SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarterly period ended Commission File Number 0-19437
MARCH 31, 1996
CELLULAR TECHNICAL SERVICES COMPANY, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 11-2962080
- - ------------------------------- -------------------
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2401 FOURTH AVENUE, SEATTLE, WASHINGTON 98121
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (206) 443-6400
NOT APPLICABLE
-----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes X No
10,945,984 Common Shares were outstanding as of May 9, 1996.
Page 1
CELLULAR TECHNICAL SERVICES COMPANY, INC.
TABLE OF CONTENTS FOR FORM 10-Q
PART I. FINANCIAL INFORMATION................................................3
ITEM 1. FINANCIAL STATEMENTS.................................................3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................6
PART II. OTHER INFORMATION..................................................11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................11
Page 2
CELLULAR TECHNICAL SERVICES COMPANY, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
(unaudited)
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,720,399 $ 9,448,255
Accounts receivable, net 480,309 508,238
Inventories, net 2,783,130 1,947,060
Prepaid expenses and other current assets 1,289,477 827,712
-------------- -----------------
Total Current Assets 10,273,315 12,731,265
PROPERTY AND EQUIPMENT, net 2,257,209 2,292,632
SOFTWARE DEVELOPMENT COSTS, net 3,500,605 3,346,748
-------------- -----------------
TOTAL ASSETS $16,031,129 $18,370,645
-------------- -----------------
-------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 912,989 $ 1,154,396
Payroll related liabilities 296,526 223,222
Taxes (other than payroll and income) 28,825 197,843
Deferred revenue and customers' deposits 195,421 61,973
-------------- -----------------
Total Current Liabilities 1,433,761 1,637,434
STOCKHOLDERS' EQUITY
Preferred Stock, $0.01 par value per share,
5,000,000 shares authorized, none issued
and outstanding
Common Stock, $0.001 par value per share,
30,000,000 shares authorized, 10,853,234
shares issued and outstanding in 1996
and 10,801,384 in 1995 10,853 10,801
Additional paid-in capital 20,713,338 20,348,674
Deficit (6,126,823) (3,626,264)
-------------- -----------------
Total Stockholders' Equity 14,597,368 16,733,211
-------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,031,129 $18,370,645
-------------- -----------------
-------------- -----------------
The accompanying notes are an integral part of these financial statements.
Page 3
CELLULAR TECHNICAL SERVICES COMPANY, INC.
STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------------
1996 1995
------------- -------------
REVENUES
License and service fees $ 645,622 $ 2,736,768
Equipment sales 89,164 612,812
Interest income 107,493 118,984
------------- -------------
Total Revenues 842,279 3,468,564
COSTS AND EXPENSES
Cost of license and service fees 785,200 922,539
Cost of equipment sales 278,405 611,731
Sales and marketing 822,873 507,607
General and administrative 510,611 601,783
Research and development 945,749 576,777
------------- -------------
Total Costs and Expenses 3,342,838 3,220,437
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (2,500,559) 248,127
PROVISION FOR INCOME TAXES 5,000
------------- -------------
NET INCOME (LOSS) $(2,500,559) $ 243,127
------------- -------------
------------- -------------
NET INCOME (LOSS) PER SHARE $ (.23) $ .02
------------- -------------
------------- -------------
WEIGHTED AVERAGE SHARES OUTSTANDING 10,804,450 11,079,343
------------- -------------
------------- -------------
The accompanying notes are an integral part of these financial statements.
Page 4
CELLULAR TECHNICAL SERVICES COMPANY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1995
----------- -----------
OPERATING ACTIVITIES
Net income (loss) $(2,500,559) $ 243,127
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Depreciation and amortization of property and equipment 180,651 127,401
Amortization of software development costs 279,972 241,775
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 27,929 (1,528,363)
(Increase) in inventories (836,070) (209,194)
(Increase) in prepaid expenses and other current assets (461,765) (204,007)
(Decrease) increase in accounts payable and
accrued liabilities (241,407) 119,575
Increase (decrease) in payroll related liabilities 73,304 (134,552)
(Decrease) increase in taxes (other than payroll and income) (169,018) 2,120
Increase in deferred revenue and customers' deposits 133,448 331,408
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (3,513,515) (1,010,710)
INVESTING ACTIVITIES
Purchase of property and equipment (145,228) (597,204)
Capitalization of software development costs (433,829) (413,857)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (579,057) (1,011,061)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 364,716 268,399
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 364,716 268,399
----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (3,727,856) (1,753,372)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,448,255 9,041,985
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $5,720,399 $7,288,613
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
Page 5
CELLULAR TECHNICAL SERVICES COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION:
The accompanying unaudited financial statements of Cellular Technical
Services Company, Inc. (the "Company"), including the December 31, 1995
balance sheet which has been derived from audited financial statements, have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The operating results
for the three month period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 1996. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the unaudited
financial data and the notes thereto included in Item 1. of this Quarterly
Report and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1995
Total revenues decreased 76% to $842,279 in 1996 from $3,468,564 in 1995 and
the Company had a net loss of $2,500,559, or $.23 per share, compared to net
income of $243,127, or $.02 per share, in 1995. These operating results were
consistent with previously announced expectations and are primarily
attributable to: (i) long sales cycles, (ii) uneven contract revenue streams
from the Company's Hotwatch-Registered Trademark- Platform and related
application products ("Hotwatch Products"), and (iii) acceleration of efforts
and expenditures in both sales and marketing and research and development of
the Company's Blackbird-TM- Platform and PreTect-TM- fraud protection
products ("Blackbird products"). The Company expects to achieve improved
financial results from the Company's products beginning in the second quarter
1996.
License and service fees derived from the Company's Hotwatch products and
phone rental products decreased 76% to $645,622 in 1996 from $2,736,768 in
1995. License and service revenues for the Company's Hotwatch products are
principally derived from agreements with four customers. These agreements
consist of the Axys and Accountlink-TM- (referred to in the Company's Form
10-K as "Interim Metered Billing") Agreements (collectively, "AWS
Agreements") between the Company and AT&T Wireless Services, Inc. ("AWS"), a
license agreement ("LIN/ACC Agreement") between the Company and collectively
LIN Broadcasting Company ("LIN") and American Cellular Communications
("ACC"), subsidiaries of AWS and BellSouth Cellular, respectively, and
license agreements with 360DEG. Communications Company (formerly Sprint
Cellular Company) ("360DEG. CC") and Ameritech Mobile Communications, Inc.
("Ameritech"). The Company also received license and service fees under
agreements for its phone rental products which are in a wind down phase, as
discussed below. Additionally, the Company recently signed contracts with
AirTouch Cellular ("AirTouch") and Bell Atlantic NYNEX Mobile ("BANM") for
installation of the Blackbird products in over 1,000 cell sites that are
expected to increase revenues in subsequent periods of 1996 (discussed below
in "Operating Outlook"). These contracts resulted from trials that had been
conducted during 1995 for purposes of testing and evaluating the Company's
Blackbird products.
License and service revenues from the Company's Hotwatch products decreased
80% to $508,000 in 1996 from $2,511,000 in 1995. Such revenues under the AWS
Agreements totaled $90,000 and $1,820,000 during 1996 and
Page 6
1995, respectively. This decrease is due primarily to completion of various
phases of these contracts in 1995 that included large non-recurring license,
service and implementation fees. License and service revenues under the
LIN/ACC Agreement continued their expected decline as they decreased 24% to
$292,000 in 1996 from $385,000 in 1995. Recurring license and service fees
from this agreement are expected to be minimal once products under the AWS
Agreements are deployed and as AWS installs its internally-developed fraud
management system in some or all of the LIN/ACC markets covered under the
agreement. Other Hotwatch license and service revenues decreased 59% to
$126,000 from $306,000 principally as a result of non-recurring 1995 license
fees associated with the installation of licenses called for in the Company's
1994 agreement with 360DEG. CC.
License and service fees from the Company's phone rental products decreased
38% to $147,000 in 1996 from $237,000 in 1995. Marketing and further
deployment of these products ceased in early 1995 as a result of the
Company's decision to exit the phone rental market. This decision was
prompted by the Company's evaluation of the long term prospects of this
market as anticipated growth had been lower than previously expected.
Revenues during the remainder of 1996 are expected to be minimal and reflect
the wind down of the phone rental operations.
The Company anticipates that revenues under the agreements with AirTouch and
BANM for licensing of the Company's Blackbird products will begin in late
second quarter, or early third quarter, 1996. Although the Company cannot
definitively state the amount of revenues expected during the year ended
December 31, 1996, it is management's opinion that such revenues will
contribute significantly toward obtaining profitability during the year.
Equipment sales, which primarily consist of the sale of computer systems
(which are generally non-recurring) and various peripheral and hardware
components, decreased 85% to $89,164 from $612,812 in 1995. Revenues during
1995 were primarily derived from equipment sales associated with the AWS,
360DEG. CC and Ameritech agreements.
Interest income decreased 10% to $107,493 in 1996 from $118,984 and is
attributable to lower average cash balances invested at lower average
interest rates during 1996 as compared to 1995.
Cost of license and service fees includes (i) the customer service and
engineering support costs that are directly associated with supporting
software license and service fee revenues, (ii) the amortization of software
development costs, and (iii) the costs associated with the design and
development of custom programming and related services. Cost of license and
service fees decreased 15% to $785,200 in 1996 from $922,539 in 1995. The
decrease is principally attributed to $250,000 of non-recurring design and
development costs associated with service revenues under the AWS agreements
recorded during 1995, which costs were partially offset by, (a) a 16%
increase to $279,972 in 1996 from $241,775 in 1995 in amortization of
software development costs primarily attributable to the 1995 release of the
first phase of the Company's Blackbird products for which no license revenues
were received, and (b) a 34% increase to $390,000 in 1996 from $291,000 in
1995 for personnel and overhead related costs incurred in supporting
anticipated growth in new customers and products during 1996.
Cost of equipment sales decreased 54% to $278,405 in 1996 from $611,731 in
1995. Cost of equipment sales, which includes purchased hardware, allocated
installation costs, and, more recently, manufacturing overhead costs, has
historically exceeded the related revenues from equipment sales. Amounts
recorded during 1995 include the costs of purchased hardware associated with
the AWS, 360DEG. CC and Ameritech equipment sales. The costs to sales ratio
increased to 312% in 1996 from 100% in 1995. The negative margins are
primarily attributable to fixed engineering, installation overhead, and
manufacturing overhead costs that were not recovered from equipment sales,
and, in 1996, include overhead-related costs associated with the Company's
new Blackbird products which are being deployed under both sales contracts
and trial agreements for testing and evaluation in several markets and for
which no revenues were recorded. The Company anticipates however, that sales
of equipment in support of its new Blackbird products will result in an
improved cost to sales ratio and such sales are expected to contribute to
profits in future periods.
Page 7
Sales and marketing expenses increased 62% to $822,873 in 1996 from $507,607
in 1995 as a result of increased personnel and related costs incurred in
connection with the Company's expansion efforts to generate demand for the
Company's products. The Company's first quarter activities generally include
its largest expenditures for trade shows and related events. Sales and
marketing expenses for the remainder of the current year are expected to
increase substantially over those reported in 1995.
General and administrative expenses decreased 15% to $510,611 in 1996 from
$601,783 in 1995. This decrease is primarily the result of reduced
management fees paid to Nationwide Cellular Service, Inc. ("Nationwide")
under the four-year management services agreement between the Company and
Nationwide that expired in August 1995. General and administrative expenses
for all of 1996, however, are expected to equal or exceed those levels
reported in 1995.
Research and development costs increased 64% to $945,749 in 1996 from
$576,777 in 1995 primarily due to the continued and expanded investment in
the Company's Blackbird products. Software development costs of $433,829 and
$413,857 were capitalized during 1996 and 1995, respectively, and relate
primarily to the development of the Company's Blackbird products. In
addition, expenditures of $224,000 related primarily to billable design and
development services under the AWS Agreements were expensed as costs of
services in 1995. Such expenses for 1996 were minimal. Including capitalized
software development and contract design and development costs, the Company
incurred gross research and development expenditures of $1,397,000 in 1996
which represents a 15% increase over 1995. This increase is primarily the
result of additional expenditures for personnel related costs for development
of the Company's Blackbird products, and for legal fees expended to protect
the Company's intellectual property. The Company anticipates that
development expenditures will continue to increase in 1996 and beyond in
response to increased market demand for new and enhanced products as
technology in the telecommunications industry moves forward at a rapid pace.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements consist primarily of funding software
development, equipment requirements and the expansion of the Company's
business. On March 31, 1996 the Company's cash balance was $5,720,399 as
compared to $9,448,255 on December 31, 1995 and working capital decreased to
$8,839,554 at March 31, 1996 from $11,093,831 at December 31, 1995.
Cash used by operating activities amounted to $3,513,515 in 1996 as compared
to $1,010,710 during 1995. This increased utilization of cash reflects the
loss in 1996, as compared to a profit in 1995, with the 1996 results being
partially offset by increased depreciation and amortization and the changes
in the balances of operating assets and liabilities. The Company continues
to increase its proprietary Blackbird hardware inventory to meet anticipated
sales demand for Blackbird-related products during 1996. The Company expects
inventory levels to continue to grow during the second quarter of 1996 with
reductions beginning during the last half of 1996 due to increased sales.
Additional inventory, currently exceeding $2,000,000, is on order and is
expected to be funded by customer deposits from signed contracts, cash
generated from operating activities and/or from March 31, 1996 cash balances.
At March 31, 1996 approximately $600,000 in deposits was prepaid for these
inventory orders. The Company does not currently expect its operating
activities to provide consistent positive cash flow on a quarter-to-quarter
basis as long sales cycles and staggered sales contract payments cause uneven
cash flow streams.
Cash utilized by investing activities totaled $579,057 and $1,011,061 during
1996 and 1995, respectively. The Company's capital requirements have been
for the funding of (i) property and equipment, primarily for furniture,
leaseholds, and equipment associated with expanding the Company's business,
and (ii) software development, particularly with respect to the Company's
Blackbird products. These expenditure levels are expected to continue in 1996
at or above the levels of 1995. At March 31, 1996 the Company had no
significant commitments for capital expenditures. The Company, as part of
its growth strategy, would consider the cost/benefit of purchasing software
technology in the event that an attractive opportunity arises.
Page 8
Cash provided by financing activities has been generated from the exercise of
stock options issued to the Company's directors, officers and employees.
Proceeds from these activities totaled $364,716 and $268,399 in 1996 and
1995, respectively.
Should the Company's recent contract signings and expanded sales efforts lead
to additional sales of its Blackbird products, and/or, should the cash flow
from the Company's existing backlog of sales be deferred past current
expectations, the Company may need to obtain additional financing to fund
this growth and its operations. Factors impacting the need will be timing of
contract signings, negotiated payment terms, timing of system installation
and acceptance, manufacturing and inventory lead times and other issues. The
Company believes that debt or equity financing could be obtained from
currently identified or new sources.
OPERATING OUTLOOK
In March 1996, the Company signed an agreement with AirTouch under which the
Company will be the exclusive provider of cellular fraud prevention systems
using radio frequency technology to AirTouch and its affiliates. AirTouch's
cellular licenses include both "A Band" and "B Band" properties. The Company
and AirTouch have begun installation of the Company's Blackbird products in
AirTouch's Atlanta (A Band) and Los Angeles (B Band) markets. In addition,
AirTouch's New Par and Bay Area Cellular Telephone Company affiliates have
agreed to deploy the Blackbird products in their Detroit and San Francisco
A Band properties respectively. The exclusive five year contract, which calls
for the purchase of the Company's products in at least 1,000 cell sites,
schedules minimum deployment in the majority of the cell sites during 1996
and 1997. Concurrently, contracts were signed for support services and CTS's
real-time roaming fraud prevention services.
In March 1996, the Company signed an interim agreement with BANM, which holds
cellular licenses for both "A Band" and "B Band" properties. Under the interim
agreement, the Company and BANM are currently deploying the Company's Blackbird
products in BANM's New York (B Band) market. Concurrently, both parties are
negotiating a definitive license agreement, which will ultimately determine the
size and scope of an anticipated greater deployment. The Company believes that
the definitive agreement will provide for installation of the Company's products
in a large number of BANM's cell sites, and will also include provisions for
the Company's support and maintenance services and CTS's real-time roaming
fraud prevention service.
Revenues from the agreements discussed above, and others which may be signed
in the near future, may contribute only modestly to financial results for the
first half of 1996. The Company is, however, optimistic about the anticipated
ramp-up in the second half of the year and for 1997 and beyond.
The Company's sources of revenue are highly concentrated among a few large
domestic cellular carriers due to the significant concentration of ownership
and/or control of cellular licenses. The Company expects that a relatively
small number of customers will continue to account for a high percentage of
its total revenues. The AWS and LIN/ACC Agreements discussed above accounted
for 52% of the Company's total product and service revenues in 1996, which
compares to 66% in 1995. As the Company expands its marketing efforts
internationally and as the wireless industry expands beyond cellular
telephony to include Personal Communications Services ("PCS"), and other
wireless infrastructures, the Company believes that markets for its products
and services will expand. This diversification should broaden the Company's
revenue base and allow for less dependence on a small group of customers.
The Company has made and will continue to make significant efforts to
diversify its revenue sources in the wireless industry and expects to achieve
such in 1996 and beyond. Revenues originating from the recent contract
signings for the Company's Blackbird products will decrease the Company's
reliance on the AWS and LIN/ACC Agreements.
Page 9
In April 1996, the Company announced the signing of a letter of intent with
Authentix Network, Inc. ("Authentix") to form a strategic alliance which
would complement CTS's real-time roaming fraud prevention service. The
proposed alliance would combine the strength of the Authentix nationwide
roamer verification service with the strength of the Company's Blackbird
products. It will also enable carriers to extend the reach of the Company's
Blackbird products into markets that do not utilize the Company's fraud
prevention products, and to provide a less obtrusive delivery of roamer
verification to their customers. Under the terms of the proposed strategic
alliance, Authentix would grant the Company rights to jointly market and
support Authentix nationwide roamer verification products and services.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. The statements above which are not
historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, demand for the Company's
products and market acceptance risks, the effect of economic conditions, the
impact of competitive products and pricing, hardware and software product
development, commercialization and technological difficulties, manufacturing
capacity and product supply constraints or difficulties, actual purchases by
current and prospective customers under existing and expected agreements, the
progress of contract implementation efforts that allow the Company to recognize
revenue under its accounting policies, and the results of financing efforts,
along with other risks detailed in the Company's Form 10-K and 10-Q Securities
and Exchange Commission filings.
Page 10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
11.1 Computation of Earnings Per Share
27 Financial Data Schedule - filed only with EDGAR submission
b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELLULAR TECHNICAL SERVICES COMPANY, INC.
By: /s/ Michael E. McConnell
------------------------
Michael E. McConnell
Vice President and Chief Financial Officer
May 14, 1996
Page 11
EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE
CELLULAR TECHNICAL SERVICES COMPANY, INC.
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
----------- ----------
Primary earnings per share:
Net income (loss) for calculation of primary
earnings per share $(2,500,559) $ 243,127
----------- ----------
Weighted average number of shares outstanding 10,804,450 9,876,404
Dilutive effect of outstanding stock options -
based upon the Treasury Stock Method using
average market price (1) 1,202,939
----------- ----------
Weighted average number of shares, as adjusted,
for calculation of primary earnings per share 10,804,450 11,079,343
----------- ----------
----------- ----------
Primary earnings (loss) per share (2) $ (.23) $ .02
----------- ----------
----------- ----------
(1) Common Stock equivalent shares have not been considered in the calculations
for the three month period ended March 31, 1996 because the effect would be
antidilutive.
(2) Fully diluted earnings per share computations are not included since they
would not materially change results presented on the primary earnings per
share basis.
Page 12
5
3-MOS
DEC-31-1996
MAR-31-1996
5,720,399
0
560,310
80,001
2,783,130
10,273,315
4,505,606
2,248,397
16,031,129
1,433,761
0
0
0
10,853
14,586,515
16,031,129
89,164
842,279
278,405
3,342,838
0
0
0
(2,500,559)
0
(2,500,559)
0
0
0
(2,500,559)
(0.23)
(0.23)
