 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
7
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 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.
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 ("OTCBB") 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.
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 stockholders to sell
their shares in the secondary market. In addition, SEC rules impose additional
sales practice requirements on broker/dealers who sell penny securities. These
rules require a summary of certain essential items. The items include the risk
of investing in penny stocks in both public offerings and secondary marketing;
terms important to an understanding of the function of the penny stock market,
such as "bid" and "offer" quotes, a dealers "spread" and broker/dealer
compensation; the broker/dealer compensation, the broker/dealer's duties to its
customers, including the disclosures required by any other penny stock
disclosure rules; the customer's rights 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
8
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; 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 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.
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 Code, 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.
9
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 stockholder approval and may result in substantial dilution in the
percentage of the Company's securities held by the Company's then-stockholders.
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-stockholders.
DEPENDENCE ON PERSONNEL; ADEQUATE STAFFING LEVELS AND MANAGEMENT OF GROWTH:
As the Company has no current business operations, its current staffing level of
one part-time employee is adequate to manage the day to day operations. If the
Company merges with or acquires another business, the staffing levels will be
reassessed.
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 "Proprietary Rights" (below). 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 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.
10
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. Description of Property
The Company is currently utilizing the Chairman's office located in a building
of which he is a one-third owner, at 20 East Sunrise Highway, Valley Stream, NY
11581, as its Corporate Office, at no charge.
Item 3. 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 not currently aware of any legal proceedings, threatened
litigation, or asserted claims.
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.
11
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities
The following table sets forth, for each quarter during the period from January
1, 2004 through December 31, 2005 the reported high and low sales prices of the
Company's Common Stock on the Over The Counter Bulletin Board ("OTCBB") (Symbol:
"CTSC.OB").
Sales Price
------------
High Low
---- ---
2004
----
First Quarter 0.78 0.72
Second Quarter 0.80 0.72
Third Quarter 0.80 0.73
Fourth Quarter 0.76 0.68
2005
----
First Quarter 1.05 0.75
Second Quarter0 1.95 0.76
Third Quarter 2.94 1.55
Fourth Quarter 2.26 1.75
As of December 31, 2005, the number of holders of record of the Company's Common
Stock was 207, and the number of beneficial stockholders 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 2005 or 2004 and the Company has no plans for
any such payments in the future.
Equity Compensation Plan Information
The following table provides information about the Company's equity compensation
plans as of December 31, 2005:
A B C
Number of securities Weighted average exercise Number of securities remaining
to be issued upon price of outstanding options, available for future issuance
exercise of outstanding warrants and rights under equity compensation plans
options, warrants securities reflected in (excluding securities
Plan Category and rights column (A) reflected in column (A))
Equity compensation plans
approved by security holders 174,600 $8.13 211,120
Equity compensation plans not
approved by security holders -- -- --
----------------------------------------------------------------------------------------
Total 174,600 $8.13 211,120
12
Item 6. Management's Discussion and Analysis or Plan of Operation.
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-KSB 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 7 of this Annual Report on Form 10-KSB. 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, which it has done. As a result, the Company
currently has no business. 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, 2005 of approximately $3.6 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.
Revenue Recognition
The company generated no revenues during 2005 and 2004.
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
13
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, which it
has done. As a result, as of December 31, 2005 CTS has no current business.
Management currently has no plan to liquidate the Company and distribute the
remaining assets to stockholders. During 2005, 2004 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 2006 the Company will incur costs of
approximately $0.3 million, primarily related to costs of maintaining the
business as a public entity and insurance. The Company does not have any current
source of revenue and has no operations. Accordingly, management believes that
its cash balances as of December 31, 2005 of approximately $3.6 million are
sufficient to fund its current cash flow requirements through at least the next
twelve months.
Revenue and Expense
Revenue
The Company had no revenue in 2005 or 2004.
Costs and Expenses
General and administrative expenditures include the costs of executive, finance
and administrative support functions, provisions for uncollectible accounts and
costs of legal and accounting professional services.
Year ended December 31, 2005 compared to year ended December 31, 2004
Overview
Total revenues remained at zero in 2005 as they were in 2004. Net loss was
$228,000 or $0.06 per share, compared to a net loss of $444,000 or $0.18 per
share in 2004.
14
The $216,000 decrease in net loss for 2005 in comparison to 2004 is due to the
completion of the wind down of all operations.
Costs and expenses
General and administrative expenses decreased 33% to $318,000 in 2005 from $
473,000 in 2004, due to overhead reductions as compared to the prior year.
Interest Income, net
Net interest income increased to $90,000 in 2005 from $29,000 in 2004. This
increase is attributable to higher interest rates earned on invested cash
balances in the current year compared to prior year and higher cash balances on
which interest was earned.
Income Tax Expense
The Company recognized no income tax expense in either 2005 or 2004.
Liquidity and Capital Resources
The Company's working capital increased to $3.5 million at December 31, 2005
from $2.1 million at December 31, 2004, due to the issuance of new capital
stock.
Net Cash used in operating activities amounted to $0.2 million in 2005, compared
to $0.5 million in 2004 and related to the net loss
Net cash provided by financing activities was $1.6 million at December 31, 2005
and $0.0 at December 31, 2004. The increase was due to the issuance of capital
stock.
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 current 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
Since 2003 when it wound down the operations of Isis, which it has done, the
Company had no business. Management has no plan to liquidate the Company and
distribute the remaining assets to stockholders. During 2004, 2005 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 2006 the Company will incur costs of
approximately $0.3 million, primarily related to costs of maintaining the
business as a public entity and insurance. The Company is not expected to have
any significant revenues or operations. Accordingly, subject to a potential
acquisition or other investment, management believes that its cash balances as
of December 31, 2005 of approximately $3.6 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. 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.
15
16
Item 7. Financial Statements
The following financial statements of Cellular Technical Services Company, Inc.
are included as required to be filed by Item 7.
Report of Stonefield Josephson, Inc., Independent
Registered Public Accounting Firm ...................................... 19
Consolidated Balance Sheets at December 31, 2005 and 2004 ................. 20
Consolidated Statements of Operations for the years ended
December 31, 2005 and 2004 ............................................. 21
Consolidated Statements of Cash Flows for the years ended
December 31, 2005 and 2004 ............................................. 22
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2005 and 2004 ................................. 23
Notes to Consolidated Financial Statements ................................ 24
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
===============================================================================
The Board of Directors and Stockholders
Cellular Technical Services Company, Inc.
Valley Stream, New York
We have audited the accompanying consolidated balance sheet of Cellular
Technical Services Company, Inc. as of December 31, 2005 and 2004 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 2005 and 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, 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. as of December 31, 2005 and 2004 and
the consolidated results of its operations and cash flows for the years ended
December 31, 2005 and 2004, in conformity with accounting principles generally
accepted in the United States of America,
/s/ Stonefield Josephson, Inc.
Stonefield Josephson, Inc.
Certified Public Accountants
Los Angeles, CA
March 5, 2006
18
CELLULAR TECHNICAL SERVICES COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in 000's)
December 31, December 31,
2005 2004
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................... $ 3,555 $ 2,199
LONG-TERM INVESTMENT, net of valuation
adjustment of $1,754 in 2005 and 2004 .......... -- --
------------ -----------
TOTAL ASSETS ...................................... $ 3,555 $ 2,199
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities ....... $ 81 $ 86
Commitments and contingencies ..................... -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value per share,
5,000 shares authorized, none issued and
outstanding ................................. 46 25
Common Stock, $.01 par value per share,
30,000 shares authorized, 4,587 shares
issued and outstanding in 2005 and 2,487
shares issued and outstanding in 2004 .......
Additional Paid-in Capital ..................... 31,663 30,095
Accumulated deficit ............................ (28,235) (28,007)
------------ -----------
Total Stockholders' Equity .................. 3,472 2,113
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........ $ 3,555 $ 2,199
============ ===========
The accompanying notes are an integral part of these consolidated
financial statements.
19
CELLULAR TECHNICAL SERVICES COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in 000's, except per share amounts)
Year Ended December 31,
2005 2004
REVENUES .......................................... -- --
COSTS AND EXPENSES
General and administrative ..................... 318 473
Total Costs and Expenses .......................... 318 473
LOSS FROM OPERATIONS .............................. (318) (473)
OTHER INCOME, net ................................. -- --
INTEREST INCOME, net .............................. 90 29
LOSS BEFORE TAX ................................... (228) (444)
PROVISION FOR INCOME TAX .......................... -- --
NET LOSS .......................................... (228) $ (444)
BASIC AND DILUTED SHARE DATA:
(LOSS) PER SHARE - Basic & Diluted ................ $ (0.06) $ (0.18)
Weighted Average Shares Outstanding -Basic
and Diluted ................................. 3,780 2,470
The accompanying notes are an integral part of these consolidated
financial statements.
20
CELLULAR TECHNICAL SERVICES COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000's)
Year Ended December 31,
2005 2004
OPERATING ACTIVITIES
Net loss ...................................... $ (228) $ (444)
Adjustments to reconcile net loss to
net cash used in operating activities:
Non cash compensation expense
(restricted stock) ...................... 14 52
Loss (Gain) on disposal of assets .......... -- 6
Changes in operating assets and
liabilities:
Decrease in accounts receivable, net .... -- 11
Decrease in prepaid expenses and
deposits ............................. -- 13
Decrease in accounts payable and
accrued liabilities .................. (5) (29)
Decrease in payroll related
liabilities .......................... -- (61)
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES ............ (219) (452)
------------ -----------
FINANCING ACTIVITIES
Issuance of Common Stock ................ 1,575 --
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........ 1,575 --
------------ -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .............................. 1,356 (452)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR ....................................... 2,199 2,651
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ......... $ 3,555 $ 2,199
------------ -----------
The accompanying notes are an integral part of these consolidated
financial statements.
21
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, December 31, 2003 2,450 $ 25 $ 30,043 $ (27,563) $ 2,505
Restricted stock for services
rendered 37 52 52
Net loss -- -- -- (444) (444)
----------- --------
Balance, December 31, 2004 2,487 $ 25 $ 30,095 $ (28,007) $ 2,113
------ ------ ---------- ----------- --------
Common Stock Issued 2,100 21 1,554 1,575
Restricted stock issued for
services rendered 14 14
Net Loss -- -- -- (228) (228)
====== ====== ========== =========== ========
Balance, December 31, 2005 4,587 $ 46 $ 31,663 $ (28,235) $ 3,474
====== ====== ========== =========== ========
The accompanying footnotes are an integral part of these consolidated financial
statements.
22
CELLULAR TECHNICAL SERVICES COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION:
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. 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, which it has done.
As a result, CTS has no current business. 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 2006 the Company will incur costs of
approximately $0.3 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 no
operations. Accordingly, management believes that its cash balances as of
December 31, 2005 of approximately $3.5 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 Isis Telecommunications Inc. and Communication Information
Svcs. Inc. All inter-company accounts and transactions have been eliminated
in consolidation.
Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. The Company has used estimates in determining the carrying value of
its long term investment, property and equipment, reserves for inventories and
uncollectible accounts receivable, deferred revenues, and certain other
provisions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
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.
23
Fair Values of Financial Instruments
At December 31, 2005 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.
Diversification of Credit Risk
The Company is subject to concentrations of credit risk primarily from cash
investments. 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.
Long-Term Investment
The Company accounted for its investment in TruePosition, Inc. under the cost
method, as the Company did 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 evaluated whether the declines in fair value of its investment are
other-than-temporary. This evaluation consisted of review of qualitative and
quantitative factors by members of senior management as well as market prices of
comparable public companies. The Company received 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
determined the fair value of the investment had an other-than-temporary decline,
an impairment write-down was recorded. There were no impairments in 2005 or
2004. (See Note C)
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.
Segment Reporting
The Company's historical 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, however,
the company currently has no revenue.
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.
24
Net Loss Per Share
Basic 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.
Outstanding stock options of 174,600 and 192,800 at December 31, 2005 and 2004,
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 each of the years ended
December 31, 2005 and 2004, were excluded from the computation of diluted
earnings per share because their effect was anti-dilutive.
Comprehensive Income
The Company has no items of other comprehensive income or loss, and accordingly,
a statement of 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 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.
25
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 2005 and 2004 was estimated at the date of grant
using a Black-Scholes option-pricing model with the following weighted-average
assumptions for 2005 and 2004.
2005 2004
------ ------
Risk-free interest rate 3.15% 3.6%
Dividend yield 0.0% 0.0%
Volatility factor 1.05% 1.06%
Expected life of the options (years) 5.7 4.0
Fair value of options granted during the year $ 0.00 $ 0.53
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):
2005 2004
------- -------
Net income (loss) $ (228) $ (444)
Add: Stock-based compensation as reported 14 57
Deduct: Total stock-based compensation expense determined
under fair value method for all awards, net of taxes 0 159
------- -------
Net income (loss) - pro forma $ (214) $ (546)
======= =======
Basic earnings (loss) per share - as reported $ (0.06) $ (0.18)
Basic earnings (loss) per share - pro forma $ (0.06) $ (0.22)
Diluted earnings (loss) per share - as reported $ (0.06) $ (0.18)
Diluted earnings (loss) per share - pro forma $ (0.06) $ (0.22)
There was no compensation expense related to stock option grants recorded by the
Company during the years 2005 and 2004. In 2005 and 2004 the Company recorded
$14,000 and $52,000 in compensation expense related to restricted stock grants,
respectively.
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, and 37,000 shares of restricted stock vesting in 2004
and 2005, to its directors. The fair market value of the stock issued was $0.66
per share on June 5, 2003 and $0.73 per share on June 8, 2004. 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 of $13,505
included in additional paid-in-capital in stockholders' equity.
Recent Accounting Pronouncements
In December 2005, the FASB issued SFAS No.123 (revised 2005), "Share-Based
Payment". SAFS 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SAFS 123(R) replaces SAFS 123, and supersedes APB
Opinion No. 25. SAFS 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, that Statement permitted entities the
option of continuing to apply the guidance in APB Opinion 25, as long as the
footnotes to financial statements disclosed what net income would have been had
the preferable fair-value-based method been used. The Company will be required
to apply SAFS 123(R) as of the first interim or annual reporting period that
begins after December 15, 2006. Management is evaluating the impact of the
adoption of SFAS 123(R).
26
Risks and Uncertainties:
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 operation.
NOTE C - 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 D - COMMITMENTS AND CONTINGENCIES:
As of December 31, 2003, the Company leased office space under a month-to-month,
verbal arrangement. During October 2005, the Company ceased operations in
Seattle and moved its records to its Chairman's office in New York. At December
31, 2005, there is no current rent expense incurred by the Company. Amounts
charged to operations under all lease and rental agreements totaled
approximately $0.00 and $17,000 in 2005 and 2004, respectively.
NOTE E - 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 and $5,000 in 2005 and 2004, respectively.
NOTE F - INCOME TAXES:
27
At December 31, 2005, the Company had available for federal income tax purposes
net operating loss carryforwards of approximately $52.4 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 $22,000 and $27,000 of the
$1.2 million expired in 2005 and 2004 respectively. 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,
2005 2004
---------------------------
Deferred tax assets:
Net operating loss carryforwards $ 18,930 $ 18,441
Research and development credits 1,194 1,217
AMT credits 53 53
---------------------------
Total deferred tax assets 20,177 19,711
Valuation allowance (20,177) (19,711)
---------------------------
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, $0.1 million in 2005, and 2004, respectively, and were primarily
attributable to the net losses in 2005 and 2004 and expiration of research and
development tax credits.
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,
-----------------------
2005 2004
-----------------------
Income tax provision (benefit) at statutory
rate of 34% $ (78) $ (149)
Utilization of net operating loss carryforwards -- --
Losses producing no current tax benefit 78 149
Alternative minimum tax provision (refunds) -- --
State income taxes -- 1
-----------------------
Income taxes provision (benefit), current $ -- $ 1
=======================
28
NOTE G - STOCKHOLDERS' EQUITY:
Stock Options
Pursuant to the Company's 1991 Qualified Stock Option and 1991 Non-Qualified
Stock Option Plans, as amended (the "1991 Plan"), 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 the 1991 Plans 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, 2004 193 0.66 - 188.75 8.17
Granted 60 0.72 - 0.73 0.73
Canceled (60) 0.70 - 8.00 2.38
--- ---- ------ ----
Balance, December 31, 2004 193 0.66 188.75 8.17
Granted 0
Canceled (18) 0.66 0.73 0.72
--- ---- ------ ----
Balance, December 31, 2005 175 0.66 188.75 8.17
--- ==== ====== ====
Exercisable at December 31, 2005 136
===
Available for grant at December 31, 2005 214
===
Common Stock reserved for future issuance 389
===
29
The following table summarizes information concerning outstanding and
exercisable stock options as of December 31, 2005 (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 60 8.08 $ 0.77 22 $ 0.82
1.91 - 3.75 30 4.95 2.77 29 2.77
8.00 - 8.38 71 4.46 8.01 71 8.01
11.34 - 29.69 11 4.98 13.31 11 13.31
175.00 - 188.75 3 1.80 180.16 3 180.16
--- ---
$ 0.66 - $ 188.75 175 5.69 $ 8.13 136 $ 10.23
=== ===
Shares under options that were exercisable at December 31, 2005 were 136,000.
Average exercise price for options that were exercisable at December 31, 2005
was $10.23.
NOTE H - 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 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, its Chairman, and Isis alleging, among other
things, that the Company breached the purchase agreement and the employment
contract. During December 2005, the Court dismissed all claims against CTS and
its Chairman. During May 2005, this case was settled out of court by payment of
a nominal sum to the former shareholder. The expense has been included in
General and Administrative Expenses on the Statement of Operations.
NOTE I - 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,
2005 and 2004 were losses of $0 and $0.4 million in 2005 and 2004, respectively.
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
30
and terminated the remaining employees of Isis. Termination benefits were
insignificant and were all paid before December 31, 2002. Revenues of Isis were
$0 in 2005 and 2004. Net earnings (losses) before tax of Isis were approximately
$0 and $0 million in 2005 and 2004 respectively.
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 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 was repaid in full. 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.
31
Item 8. 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, 2005 and 2004. .
Item 8A. Controls and Procedures
As of the end of the fiscal year ended December 31, 2005, 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.
32
PART III
Item 9. Directors, Executive Officers Promoters and Control Persons; In
Compliance with Section 16(a) of the Exchange Act
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 63 Chairman of the Board of Directors, Chief Executive
Officer and Acting President 1988 2006
Lawrence Schoenberg 73 Director 1996 2006
Joshua J. Angel 69 Director 2001 2007
Dr. Phillip Frost Director 2005 2006
Dr. Jane Hsaio 58 Director 2005 2006
Richard C. Pfenniger 50 Director 2005 2006
Kenneth Block 58 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
the founder and Senior Managing Shareholder of Angel & Frankel, P.C., a New York
based law firm specializing in commercial insolvency and creditors rights. On
January 3, 2006 Angel & Frankel, P.C. merged its practice with Cole, Schotz,
Meisel, Forman & Leonard, P.A., a general practice law firm. Mr. Angel currently
serves as senior counsel to that firm. Mr. Angel has a B.S. from N.Y.U. and an
L.L.B. from Columbia University.
Dr. Phillip Frost, MD. served as Chairman of the Board and Chief Executive
Officer of IVAX Corporation from 1987 to 2006. He is Chairman of the Board of
Directors of IVAX Diagnostics, Inc. (diagnostic reagent kits). He is a director
of Northrop Grumman Corporation, (aerospace), Cellular Technical Services
Company, Inc. (a corporate shell), Continucare Corporation (healthcare), and
Ladenburg Thalmann Financial Services, Inc. (securities brokerage). He is a
member of the Board of Trustees of The Scripps Research Institute and is a life
member, and former Chairman of the Board of Trustees of the University of Miami.
He is Vice Chairman of the Board of Teva Pharmaceutical Industries LTD and
co-Vice Chairman of the Board of Governors of the American Stock Exchange
33
Dr. Jane Hsaio Ph.D. in Medicinal Chemistry, University of Illinois, 1973.
Founded Innotech Laboratory in 1981. One of the co-founders of IVAX Corporation
in 1986, and sold to Teva Pharmaceutical in 2006. Held positions at IVAX as Vice
Chairman, Director, Chief Technical Officer and Chairman/CEO/President of IVX
Animal Health, a wholly owned subsidiary of IVAX Corporation. Also served as
Director of IVAX Diagnostic.
Richard C.Pfenniger, Jr., has been a director of the Company since April 2005.
Mr. Pfenniger has been Chief Executive Officer and President of Continucare
Corporation (healthcare) since October 2003, and the Chairman of Continucare's
Board of Directors since 2002. He served as CEO and Vice Chairman of Whitman
Education Group, Inc. (proprietary education) from 1997 until 2003. Mr.
Pfenniger is a director of GP Strategies, Inc. (corporate training).
Kenneth Block joined the Company in September 2005 as Secretary and Chief
Financial Officer. Since 1991 Mr. Block has been the controller of Shadybrook
Charter Corp. and Sunrise Charter Management Corp., each of which is a real
estate management company. Mr. Block graduated from Bernard Baruch College with
a Bachelors of Business Administration degree. He is a Certified Public
Accountant in the State of New York.
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. Pfenniger, 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 2007,
2006 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 10. Executive Compensation
The information required by this item is incorporated by reference to the
Company's definitive proxy statement relating to its 2006 Annual Meeting of
Stockholders under the caption "Executive Compensation and Related Information."
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder matters
The information required by this item is incorporated by reference to the
Company's definitive proxy statement relating to its 2006 Annual Meeting of
Stockholders under the caption "Security Ownership."
Item 12. 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 2006 Annual Meeting of
Stockholders under the caption "Certain Relationships and Related Transactions."
Item 13. 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)
14.1 Code of Ethics Pursuant to Section 406 of the Sarbanes-Oxley Act of 2002
(8)
21.1 Subsidiaries of the Registrant (9)
34
23.1 Consent of Stonefield Josephson, Inc., independent auditors (9)
31.1 Rule 13a-14(a)/15d-14(a) Certification by CFO (9)
31.2 Rule 13a-14(a)/15d-14(a) Certification by CEO (9)
32.1 Section 1350 Certifications (9)
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).
(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 April 23, 2005 (File
No.0-19437).
(8) Incorporated by reference to Annual Report on Form 10-K filed on March 30,
2005 for the year ended December 31, 2003 (File No. 0-19437).
(9) Filed herewith.
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 Registered
Public Accounting Firm" in the Proxy Statement relating to the Company's 2006
Annual Meeting of Stockholders.
35
PART IV
All other schedules have been omitted because they are inapplicable, not
required, or the information is included in the financial statements or notes
thereto.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Cellular Technical Service Company, Inc.
Registrant
By: /s/ Stephen Katz
---------------------------------
Stephen Katz, Chairman of the Board of
Directors and Chief Executive Officer
Date: March 30, 2006
In accordance with the Exchange Act, 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/ Richard C. Pfenniger
- ---------------------------------------------------- ----------------------------------
Stephen Katz, Chairman of the Board of Directors and Richard C. Pfenniger, Director
Chief Executive Officer March 30, 2006
(Principal Executive Officer)
March 30, 2006
/s/ Kenneth Block /s/ Joshua J. Angel
- ---------------------------------------------------- ----------------------------------
Kenneth Block Joshua J. Angel, Director
Chief Financial Officer and Secretary March 30, 2005
(Principal Financial and Accounting Officer)
March 30, 2006
/s/ Lawrence Schoenberg /s/ Phillip Frost
- ---------------------------------------------------- ----------------------------------
Lawrence Schoenberg, Director Phillip Frost, Director
March 30, 2006 March 30, 2006
/s/ Jane Hsaio
- ----------------------------------------------------
Jane Hsaio, Director
March 30, 2006
36
Exhibit 21.1 Subsidiaries of the Registrant
Name of Subsidiary State of Incorporation Name Under Which Subsidiary Is Doing Business
Isis Tele-Communications, Inc. Delaware Isis Tele-Communications, Inc.
37
Exhibit 23.1 Consent of Stonefield Josephson, Inc., Independent Registered
Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-76128) pertaining to the 1991 Qualified Stock Option Plan and 1991
Nonqualified Stock Option Plan, in the Registration Statement (Form S-8 No.
33-82016) pertaining to the 1993 Non-Employee Director Stock Option Plan, in the
Registration Statement (Form S-8 No. 333-08049) pertaining to the 1996 Stock
Option Plan and in the Registration Statement (Form S-8 No. 333-44410)
pertaining to the 1993 Non-Employee Director Stock Option Plan and 1996 Stock
Option Plan, of our report dated March 5, 2006, with respect to the consolidated
financial statements and related schedule of Cellular Technical Services
Company, Inc. as of December 31, 2005 and 2004 and for the years then ended
included in the Annual Report (Form 10-KSB/A) for the year ended
December 31, 2005.
/s/ Stonefield Josephson, Inc.
Los Angeles, California
April 6, 2006
38
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification
In connection with the filing of the Annual Report on Form 10-KSB for the Year
Ended December 31, 2005 (the "Report") by Cellular Technical Services Company,
Inc. ("registrant"), I, Kenneth Block, certify that:
1. I have reviewed this annual report on Form 10-KSB of Cellular
Technical Services Company, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure control and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors
a. All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
By: /s/ Kenneth Block
--------------------------------------------
Kenneth Block
Secretary and Chief Financial Officer
March 30, 2006
39
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification
In connection with the filing of the Annual Report on Form 10-KSB for the Year
Ended December 31, 2005 (the "Report") by Cellular Technical Services Company,
Inc. ("registrant"), I, Stephen Katz, certify that:
1. I have reviewed this annual report on Form 10-KSB of Cellular
Technical Services Company, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure control and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors
40
a. All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
By: /s/ Stephen Katz
--------------------------
Stephen Katz
Chief Executive Officer
March 30, 2006
41
Exhibit 32.1 Section 1350 Certification
In connection with the filing of the Annual Report on Form 10-KSB for the Year
Ended December 31, 2005 (the "Report") by Cellular Technical Services Company,
Inc. ("Registrant"), each of the undersigned hereby certifies that:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of Registrant.
By: /s/ Stephen Katz
---------------------------------------
Stephen Katz
Chief Executive Officer
March 30, 2006
By: /s/ Kenneth Block
---------------------------------------
Kenneth Block
Secretary and Chief Financial Officer
March 30, 2006
A signed original of this written statement required by Section 906 of the
Sarbanes-Oxley Act of 2002 has been provided to Cellular Technical Services
Company, Inc and will be retained by the Registrant and furnished to the
Securities and Exchange Commission or its staff upon request.
42
