================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------
FORM 10-QSB
(MARK ONE)
--------------------------------------------------------------------------------
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
--------------------------------------------------------------------------------
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
--------------------------------------------------------------------------------
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
--------------------------------------------------------------------------------
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER 000-25205
CELLPOINT INC.
(Name of small business issuer in its charter)
--------------------------------------------------------------------------------
NEVADA 52-2032380
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
--------------------------------------------------------------------------------
3000 HILLSWOOD DRIVE, (Zip Code)
HILLSWOOD BUSINESS PARK,
CHERTSEY, SURREY KT16 0RS, ENGLAND
(Address of principal executive offices)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
44-1932 895 310
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: NONE.
Securities registered under Section 12(g) of the Exchange Act:
--------------------------------------------------------------------------------
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Common Stock, $.001 par value NASDAQ National Market
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-----------
Check whether the issuer: (1) 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 such filing requirements for past 90 days. Yes |X| No |_|
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes |_| No |_|
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of November 12, 2001,
17,069,622 shares of Common Stock, par value $.001 per share.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
==============================================================================
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial statements for the Company's first fiscal quarter ended September
30, 2001 are attached to this Report, commencing on page F-1.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our consolidated financial condition
and consolidated results of operations should be read in conjunction with our
consolidated financial statements and related notes thereto in our Annual Report
on Form 10-KSB for the fiscal year ended June 30, 2001.
RECENT DEVELOPMENTS
UNWIRE AB AND TELEMATICS OPERATIONS IN CELLPOINT SOUTH AFRICA
On May 19, 2001, the Company approved the disposal of the telematics business
segment of the Company and committed to a plan to dispose of the business.
Accordingly, the telematics business segment was presented as a discontinued
operations in the balance sheets as of September 30, 2001 and June 30, 2001 and
the related statements of operations and cash flows for the three months ended
September 30, 2001. The related statements of operations and cash flows for the
three months ended September 30, 2000, have been restated to conform with this
presentation. At June 30, 2001, the Company had accrued approximately $1,100,000
for additional losses expected from the discontinued operations through the
expected date of disposition. For the three months ended September 30, 2001 the
Company has incurred losses of approximately $1,085,000 against the accrual. The
Company does not anticipate any further significant losses. Net sales for
Telematics were approximately $264,000 and $53,000 for the three-months ended
September 30, 2001 and 2000, respectively.
On October 9, 2001, the Company's subsidiary, Unwire AB, filed for bankruptcy in
Sweden. As a result of the filing, the Company has effectively ceased all
funding of Unwire operations. The bankruptcy courts have appointed a Trustee to
oversee the disbursement of Unwire's assets and the Company now effectively has
no control over the operations or decision making capabilities of Unwire.
In November, 2001 CellPoint Systems SA ("Systems SA"), the Company's South
African subsidiary, filed for liquidation. Systems SA operated a research and
development facility for the Company. The telematics portion of Systems SA has
already been included in the discontinued operations. The location services
portion of Systems SA is not included in discontinued operations, and those
functions are continued within the Company's Swedish subsidiary. Costs of
closing this
subsidiary, primarily the write-off of the net receivable from Systems SA, were
accrued in the June 30, 2001 financial statements.
RESTRUCTURING PROGRAM
On October 19, 2001 CellPoint Systems AB acquired 100% of its partly-owned
development company, Micronet MLS AB in Karlskrona, Sweden, purchasing the
outstanding 42% of Micronet MLS and assets with 107,142 shares of the Company's
common stock. Micronet MLS AB staff has been transferred to Systems AB ensuring
that all development knowledge remains in-house which provides further cost
savings going forward.
Consistent with the Company's strategy to reduce operating costs within
continuing operations, the United Kingdom subsidiary CellPoint Europe Ltd filed
for liquidation on November 2, 2001. The Company's headquarters and all
management functions will reside in its office in Kista, Sweden. A branch office
will be maintained in the United Kingdom to continue serving existing and future
customers. Costs of liquidating CellPoint Europe, primarily the write-off of the
intercompany net receivable from CellPoint Europe, amounting to approximately
$3,049,000, have been accrued in the September 30, 2001 financial statements
and recorded as selling, general and administrative expenses in the statement
of operations.
LONG TERM DEBT
On December 6, 2000, the Company entered into an agreement whereby it issued to
Castle Creek Technology Partners LLC ("Castle Creek") convertible notes in the
aggregate principal amount of $10,000,000, which were originally due and payable
on September 30, 2002. Interest on the debt is 6% per annum, compounded
semi-annually and payable semi-annually on each June 30 and December 31. Prior
to June 5, 2001, the notes were convertible, in whole or in part, at a fixed
conversion price of $25 per share at the option of the holder of the debt and
could be converted in exchange for all or part of the outstanding debt plus the
accrued interest at the conversion date. Subsequent to June 5, 2001, the notes
were convertible at the lower of $25 or 90% of the average of the five lowest
volume weighted average prices during the period of twenty consecutive trading
days ending on the trading day immediately prior to the date of determination.
The conversion of the notes contained certain limitations as set forth in the
agreement. The Company has reserved 2,000,000 shares for the purpose of possible
future conversions.
In connection with the convertible notes, the Company issued warrants
exercisable immediately and expiring on December 5, 2005. The warrants grant
Castle Creek the right to purchase 210,526 shares of the Company's common stock
at an exercise price per share of $11.40.
On July 25, 2001, the Company entered into a note purchase, modification and
forebearance agreement with Castle Creek concerning the above mentioned notes.
Under the agreement, the outstanding notes were to be repurchased by the
Company. The Company agreed to buy back the outstanding principal of the notes
over 90 days for 86% of the remaining principal, plus accrued interest, and
issued a warrant with 500,000 shares issuable upon exercise of the warrant at an
exercise price of $3.14 per share and exercisable after one year for a period of
four years (subject to specified anti-dilution adjustments). In addition, the
Company granted to Castle Creek a security interest in its assets (including the
assets of its subsidiaries), including its intellectual property. Castle Creek
agreed not to trade in the Company's stock effective July 25, 2001 until the
note repurchase is completed, in consideration for which Castle Creek was paid
$1,000,000 as a non-refundable deposit against the final note purchase payment.
The fixed conversion price of the Notes was changed to $4.00 with no floating
conversion price if the notes are purchased on a timely basis and the Company
complies with all its other obligations to Castle Creek in all material
respects. The Company also agreed to certain limitations on the terms of future
debt and equity financings, which limitations would not apply to a financing
that provided the proceeds for the final purchase of the Notes.
On September 26, 2001, the Company and Castle Creek entered into an amendment of
the July 25, 2001 agreement, wherein the outstanding convertible notes will be
repurchased at 100% of the remaining principal and subject to a fixed conversion
price of $4.00. The Company paid $2,250,000 to Castle Creek on September 26,
2001 for principal and accrued interest and is scheduled to make a final payment
on October 1, 2002 for $6,105,100 plus accrued interest (subject to specified
adjustments upon a material breach by the Company). The outstanding notes are
prepayable in part or in whole at any time without penalty. However, if the
Company is in non-compliance of the limitations on the terms of future debt
and equity financing, there will be a $2,000,000 penalty and the notes will
become convertible at the lower of 1) the average
closing price during the ten day period beginning five days prior to the date of
the non-compliance event or (2) the lowest price of common stock or common stock
equivalents sold from September 25, 2001 to the non-compliance event. The July
agreement, except as modified by the amendment, remains in effect.
On November 15, 2001, the Company was served with a suit by Castle Creek to
have its debt of in excess of $6.1 million principal plus interest declared
due and payable, for a default payment of $2 million and other damages and
relief. The principal issue in dispute in the litigation is the antidilution
adjustment applicable to the number of shares that Castle Creek is entitled
to purchase under the warrant issued in the July 25, 2001 restructuring with
Castle Creek to purchase 500,000 shares of common stock (see "Legal
Proceedings"). The Company has registered additional shares for Castle Creek
in its registration statement on Form S-3 as required by the antidilution
provisions of this warrant. If the Company does not settle or prevail in this
suit, or unless financing becomes available to pay its obligations to Castle
Creek, the Company would be forced to file for bankruptcy.
Following the debt modifications, the Company applied the rules of EITF 96-19:
"Debtor's Accounting for a Modification or Exchange of Debt Instruments." Based
on the provisions of EITF 96-19 it was determined that there was not a
substantial change from the original debt agreement and as such, the modified
debt is shown at fair value using the new effective interest rate. The adjusted
warrant was valued at approximately $700,000 and is being amortized over the
remaining life of the debt. Legal fees associated with the modifications were
expensed in the period.
As of September 30, 2001, Castle Creek had converted $750,000 of the notes into
270,592 shares.
Due to the beneficial conversion features associated with the financing and the
amendments thereto, the Company has applied Emerging Issues Task Force ("EITF")
00-27: Application of EITF No. 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios", to
certain convertible instruments. In accordance with EITF 00-27 the value of the
beneficial conversion feature was recorded as a reduction to the carrying amount
of the convertible debt and an addition to paid-in-capital. The fair value of
the warrants was recorded as a further reduction to the carrying amount and an
addition to paid-in-capital. The Company therefore has recorded a total debt
discount of approximately $3,514,000 and is amortizing the discount over the
term of the debt. Amortization is accelerated when necessary for conversions and
repayments of the debt principal. Amortization for the three-months period ended
September 30, 2001 was approximately $1,121,000 and is recorded as a component
of financial items.
As a result of the private placements at the end of the quarter the
anti-dilution provision attached to the warrants issued on July 25, 2001
became effective. As such, the Company recalculated and adjusted the exercise
price and therefore adjusted the number of shares issuable upon exercise of
the warrants. This resulted in an adjusted exercise price of $1.42 and
additional shares of 608,235 issuable upon exercise of the warrants.
RECENT SALE OF UNREGISTERED SECURITIES
On September 25, 2001, the Company closed a private placement pursuant to which
it will issue 3,250,000 shares of Common Stock for proceeds of $3,250,000. In
addition, the Company will issue warrants to purchase 1,625,000 shares of Common
Stock, exercisable at $2.25 per share for two years. The Company used part of
the proceeds from this offering to make the required payment to Castle Creek for
the repurchase of a portion of the convertible notes held by Castle Creek.
On September 25, 2001, the Company closed a placement under Regulation S for an
aggregate of $2,071,130, pursuant to which the Company will issue an aggregate
of 1,568,144 shares and 784,071 warrants to purchase shares of the Company's
Common Stock, exercisable at $2.36 per share for two years.
As a result of the private placements, the Company had received proceeds
totaling approximately $5,583,000 by September 30, 2001. Commitments totaling
approximately $1,038,000 have been reported as Stock subscriptions receivable in
Stockholders' equity. Shares of the Company's Common Stock in relation to the
private placements were not issued until October 2001 and thus they have been
reflected in Stockholders' equity as Common Shares to be Issued at September 30,
2001.
Subsequent to the quarter end, on October 5, 2001, the Company completed the
initial closing of a private placement of Common Stock and warrants pursuant to
which it will issue an aggregate of 1,238,096 shares of Common Stock for
proceeds of $1,300,000. In addition, the Company will issue warrants to purchase
619,048 shares of Common Stock, half of which are exercisable at $3.50 per share
for twelve months following the closing, and the other half of which are
exercisable at $5.00 per share for twenty-four months following the closing.
The Company filed with the Securities and Exchange Commission on October 31,
2001 and amended on November 16, 2001 a registration statement covering all
shares of Common Stock issued and issuable upon exercise of the warrants
described above.
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001
The results of continuing operations are reported herein for the Company's
location services business. The Company's telematics division is reported as
"discontinued operations".
REVENUES. In the fiscal quarter ended September 30, 2001 (the "Current
Quarter"), the Company's gross revenues from continuing operations were
$415,205, as compared to revenues from continuing operations of $925,553 for the
fiscal quarter ended September 30, 2000 (the "Comparable Quarter"). All of the
Company's revenues came from the European market. The decrease in revenues is
considered to be a timing effect as the Company is currently engaged in several
negotiations to close further contracts.
COST OF REVENUES. Costs incurred by the Company in producing revenues in the
Comparable Quarter were mainly the costs of supplying hardware in conjunction
with the sale of the previous generation of software platforms. Such costs
decreased by $207,787 to $21,046 in the Current Quarter as compared to $228,833
in the Comparable Quarter. The Company's role in supplying hardware in relation
to its sale of software and applications is decreasing, and accordingly, the
costs of producing revenue as a percentage of revenue has decreased. Research
and development expenses are recorded separately.
GROSS PROFIT. For the Current Quarter, the Company recorded a gross profit of
$394,159 as compared to $696,720 gross profit in the Comparable Quarter. This
decrease in gross profit is attributable to the decrease in revenues in the
Current Quarter whilst the gross margin increased by 19.4% to 94.9% in the
Current Quarter from 75.3% in the Comparable Quarter as a result of decreased
need to supply hardware as part of the Company's product.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling, general
and administrative expenses increased by $3,509,040 to $4,863,818 in the Current
Quarter from $1,354,778 in the Comparable Quarter. The increase in selling,
general and administrative expenses in the Company's continuing operations was
primarily due to one-time costs of $3,049,449 taken in connection with the
liquidation of CellPoint Europe Ltd. Excluding the one-time liquidation costs in
this quarter, selling, general and administrative expenses amount to $1,814,369
and are expected to decrease due to the restructuring program in place.
RESEARCH AND DEVELOPMENT EXPENSES. The Company's research and development
expenses increased by $292,807 to $1,072,107 in the Current Quarter from
$779,300 in the Comparable Quarter. The increase in research and development
expenses in the Company's continuing operations was due to the research and
development of the new generation of software platforms for location-based
services.
PROFESSIONAL FEES. Professional fees decreased by $55,823 to $165,675 in the
Current Quarter from $221,498 in the Comparable Quarter. Professional fees in
the Current Quarter are primarily related to costs incurred in connection with
regulatory compliance.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
increased by $100,245 to $1,010,219 in the Current Quarter from $909,974 in the
Comparable Quarter. Depreciation and amortization is primarily related to
purchased technology. The amortization of the positioning technology acquired in
connection with the Unwire acquisition amounts to $418,478 and $386,879 and the
amortization of the original core technology amounts to $445,830 and $497,082
for the three months ended September 30, 2001 and 2000, respectively.
FINANCIAL ITEMS. Financial items resulted in an expense of $1,540,578 in the
Current Quarter compared to a net expense of $149,643 in the Comparable Quarter.
Interest expense was $1,392,534 in the Current Quarter, compared to $211,615 in
the Comparable Quarter. The increase in interest expense was attributable to the
$10,000,000 of convertible notes issued in December 2000 and the amortization of
the debt discount recorded in relation to those notes and the subsequent
amendments to the terms thereof resulting in non-cash expense in the Current
Quarter of $1,120,945. In the Current Quarter, the Company had realized foreign
exchange losses aggregating $124,453 whereas in the Comparable Quarter, the
Company had net realized foreign exchange losses of $6,610. These items result
primarily from exchange rate fluctuations in the currencies of the United States
and Sweden.
LOSS FROM CONTINUING OPERATIONS. Loss from continuing operations for the
Current Quarter was ($8,258,238) versus
($2,718,473) in the Comparable Quarter. The increase in loss from continuing
operations in the Current Quarter was mainly due to the cost for liquidation of
CellPoint Europe Ltd. and the amortization of the debt discount related to the
convertible notes.
LOSS FROM DISCONTINUED OPERATIONS. On July 25, 2001, the Company publicly
announced its intention to sell its telematics division. On October 9, 2001,
Unwire filed for bankruptcy protection under the laws of Sweden. Under
accounting principles generally accepted in the United States, the results of
operations for the telematics division, are presented under "Loss from
Discontinued Operations" for the Comparable Quarter. The loss from "discontinued
operations" of $2,628,825 represents the operating losses of the telematics
division for the comparable quarter. This amount includes depreciation and
amortization of $2,214,672. The loss for the discontinued operations for the
Current Quarter was taken as a cost in the fiscal year-end 2001.
NET LOSS AND LOSS PER SHARE. Net loss was ($8,258,238) for the Current Quarter,
a majority of which was attributable to the loss on liquidation of CellPoint
Europe Ltd. of ($3,049,449) and non-cash expenses of ($1,120,945) due to the
amortization of the debt discount related to the convertible notes. Loss per
share from continuing operations was ($0.75) based on weighted average shares
outstanding of 10,982,040, while the Comparable Quarter loss per share from
continuing operations was ($0.31) based upon a weighted average of 8,743,630
shares outstanding. The net loss for the Comparable Quarter was ($5,347,298)
including the loss from discontinued operations of ($2,628,825).
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. At September 30, 2001, the Company had $4,558,437 in current
assets. Cash and cash equivalents amounted to $2,312,231. Current liabilities
were $11,089,064 at September 30, 2001. At June 30, 2001, the Company had
$4,993,093 in current assets, of which $687,151 consisted of cash and cash
equivalents. Working capital deficit at the end of the Current Quarter was
($6,530,627), as compared to ($2,408,779) at the end of Fiscal 2001. The
decrease in working capital is attributable mainly to the provision for the
write off of the intercompany receivable from CellPoint Europe of $3,049,449
and the use of a bank overdraft facility.
CASH FLOW FROM OPERATIONS. For the Current Quarter, the Company used net cash
in operating activities from continuing operations of $158,061 as compared to
$2,512,572 for the Comparable Quarter. Net cash used in operating activities
from discontinued operations was $1,079,392 in the Current Quarter, as compared
to $412,787 in the Comparable Quarter. The increase in net cash provided is
primarily a result of decreased operating loss before depreciation and
amortization, non-cash expense related to the amortization of the debt discount
in connection with convertible notes and an accrual for one-time costs related
to the liquidation of CellPoint Europe Ltd. For the current fiscal year, total
operating expenses are expected to continue to decrease on a quarterly basis.
On July 25, 2001, CellPoint publicly announced the planned sale of Unwire.
Selling Unwire would among other things lower the Company's burn-rate
significantly and get it to cash flow positive sooner. The Company was unable to
identify a purchaser for Unwire and on October 9, 2001, Unwire filed for
bankruptcy protection under the laws of Sweden. The Company does not
anticpate any further significant charges in relation to this bankruptcy.
CASH FLOW FROM INVESTING ACTIVITIES. For the Current Quarter, the Company had a
net cash outflow from investing activities from continuing operations of
$200,911 versus a net cash outflow of $82,980 in the Comparable Quarter
primarily due to ongoing research and development expenses. The Company does not
currently have any commitments for capital expenditures during the current
fiscal year, but the Company may make such expenditures if an opportunity
consistent with the Company's business strategy presents itself.
CASH FLOW FROM FINANCING ACTIVITIES. For the Current Quarter, the Company had a
net cash inflow from financing activities from continuing operations of
$2,897,448 versus a net cash inflow from continuing operations of $149,800 in
the Comparable Quarter. The Company received net proceeds of approximately
$5,583,000 from sales of equity through private placements in the Current
Quarter. Proceeds were used to repay long term debt and for working capital.
The Company may require additional capital during its fiscal year ending June
30, 2002 to implement its business strategies, including cash for (i) payment of
operating expenses such as salaries for employees, and (ii) further
implementation of those business strategies. Such additional capital may be
raised through additional public or private financing, as well as borrowings and
other resources. To the extent that additional capital is raised through the
sale of equity or equity-related securities, the issuance of such securities
could result in dilution to the Company's stockholders. No assurance can be
given, however, that the Company will have access to the capital markets in the
future, or that financing will be available on
acceptable terms to satisfy the Company's cash requirements to implement its
business strategies. If the Company is unable to access the capital markets
or obtain acceptable financing, its future results of operations and
financial conditions could be materially and adversely affected. See "Legal
Proceedings" below for a description of a lawsuit filed by Castle Creek
Technology Partners, LLC, which may, inter alia, substantially impair the
Company's ability to raise additional capital. The Company may be required to
raise substantial additional funds through other means. If adequate funds are
not available to the Company, it may be required to curtail operations
significantly or to obtain funds through entering into arrangements with
collaborative partners or others that may require us to relinquish rights to
certain of its technologies or product candidates that the Company would not
otherwise relinquish. While the Company has begun to receive commercial
revenues, there can be no assurances that its existing commercial agreements
will provide adequate cash to sustain its operations. If the Company decides
to expand its business faster, or to geographic areas outside of Europe
during the next twelve months, it may need to raise further capital.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") finalized FASB
Statements No. 141, BUSINESS COMBINATIONS (SFAS No. 141), and No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS (SFAS No. 142). SFAS No. 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
SFAS No. 141 also requires that the Company recognize acquired intangible assets
apart from goodwill if the acquired intangible assets meet certain criteria.
SFAS No. 141 applies to all business combinations initiated after June 30, 2001
and for purchase business combinations completed on or after July 1, 2001. It
also requires, upon adoption of SFAS No. 142 that the Company reclassify the
carrying amounts of intangible assets and goodwill based on the criteria in SFAS
No. 141.
SFAS No. 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS No. 142 requires that the Company identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS No. 142. SFAS No. 142 is required to be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized. Early adoption is permitted in the first quarter of
fiscal years beginning after December 15, 2000. SFAS No. 142 requires the
Company to complete a transitional goodwill impairment test six months from the
date of adoption. The Company is also required to reassess the useful lives of
other intangible assets within the first interim quarter after adoption of SFAS
No. 142. The Company is still assessing the impact SFAS No. 142 will have on its
financial position and results of operations and thus was unable to early adopt
SFAS No. 142. The Company will thus adopt SFAS No. 142 on July 1, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" ("SFAS No. 144"). This statement supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS No. 121") and Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations -Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". SFAS No. 144
retains the fundamental provisions of SFAS No. 121 for recognition and
measurement of impairment, but amends the accounting and reporting standards
for segments of a business to be disposed of. SFAS No.144 is effective for
fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years, with early application encouraged. The provisions of SFAS
No. 144 generally are to be applied prospectively. The Company believes that
the adoption of SFAS No. 144 will not have a material impact on the Company's
financial position or results of operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report contain "forward looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. These are statements that do not relate strictly to
historical or current facts. Although the Company believes that its plans,
intentions and expectations reflected in such forward looking statements are
reasonable, it can give no assurance that such plans, intentions or expectations
will be achieved. Such forward-looking statements involve known and unknown
risks and uncertainties. The Company's actual actions or results may differ
materially from those discussed in the forward-looking statements. These risk
factors are set forth below. All forward looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements set forth below:
o Our limited operating history makes evaluation of our business
and prospects difficult;
o Our business and prospects must be considered in light of the
risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets,
such as the market for location services;
o The Company has been sued by Castle Creek Technology
Partners, LLC, which has provided the Company financing, to
have the Company's debt of in excess of $6 million declared
due and payable, for a default payment of $2 million and other
damages and relief (See "Legal Proceedings"), based on an
alleged failure on the Company's part to register an increased
number of shares for Castle Creek due to the operation of
antidilution provisions in a warrant the Company issued to
Castle Creek in July 2001--the Company has registered these
additional shares in the amendment to its registration
statement on Form S-3 filed November 16, 2001.
o Our sales cycles are long and our revenue is unpredictable;
o Our ability to secure additional financing on acceptable
terms, as and when necessary;
o Our ability to improve our technology to keep up with customer
demand for new services;
o The development cycle for new products may be significantly
longer than expected, resulting in higher than anticipated
development costs;
o The ability of our systems and operations to connect and
manage a substantially larger number of customers while
maintaining adequate performance, which could place a strain
on managerial and operational resources;
o Our ability to expand customer service, billing and other
related support systems;
o Our ability to retain the services of our key management and
to attract new members of our management team;
o Our ability to effect and retain appropriate patent, copyright
and trademark protection of our products;
o Despite the implementation of security measures, our computer
networks and web sites may be vulnerable to unauthorized
access, computer viruses and other disruptive problems, and
any such occurrence could result in the expenditure of
additional resources necessary to protect our assets;
o Increased competition in the field of location services;
o Our ability to retire the outstanding convertible notes held
by Castle Creek Technology Partners, LLC, pursuant to the
terms of the Note Purchase, Modification and Forebearance
Agreement, dated as of July 25, 2001, as amended as of
September 26, 2001.
o Our ability to continue to meet the listing requirements of
the Nasdaq National Market.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART II
ITEM 1. LEGAL PROCEEDINGS
PENDING LEGAL PROCEEDING
As described elsewhere in this report, the Company is party to a Securities
Purchase Agreement, dated December 6, 2000, with Castle Creek Technology
Partners LLP ("Castle Creek"), pursuant to which it issued $10,000,000
principal amount of its convertible notes (the "Notes") to Castle Creek, a
Stock Purchase Warrant, dated December 6, 2000, entitling Castle Creek to
purchase additional shares of the Company's common stock, and a related
Registration Rights Agreement, dated December 6, 2000, providing for
registration with the Securities and Exchange Commission ("SEC") of the
shares of common stock owned by Castle Creek and issuable pursuant to said
convertible notes and stock purchase warrant for resale. On July 25, 2001,
the Company entered into a Note Purchase, Modification and Forbearance
Agreement with Castle Creek, pursuant to which a portion of the principal
amount of the Notes was paid, and the balance of the Notes to be paid in full
by October 23, 2001. On July 25, 2001, in connection with the restructuring
of the December 2000 Securities Purchase Agreement, the Company issued to
Castle Creek a warrant to purchase 500,000 shares of its common stock, at an
initial exercise price of $3.14 per share (the "July 2001 Warrant"). Its
agreements with Castle Creek were further restructured pursuant to an
Amendment to the July 2001 Note Purchase, Modification and Forbearance
Agreement, dated September 26, 2001, which involved a further payment by the
Company on the principal amount of the Notes and the extension of the due
date of the Notes to October 1, 2002. The original due date of the Notes was
September 30, 2002.
On October 31, 2001, the Company filed a registration statement on
Form S-3 with the SEC which registered, inter alia, 600,000 shares of common
stock for resale by Castle Creek (120% of the 500,000 shares issuable upon
exercise of the July 2001 Warrant). The Company disclosed in this filing that
it may have a claim against its former legal counsel resulting from their
representation of the Company in the restructuring of the Castle Creek
agreements in which the July 2001 Warrant was issued. It is management's
position that the warrant documents reviewed and approved by former counsel
do not accurately reflect the business terms of the agreement with Castle
Creek with regard to the anti-dilution provisions.
In order to reflect the potential effect of the anti-dilution provisions
in the July 2001 Warrant, the Company has now amended the registration
statement and registered 729,882 additional shares for issuance pursuant to
the July 2001 Warrant (608,235 additional shares are purchasable upon
exercise of the July 2001 Warrant over and above the 500,000 shares as to
which the Warrant was initially exercisable, plus 20% of that amount, as per
the related registration rights agreement which requires that 120% of shares
underlying the warrants be registered). The July 2001 Warrant is not
exercisable until July 26, 2002, unless there is a breach of the terms of the
Warrant by the Company.
On November 15, 2001, the Company was served with a lawsuit filed by
Castle Creek against the Company (the "Castle Creek Litigation") in the U.S.
District Court for the Southern District of New York. Castle Creek is
claiming that the Company is required to register additional shares
underlying the July 2001 Warrant. The Company did not previously register
additional shares for Castle Creek as there was no consensus as to the
precise number of additional shares to be registered at the required October
31, 2001 filing deadline of the registration statement of which this
Prospectus is a part. However, the Company did register the known number of
shares for Castle Creek per the July 2001 agreements and specifically the
500,000 warrant shares underlying the July 2001 Warrant plus the additional
20% as required per the July Note Purchase, Modification and Forbearance
Agreement. Castle Creek is now seeking the following relief in Court, which
the Company will dispute given Castle Creek's alleged failure to reach
agreement with the Company on any specific number of additional shares to be
registered per complex formulae in the July 2001 Warrant: a declaratory
judgment of the Court as to the operation of the anti-dilution provisions of
the July 2001 Warrant (to the effect that these provisions entitle Castle
Creek to purchase additional shares of common stock underlying additional
warrants, requiring the Company to provide to Castle Creek the notice
provided for in the Warrant as to the adjustment in the number of July 2001
Warrant shares and exercise price; an order of the Court compelling the
Company to register in an amendment to its registration statement on Form S-3
filed
with the Securities and Exchange Commission on October 31, 2001, an aggregate of
120% of the number of shares purchasable upon exercise of the July 2001 Warrant;
that the Company pay Castle Creek the "Default Amount" under the Company
outstanding Notes with Castle Creek, including all costs of collection,
attorneys' fees, experts' fees, accountants' fees, litigation costs, expenses
and disbursements; the complaint alleges that the "Default Amount" is
calculated by dividing the aggregate principal amount owing under the Notes
plus all accrued and unpaid interest thereon through the payment date by the
conversion price in effect on the date of receipt of the default notice (the
Company has not received a default notice) multiplied by the highest closing
bid price of the Company's common stock during the period beginning on the
date on which the Company receives a default notice and ending on the date
immediately preceding the date of payment of Default Amount; entry of
judgment confessed by the Company in the amount of $10 million, less any
principal amounts on the Notes paid prior to entry of judgment (estimated by
the Company to be approximately $ 6.1 million principal remaining), plus
interest at the rate of 15% per annum from December 6, 2000; and a
declaratory judgment of the Court declaring that the Company has defaulted
under its agreements with Castle Creek, and that, as a result, the conversion
price for the Notes became subject to adjustment pursuant to the parties'
agreements and the Company's re-purchase price for the Notes was increased by
$2 million.
To date, the Company has been unsuccessful in settling the Castle Creek
Litigation, and it intends to answer Castle Creek's complaint and contest the
issues raised by Castle Creek in Court. In order to reflect the potential
impact of the claims of Castle Creek, the Company registered in the
November 16 amendment to its registration statement the additional shares
as required by these antidilution provisions in the July 2001 Warrant, based
on its understanding of the formulae. The Company will seek reformation to
have the July 2001 Warrant conform to its negotiated agreement with Castle
Creek, and other relief that may be appropriate. The Company is required to
file an answer and any counterclaims in the Castle Creek Litigation on or
shortly after December 8, 2001, unless the claim is withdrawn in full.
ArosMaizels AB Arbitration
The Company had received a claim by ArosMaizels AB for 5,700,000 Swedish
Kronor (approximately $550,000) for financial services rendered to the
Company in connection with the Unwire transaction and potential financings.
This claim was submitted for arbitration, as a result of which, the Company
is required to pay 4,500,000 Swedish Kronor (approximately $425,000) plus
interest at 8% from May 3, 2001. The Company previously recorded a reserve
for this claim and intends to pay it in full.
ITEM 2. CHANGES IN SECURITIES
(a) None.
(b) None.
(c) Recent Sales of Unregistered Securities.
In late September and early October, 2001, the Company closed three
private Placements of its common stock and warrants to purchase
common stock: the first placement was for $3.25 million, pursuant to
which the Company issued 3,250,000 shares of Common Stock plus
1,625,000 warrants to purchase shares of Common Stock at an exercise
price of $2.25 per share, exercisable for two years. The units were
sold to accredited investors pursuant to Regulation 506 under the
Securities Act of 1933, as amended (the "Securities Act"). The
proceeds from the sale of these units were used to repurchase a
portion of the convertible notes held by Castle Creek. The second
placement was an offering pursuant to Regulation S under the
Securities Act, in which non-U.S. Persons (as such term is defined in
Regulation S), purchased 1,568,144 shares of Common Stock and 784,071
warrants to purchase shares of Common Stock, exercisable at $2.36 per
share for two years. The proceeds from the Regulation S offering
aggregated $2,071,130, and will be used for working capital. The third
placement was for shares of Common Stock and warrants to purchase
Common Stock for $1,300,000. Such offering was made to accredited
investors pursuant to Regulation 506 under the Securities Act. In
connection with such offering, the Company issued 1,238,096 shares
of Common Stock, and 619,048 warrants to purchase shares of Common
Stock, half of which are exercisable at $3.50 per share for twelve
months and the other half of which are exercisable at $5.00 per share
for twenty-four months.
(d) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
Current Reports on Form 8-K were filed on July 31, 2001, and
on October 5, 2001.
CELLPOINT INC. AND SUBSIDIARIES
CONTENTS
PAGE:
Consolidated balance sheets as of September 30, 2001 (Unaudited) and June 30, 2001 (Audited)..................... F-1
Consolidated statements of operations for the three months ended September 30, 2001 and 2000..................... F-2
Consolidated statements of comprehensive loss for the three-months ended September 30, 2001 and 2000............. F-3
Consolidated statements of cash flows for the three-months ended September 30, 2001 and 2000..................... F-4
Notes to consolidated financial statements....................................................................... F-5
CELLPOINT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN USD)
NOTE SEPTEMBER 30, JUNE 30,
2001 2001
ASSETS (unaudited) (audited)
CURRENT ASSETS
Cash and cash equivalents $ 2,312,231 $ 687,151
Accounts receivable 642,793 1,366,641
Unbilled receivables 368,451 792,443
Prepaid expenses and other current assets 179,963 383,578
Other receivables 420,576 402,132
Current assets of discontinued operations 2 634,423 1,361,148
------------- -------------
TOTAL CURRENT ASSETS 4,558,437 4,993,093
LONG-TERM ASSETS
Restricted cash 7 385,720 184,216
Acquired technology, net of accumulated amortization of $6,212,579 and 14,770,026 15,571,001
$5,411,604, respectively
Other intangible assets, net of accumulated amortization of $1,408,654 and 1,010,377 1,107,201
$1,311,830, respectively
Property and equipment, net of accumulated depreciation of $951,999 and 969,760 885,780
$480,345, respectively
Non-current assets of discontinued operations 2 477,388 521,401
------------- -------------
TOTAL LONG-TERM ASSETS 17,613,271 18,269,599
------------- -------------
TOTAL ASSETS $ 22,171,708 $ 23,262,692
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and other current liabilities $ 6,317,372 $ 2,337,066
Accounts payable 2,939,457 2,082,257
Current liabilities of discontinued operations 2 1,126,798 2,982,549
Bank overdraft 705,437 --
------------- -------------
TOTAL CURRENT LIABILITIES 11,089,064 7,401,872
LONG-TERM DEBT (net of debt discount of $1,499,587 and $1,914,490,
respectively) 3 8,605,513 11,785,510
------------- -------------
TOTAL LIABILITIES 19,694,577 19,187,382
------------- -------------
MINORITY INTEREST 48,464 48,464
COMMITMENTS AND CONTINGENCIES 9
STOCKHOLDERS' EQUITY
Preferred shares ($0.001 par value; authorized 3,000,000 shares, nil issued -- --
and outstanding)
Common shares ($0.001 par value; authorized 22,000,000 shares, 11,008,141 11,008 10,824
shares and 10,824,503 shares issued and outstanding, respectively)
Common shares to be issued 4 6,621,130 --
Additional paid in capital 99,601,633 98,692,254
Cumulative foreign currency translation adjustment 764,584 597,478
Stock subscription receivable 4 (1,037,740) --
Accumulated deficit (103,531,948) (95,273,710)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 2,428,667 4,026,846
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,171,708 $ 23,262,692
------------- -------------
See accompanying notes to the consolidated financial statements
F-1
CELLPOINT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN USD)
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
NOTE 2001 2000
(unaudited) (unaudited)
Revenues $ 415,205 $ 925,553
Cost of revenues (21,046) (228,833)
------------ ------------
Gross profit 394,159 696,720
------------ ------------
Selling, general and administrative expenses 5 (4,863,818) (1,354,778)
Research and development expenses (1,072,107) (779,300)
Professional fees (165,675) (221,498)
Depreciation and amortization (1,010,219) (909,974)
------------ ------------
TOTAL OPERATING EXPENSES..................... (7,111,819) (3,265,550)
------------ ------------
LOSS FROM OPERATIONS (6,717,660) (2,568,830)
Financial items, net 8 (1,540,578) (149,643)
------------ ------------
LOSS FROM CONTINUING OPERATIONS........................ (8,258,238) (2,718,473)
------------ ------------
LOSS FROM DISCONTINUED OPERATIONS...................... 2 -- (2,628,825)
------------ ------------
NET LOSS ($ 8,258,238) ($ 5,347,298)
------------ ------------
Weighted average number of shares outstanding,
basic and diluted 10,982,040 8,743,630
------------ ------------
Net loss per common share basic and diluted:
Continuing operations $ (0.75) $ (0.31)
Discontinued operations $ (0.00) $ (0.30)
Net loss per share $ (0.75) $ (0.61)
See accompanying notes to the consolidated financial statements
F-2
CELLPOINT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(AMOUNTS IN USD)
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
(UNAUDITED) (UNAUDITED)
Net loss ($ 8,258,238) ($ 5,347,298)
Other comprehensive income/(loss),
cumulative foreign exchange adjustments 167,106 (152,446)
------------ ------------
Comprehensive loss ($ 8,091,132) ($ 5,499,744)
============ ============
F-3
CELLPOINT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN USD)
NOTE 6 THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ......................................................................... $ (8,258,238) $ (5,347,298)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Loss from discontinued operations ................................................ -- 2,628,825
Depreciation and amortization .................................................... 1,010,219 909,974
Provision for allowance on accounts receivables .................................. -- (36,732)
Non-cash financing costs ......................................................... 1,120,945 --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Increase in restricted cash ...................................................... (201,504) --
Increase in accounts receivable .................................................. 723,848 (711,106)
Increase in inventory ............................................................ -- (21,914)
Decrease in unbilled receivables ................................................. 423,992 --
Decrease in prepaid expenses ..................................................... 203,615 223,536
Decrease/(increase) in other receivables ......................................... (18,444) 168,416
Increase/(decrease) in accrued expenses and other current liabilities ............ 3,980,306 (175,424)
Increase/(decrease) in accounts payable .......................................... 857,200 (95,332)
Decrease in due to affiliate ..................................................... -- (55,517)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES FROM CONTINUING OPERATIONS: .................. (158,061) (2,512,572)
NET CASH USED IN OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS: ................. (1,079,392) (412,787)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES: .............................................. (1,237,453) (2,925,359)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ............................................................. (200,911) (82,980)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES FROM CONTINUED OPERATIONS: .................... (200,911 (82,980)
NET CASH USED IN INVESTING ACTIVITIES FROM DISCONTINUED OPERATIONS: ................. (3,429) (106,728)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES: .............................................. (204,340) (189,708)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable ........................................................ (3,144,900) --
Net proceeds from private placements ............................................. 5,336,911 149,800
Bank overdraft ................................................................... 705,437 --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES FROM CONTINUING OPERATIONS: ............... 2,897,448 149,800
Effects of exchange rate changes on cash ............................................ 171,617 (35,310)
Effects of exchange rate changes on cash from discontinued operations ............... (2,192) (43,666)
------------ ------------
Increase/ (decrease) in cash and cash equivalents ................................... 1,625,080 (3,044,243)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................... 687,151 6,624,392
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................................... $ 2,312,231 $ 3,580,149
------------ ------------
See accompanying notes to the consolidated financial statements
F-4
CELLPOINT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
1 BASIS OF PRESENTATION
NATURE OF REPORT. The consolidated balance sheet at the end of the preceding
fiscal year has been derived from the audited consolidated balance sheet
contained in the Company's Annual Report on Form 10-KSB, on file with the
Securities and Exchange Commission, and is presented for comparative purposes.
All other financial statements are unaudited. The unaudited financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. The financial information
included in the quarterly report should be read in conjunction with the
Company's audited financial statements and related notes thereto for the fiscal
year ended June 30, 2001. In the opinion of management, all adjustments
necessary to present fairly the financial position, results of operations and
changes in cash flows, for all periods presented, have been made. The results
of operations for interim periods are not necessarily indicative of the
operating results for the full year.
ESTIMATES AND UNCERTAINTIES. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
RECLASSIFICATIONS. Certain amounts relating to the three-months ended
September 30, 2000 have been reclassified to conform to the current year
presentation.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS. In June 2001, the Financial
Accounting Standards Board ("FASB") finalized FASB Statements No. 141, "Business
Combinations" (SFAS No. 141), and No. 142, "Goodwill and Other Intangible
Assets" (SFAS No. 142). SFAS No. 141 requires the use of the purchase method of
accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS No. 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS No. 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS No. 142 that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS No. 141.
SFAS No. 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS No. 142 requires that the Company identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS No. 142. SFAS No. 142 is required to be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized. Early adoption is permitted in the first quarter of
fiscal years beginning after December 15, 2000. SFAS No. 142 requires the
Company to complete a transitional goodwill impairment test six months from the
date of adoption. The Company is also required to reassess the useful lives of
other intangible assets within the first interim quarter after adoption of SFAS
No. 142.
The Company has not completed its assessment of the impact SFAS No. 142 will
have on its financial position and results of operations and thus is unable to
early adopt SFAS No. 142 in the current quarter. The Company will thus adopt
SFAS No. 142 on July 1, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS No. 121") and Accounting Principles Board Opinion No. 30,
"Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
F-5
Events and Transactions". SFAS No. 144 retains the fundamental provisions of
SFAS No. 121 for recognition and measurement of impairment, but amends the
accounting and reporting standards for segments of a business to be disposed of.
SFAS No.144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
The provisions of SFAS No. 144 generally are to be applied prospectively. The
Company believes that the adoption of SFAS No. 144 will not have a material
impact on the Company's financial position or results of operations.
2 DISCONTINUED OPERATIONS
On May 19, 2001, the Company approved the disposal of the telematics business
segment of the Company and committed to a plan to dispose of the business.
Accordingly, the telematics business segment was presented as a discontinued
operation in the balance sheets as of September 30, 2001 and June 30, 2001 and
the related statements of operations and cash flows for the three months ended
September 30, 2001. The related statements of operations and cash flows for the
three months ended September 30, 2000, have been restated to conform with this
presentation. At June 30, 2001, the Company had accrued approximately $1,100,000
for additional losses expected from the discontinued operation through the
expected date of disposition. For the three months ended September 30, 2001 the
Company has incurred losses of approximately $1,085,000 against the accrual. The
Company does not anticpate any further significant losses. Net sales for
Telematics were approximately $264,000 and $53,000 for the three-months ended
September 30, 2001 and 2000, respectively.
The continuing operations of the Company now constitute the only reportable
business segment.
The components of assets (liabilities) of discontinued operations included in
the Company's Consolidated Balance Sheets at September 30, 2001 and June 30,
2001 are as follows:
SEPTEMBER 30, JUNE 30,
2001 2001
Current assets:
Cash and cash equivalents ......................................... $ 8,400 $
Accounts receivable ............................................... 39,460 262,504
Prepaid expenses and other current assets ......................... 79,478 --
Other receivables ................................................. 75,094 482,423
Inventory ......................................................... 431,991 429,432
Other current assets .............................................. -- 186,789
Non-current assets:
Other long-term assets ............................................ 477,388 521,401
Current liabilities:
Accounts payable, accrued expenses and other current liabilities .. (1,126,798) (2,982,549)
------------ ------------
Net liabilities of discontinued operations ........................... $ (14,987) $ (1,100,000)
------------ ------------
3 LONG TERM DEBT
SEPTEMBER 30, JUNE 30,
2001 2001
Bank loan $ 4,000,000 $ 4,000,000
Castle Creek (a) 4,605,513 7,785,510
------------ ------------
$ 8,605,513 $ 11,785,510
------------ ------------
(a) Castle Creek. On December 6, 2000, the Company entered into an agreement
whereby it issued to Castle Creek Technology Partners LLC ("Castle Creek")
convertible notes in the aggregate principal amount of $10,000,000, which were
originally due and payable on September 30, 2002. Interest on the debt is 6% per
annum, compounded semi-annually and payable semi-annually on each June 30 and
December 31. Prior to June 5, 2001, the notes
F-6
were convertible, in whole or in part, at a fixed conversion price of $25 per
share at the option of the holder of the debt and could be converted in exchange
for all or part of the outstanding debt plus the accrued interest at the
conversion date. Subsequent to June 5, 2001, the notes were convertible at the
lower of $25 or 90% of the average of the five lowest volume weighted average
prices during the period of twenty consecutive trading days ending on the
trading day immediately prior to the date of determination. The conversion of
the notes contained certain limitations as set forth in the agreement. The
Company has reserved 2,000,000 shares for the purpose of possible future
conversions.
In connection with the convertible notes, the Company issued warrants
exercisable immediately and expiring on December 5, 2005. The warrants grant
Castle Creek the right to purchase 210,526 shares of the Company's common stock
at an exercise price per share of $11.40.
On July 25, 2001, the Company entered into a note purchase, modification and
forebearance agreement with Castle Creek concerning the above mentioned notes.
Under the agreement, the outstanding notes were to be repurchased by the
Company. The Company agreed to buy back the outstanding principal of the notes
over 90 days for 86% of the remaining principal, plus accrued interest, and
issued a warrant with 500,000 shares issuable upon exercise of the warrant at an
exercise price of $3.14 per share and exercisable after one year for a period of
four years (subject to specified anti-dilution adjustments). In addition, the
Company granted to Castle Creek a security interest in its assets (including the
assets of its subsidiaries), including its intellectual property. Castle Creek
agreed not to trade in the Company's stock effective July 25, 2001 until the
note repurchase is completed, in consideration for which Castle Creek was paid
$1,000,000 as a non-refundable deposit against the final note purchase payment.
The fixed conversion price of the Notes was changed to $4.00 with no floating
conversion price if the notes are purchased on a timely basis and the Company
complies with all its other obligations to Castle Creek in all material
respects. The Company also agreed to certain limitations on the terms of future
debt and equity financings, which limitations would not apply to a financing
that provided the proceeds for the final purchase of the Notes.
On September 26, 2001, the Company and Castle Creek entered into an amendment of
the July 25, 2001 agreement, wherein the outstanding convertible notes will be
repurchased at 100% of the remaining principal and subject to a fixed conversion
price of $4.00. The Company paid $2,250,000 to Castle Creek on September 26,
2001 for principal and accrued interest and is scheduled to make a final payment
on October 1, 2002 for approximately $6,105,100 plus accrued interest (subject
to specified adjustments upon a material breach by the Company). The outstanding
notes are prepayable in part or in whole at any time without penalty. However,
if the Company is in non-compliance of the limitations on the terms of future
debt and equity financing, there will be a $2,000,000 penalty and the notes will
become convertible at the lower of 1) the average closing price during the ten
day period beginning five days prior to the date of the non-compliance event or
(2) the lowest price of common stock or common stock equivalents sold from
September 25, 2001 to the non-compliance event. The July agreement, except as
modified by the amendment, remains in effect.
Following the debt modifications, the Company applied the rules of EITF 96-19:
"Debtor's Accounting for a Modification or Exchange of Debt Instruments." Based
on the provisions of EITF 96-19 it was determined that there was not a
substantial change from the original debt agreement and as such, the modified
debt is shown at fair value using the new effective interest rate. The adjusted
warrant was valued at approximately $700,000 and is being amortized over the
remaining life of the debt. Legal fees associated with the modifications were
expensed in the period.
As of September 30, 2001, Castle Creek had converted $750,000 of the notes into
270,592 shares.
Due to the beneficial conversion features associated with the financing and the
amendments thereto, the Company has applied Emerging Issues Task Force ("EITF")
00-27: Application of EITF No. 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios", to
certain convertible instruments. In accordance with EITF 00-27 the value of the
beneficial conversion feature was recorded as a reduction to the carrying amount
of the convertible debt and an addition to paid-in-capital. The fair value of
the warrants was recorded as a further reduction to the carrying amount and an
addition to paid-in-capital. The Company therefore has recorded a total debt
discount of approximately $3,514,000 and is amortizing the discount over the
term of the debt. Amortization is accelerated when necessary for conversions and
repayments of the debt principal. Amortization for the three-months period ended
September 30, 2001 was approximately $1,121,000 and is recorded as a component
of interest expense within financial items.
As a result of the private placements at the end of the quarter (see Note 4),
the anti-dilution provision attached to the warrants issued on July 25, 2001
became effective. As such, the Company recalculated the adjusted exercise price
and the adjusted number of shares issuable upon exercise of the warrants. This
resulted in an adjusted exercise price of approximately $1.42 and additional
shares of approximately 608,235 issuable upon exercise of the warrants.
F-7
See also Note 9.
4 EQUITY FINANCING
On September 25, 2001, the Company closed a private placement pursuant to which
it will issue 3,250,000 shares of Common Stock for proceeds of $3,250,000. In
addition, the Company will issue warrants to purchase 1,625,000 shares of Common
Stock, exercisable at $2.25 per share for two years. The Company used part of
the proceeds from this offering to make the required payment to Castle Creek for
the repurchase of a portion of the convertible notes held by Castle Creek.
On September 25, 2001, the Company closed a placement under Regulation S for an
aggregate of $2,071,130, pursuant to which the Company will issue an aggregate
of 1,568,144 shares and 784,071 warrants to purchase shares of the Company's
Common Stock, exercisable at $2.36 per share for two years.
As a result of the private placements, the Company had received proceeds
totaling approximately $5,583,000 by September 30, 2001. Commitments totaling
approximately $1,038,000 have been reported as Stock subscriptions receivable in
Stockholders' equity. Shares of the Company's Common Stock in relation to the
private placements were not issued until October 2001 and thus they have been
reflected in Stockholders' equity as Common Shares to be Issued at September 30,
2001.
Subsequent to the quarter end, on October 5, 2001, the Company completed the
initial closing of a private placement of Common Stock and warrants pursuant to
which it will issue an aggregate of 1,238,096 shares of Common Stock for
proceeds of $1,300,000. In addition, the Company will issue warrants to purchase
619,048 shares of Common Stock, half of which are exercisable at $3.50 per share
for twelve months following the closing, and the other half of which are
exercisable at $5.00 per share for twenty-four months following the closing.
The Company filed with the Securities and Exchange Commission on October 31,
2001 and amended on November 16, 2001 a registration statement covering all
shares of Common Stock issued and issuable upon exercise of the warrants
described above.
5 SUBSEQUENT EVENTS
In October 2001, the Company's subsidiary, Unwire, filed for bankruptcy in
Sweden. As a result of the filing the Company has effectively ceased all funding
of Unwire operations. The bankruptcy courts have appointed a Trustee to oversee
the disbursement of Unwire's assets and the Company now effectively has no
control over the operations or decision making capabilities of Unwire.
The Company's South African subsidiary, CellPoint Systems SA (Pty) Ltd ("Systems
SA"), also filed for bankruptcy in November 2001. Systems S.A. operated a
research and development facility for the Company. The telematics portion of
Systems SA has already been included in the discontinued operations. The
location services portion of Systems SA is not included in discontinued
operations, and those functions will continue to be performed by the Company's
Swedish subsidiary. Costs of closing this subsidiary, primarily the write-off of
the intercompany net receivable from Systems SA, have been accrued in the
June 30, 2001 financial statements.
On November 2, 2001 the Company's subsidiary in England, CellPoint Europe Ltd.
("CellPoint Europe"), was filed for liquidation by the appointed liquidator. The
functions performed by CellPoint Europe will now be performed by the Swedish
subsidiary CellPoint Systems AB and its branch office in the United Kingdom. As
a result of the liquidation, the Company has recorded a reserve against
intercompany net claims against CellPoint Europe of approximately $3,050,000
that has been reflected as selling, general and administrative expenses in the
three-month period ended September 30, 2001.
The assets, liabilities and results of operations of Systems SA and CellPoint
Europe were immaterial to the financial statements of the Company for all
periods presented.
See also Note 9
F-8
6 SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
Cash paid during the year for:
Interest related to continuing operations .................. $ 351,392 $ 95,541
Interest related to discontinued operations ................ 4,796 3,477
Non-cash transactions relating to investing and financing
activities:
Discount on debt issued .................................... 706,042 --
Conversion of convertible debt to common stock ............. 450,000 --
Stock subscription receivable 1,037,740 --
7 RESTRICTED CASH
Cash is restricted in accordance with bank performance guarantees whereby in the
event the Company does not fulfill certain contracts, the cash will be disbursed
to the related customer. The Company has two bank performance guarantees
amounting to approximately $386,000, one of which for approximately $193,000
expires on December 31, 2004 but will automatically be reduced by approximately
$138,000 on January 1, 2003 and the other for approximately $193,000 expires on
October 30, 2002.
8 FINANCIAL ITEMS, NET
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
Interest expense ($ 1,392,534) ($ 211,615)
Other financial income (expense) (23,591) 68,582
Foreign currency exchange loss (124,453) (6,610)
------------ ------------
($ 1,540,578) ($ 149,643)
------------ ------------
9 COMMITMENTS AND CONTINGENCIES
The Company has received notice of a lawsuit filed by Castle Creek in which
Castle Creek are claiming that the outstanding notes are due and payable and are
seeking payment of a default penalty of $2,000,000 and other damages and relief
based on an alleged failure on the part of the Company to register an increased
number of shares on behalf of Castle Creek relative to the operation of the
antidilution provisions in the July amendment to the notes payable. The company
believes the lawsuit is without merit and intends to vigorously defend its
position in this regard. No adjustments have been made in the Company's
financial statements as a result of this lawsuit.
The Company believes it may have a claim against its former legal counsel
resulting from their representation of the Company in the restructuring of the
Castle Creek agreements in which the July 2001 warrant was issued.
F-9
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CELLPOINT INC.
By: /s/ Peter Henricsson
---------------------------------------
Peter Henricsson
President and Chief Executive Officer
By: /s/ Lars Wadell
----------------------------------------
Lars Wadell
Chief Financial Officer
Date: November 19, 2001