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, 1999
CELLULAR TECHNICAL SERVICES COMPANY, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 11-2962080
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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
2,281,509 Common Shares were outstanding as of May 14, 1999.
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..................................................8
PART II. OTHER INFORMATION.....................................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................15
Page 2
CELLULAR TECHNICAL SERVICES COMPANY, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
(in 000's, except per share amounts)
(unaudited)
MARCH 31, DECEMBER 31,
1999 1998
--------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,495 $1,567
Accounts receivable, net of allowances of $46 in 1999 and $72 in 1998 3,234 2,860
Inventories, net 915 1,014
Prepaid expenses and other current assets 324 185
-------- --------
Total Current Assets 6,968 5,626
PROPERTY AND EQUIPMENT, net 1,703 1,941
SOFTWARE DEVELOPMENT COSTS, net 380 535
-------- --------
TOTAL ASSETS $9,051 $8,102
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $1,260 $1,358
Payroll related liabilities 384 470
Taxes (other than payroll and income) 48 128
Deferred revenue and customers' deposits 3,770 3,074
-------- --------
Total Current Liabilities 5,462 5,030
STOCKHOLDERS' EQUITY
Preferred Stock, $0.01 par value per share, 5,000 shares
authorized, none issued and outstanding
Common Stock, $0.001 par value per share, 30,000 shares 23 23
authorized, 2,281 shares issued and outstanding at
March 31, 1999 and Dec. 31, 1998
Additional paid-in capital 29,931 29,931
Accumulated Deficit (26,365) (26,882)
-------- --------
Total Stockholders' Equity 3,589 3,072
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,051 $8,102
======== ========
- -----------------
The accompanying notes are an integral part of these financial statements.
Page 3
CELLULAR TECHNICAL SERVICES COMPANY, INC.
STATEMENTS OF OPERATIONS
(in 000's, except per share amounts)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
-------- --------
REVENUE
Systems $ 557 $1,742
Services 2,207 1,680
-------- --------
Total Revenue 2,764 3,422
COSTS AND EXPENSES
Cost of systems and services 1,078 2,495
Sales and marketing 170 389
General and administrative 589 848
Research and development 445 1,503
-------- --------
Total Costs and Expenses 2,282 5,235
-------- --------
INCOME (LOSS) FROM OPERATIONS 482 (1,813)
INTEREST INCOME, NET 33 24
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES 515 (1,789)
PROVISION FOR INCOME TAXES - -
======== ========
NET INCOME (LOSS) $515 $(1,789)
======== ========
EARNINGS (LOSS) PER SHARE
Basic $.23 $(.78)
======== ======
Diluted $.23 $(.78)
======== ======
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 2,281 2,280
Diluted 2,281 2,280
- ------------------------
The accompanying notes are an integral part of these financial statements.
Page 4
CELLULAR TECHNICAL SERVICES COMPANY, INC.
STATEMENTS OF CASH FLOWS
(in 000's)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
---------- -----------
OPERATING ACTIVITIES
Net income (loss) $ 515 $ (1,789)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization of property and equipment 239 315
Amortization of software development costs 155 316
Loss (gain) on disposal of assets (2) 41
Provision for inventory reserves 90 105
Other 2 42
Changes in operating assets and liabilities:
(Increase) in accounts receivable (374) (1,930)
Decrease in inventories 9 122
Decrease (Increase) in prepaid expenses and other current assets (139) 25
(Decrease) in accounts payable and accrued liabilities (98) (117)
(Decrease) in payroll related liabilities (86) (145)
(Decrease) in taxes (other than payroll and income) (80) (429)
Increase in deferred revenue and customers' deposits 696 1,994
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 927 (1,450)
INVESTING ACTIVITIES
Purchase of property and equipment (1) (114)
Proceeds for sale of property and equipment 2 0
Capitalization of software development costs (416)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1 (530)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 0 0
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 928 (1,980)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,567 3,448
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,495 $ 1,468
========= =========
- ---------------------
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, 1998 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, 1999
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1999. 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, 1998.
NOTE B - INVENTORIES:
Inventory consists of the following (in 000's):
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
Inventory, primarily service parts $ 3,806 $ 3,815
Less inventory reserves (2,891) (2,801)
------- ------
$ 915 $ 1,014
======= =======
NOTE C - CONTINGENCIES:
The following legal matters are outstanding as of March 31, 1999:
Between July 1997 and September 1997, eight separate lawsuits were filed against
the Company and two of its current or former executive officers. In February
1998, the lawsuits were consolidated pursuant to a revised consolidated
complaint filed by plaintiffs. The consolidated complaint alleges violations of
certain federal securities laws, and purports to seek unspecified damages on
behalf of a class of persons, other than defendants and their affiliates, who
purchased the Company's common stock or call options on the Company's common
stock, or who sold put options on the Company's common stock, during the period
March 6, 1996 through July 30, 1997. On March 12, 1999, the Company, together
with the individually named defendants, entered into a Stipulation and Agreement
of Settlement with the plaintiffs (the "Stipulation"), under which the parties
have agreed to settle the lawsuit upon the following principal terms: (i)
payment of $4,100,000 made by the Company's insurers to plaintiffs; and (ii) the
dismissal of the lawsuit against all defendants and related parties, with
prejudice, but without any admission of liability or wrongdoing. The Stipulation
requires court approval to become final, and is subject to certain other terms
and conditions. While the Company anticipates that court approval will be
forthcoming, there can be no assurance the court will approve the settlement or
that all other conditions set forth in the Stipulation will be met. In the event
that court approval of the settlement is denied, or if the settlement is
otherwise terminated, the Company expects that the lawsuit will resume and that
the Company will renew its vigorous defense of the claims. In the event of a
renewal of the lawsuit, an award of monetary damages against the Company in
excess of applicable insurance coverage, the expenditure of significant
Page 6
CELLULAR TECHNICAL SERVICES COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CON'T)
sums in the defense of the lawsuit, or the diversion of management's attention
from other business concerns, could each have a material adverse effect on the
Company's business, financial condition and results of operations.
In January 1998, Communications Information Services, Inc. filed an action
against the Company and AirTouch Communications, Inc. for alleged infringement
of United States Patent No. 5,329,591 ("the `591 patent") in the United States
District Court for the Northern District of Georgia at Atlanta. In January 1999,
the Court granted the Company's motion to transfer this lawsuit to the United
States District Court for the Western District of Washington. The complaint
asserts that the plaintiff is the exclusive licensee of all rights under the
`591 patent, alleges that the Company's cellular telephone fraud prevention
technology infringes the `591 patent, and seeks damages in unspecified amounts.
The Company believes this lawsuit is without merit and is vigorously defending
against it. Although no estimate of any outcome of this action can currently be
made, an unfavorable resolution of this lawsuit could have a material adverse
effect on the Company's business, financial condition and results of operations.
From time to time, the Company is also a party to other legal proceedings in the
ordinary course of business and/or which management believes will be resolved
without a material adverse effect on the Company's business, financial condition
or results of operations.
NOTE D - REVERSE STOCK SPLIT:
On January 5, 1999, the Company implemented a one-for-ten stock combination
(reverse stock split) pursuant to the stockholders' approval at the Company's
annual meeting of stockholders on December 14, 1998. All outstanding common
shares and per share amounts in the accompanying financial statements have been
retroactively adjusted to give effect to the one-for-ten stock combination.
NOTE E - EARNINGS (LOSS) PER SHARE:
The calculation of basic and diluted earnings per share is as follows (in 000's,
except per share amounts):
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1999 1998
---------------- ------------------
Net income (loss) $ 515 $(1,789)
====== =======
Weighted average number of shares for basic earnings per share 2,281 2,280
Effect of dilutive securities: Employee stock options - -
----- -------
Weighted average number of shares for diluted earnings per share 2,281 2,280
====== =======
Net income (loss) per share - Basic $ .23 $ (.78)
====== =======
Net income (loss) per share - Diluted $ .23 $ (.78)
====== =======
Page 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. The discussion should be read in
conjunction with the financial statements and notes thereto.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for Cellular Technical Services Company, Inc.
(the "Company") contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 that reflect the
Company's views with respect to future events and financial performance. The
Company uses words and phrases such as "anticipate," "expect," "intend," "the
Company believes," "future," and similar words and phrases to identify
forward-looking statements. Reliance should not be placed on these
forward-looking statements. These forward-looking statements are based on
current expectations and are subject to risks, uncertainties and assumptions
that could cause, or contribute to causing, actual results to differ materially
from those expressed or implied in the applicable statements. Readers should pay
particular attention to the descriptions of risks and uncertainties described in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998
and in the Company's other filings with the Securities and Exchange Commission.
All forward-looking statements included in this report are based on information
available to the Company on the date of this report. The Company assumes no
obligation or duty to update any such forward-looking statements.
OVERVIEW
The Company's goal is to be a premier provider of real-time information
processing and information management solutions for the worldwide wireless
communications industry. Over the past 10 years, the Company has used its
extensive experience with real-time wireless call processing to create
technologically advanced solutions for this industry.
Today, the Company develops, markets and supports both software and hardware as
part of its integrated solution for wireless communications fraud management.
The Company's radio frequency ("RF") based suite of platform solutions include
the Blackbird'r' Platform, PreTect'TM' cloning-fraud prevention application, No
Clone Zone'sm' roaming-fraud prevention service and related application products
and services ("Blackbird Platform Products"). The Blackbird Platform Products
are currently used to address the wireless communications industry's need to
more effectively combat cloning fraud. In addition, the Blackbird Platform is
designed to support a broad range of products and services for the wireless
communications industry, including both fraud and non-fraud products and
services. The Company believes that the open, scalable architecture of the
Blackbird Platform allows it and others to develop applications that run on or
exchange information with our Blackbird Platform.
Over the past three years, the Company has entered into agreements with AirTouch
Cellular and certain affiliates, Bell Atlantic Mobile and certain affiliates,
GTE Mobilnet of California Limited Partnership, GTE Mobilnet Service Corp.,
Ameritech Mobile Communications, Inc. and SNET Mobility to deploy and support
Blackbird Platform Products. In 1998, revenue from Blackbird Platform Products
represented substantially all of the Company's total revenue, and the Company
anticipates that revenue from Blackbird Platform Products will continue to
represent substantially all of the Company's total revenue in 1999. Until the
Company's launch of the Blackbird Platform Products in 1996, the Company's
revenue had been derived primarily from the Company's Hotwatch'r' Platform and
related application products and services ("Hotwatch Platform Products"), which
provide credit management and prepaid billing applications and services to the
wireless communications industry.
As previously reported, the Company implemented an aggressive restructuring plan
during 1998 after incurring significant operating losses during 1996 and 1997.
The restructuring plan had three specific objectives: reduce expenses, achieve
positive cash flow by the end of 1998 and return the Company to sustainable
profitability in 1999.
Page 8
The plan called for a significant reduction in workforce and related expenses, a
consolidation of facilities and equipment, the sale of underutilized assets, and
management changes. These restructuring initiatives began to yield positive
results in the third and fourth quarters of 1998. As reflected in this report,
the Company's financial position continued to improve during the first quarter
of 1999, achieving both profitability and positive cash flow during the period.
The Company believes that its financial position should continue to improve
during the remainder of 1999.
REVENUE GENERATION
The Company currently generates revenue through two sources: systems revenue and
service revenue.
Systems revenue is generated from licensing and sales of the Company's
proprietary software and hardware products, the sale of third-party equipment
sold in support of the proprietary systems and, to a lesser extent, fees earned
in connection with the installation and deployment of such systems. Revenue is
recognized when all of the following conditions are met:
(i) persuasive evidence of an arrangement exists;
(ii) delivery has occurred and all contractual obligations and other
elements that are essential to the functionality of the delivered
products have been satisfied;
(iii) the amount is fixed and determinable; and
(iv) collectability is probable.
Revenue is deferred for non-essential undelivered elements, based on vendor
specific objective evidence ("VSOE") of the fair value for all elements of the
arrangement. VSOE is typically based on the price charged when an element is
sold separately, or in the case of an element not yet sold separately, the price
established by authorized management, if it is probable that the price, once
established, will not change before market introduction. Elements included in
multiple element arrangements could consist of software products, upgrades,
enhancements, customer support services, or consulting services.
Service revenue is derived primarily from hardware and software maintenance
programs, No Clone Zone roaming fraud prevention services, Blackbird Platform
Monitoring service and related professional services provided in support of the
Company's currently deployed product base. Service revenue is recognized ratably
over the period that the service is provided. Hardware and software maintenance
generally begins after system acceptance. Prepaid or allocated maintenance and
services are recorded as deferred revenue.
Revenue recognition for the Company's systems varies by customer and by product.
Every element of a contract must be identified and valued based upon VSOE,
regardless of any stated price in the contract. Revenue from any undelivered
elements of a contract is deferred. However, any undelivered element essential
to the functionality of the delivered product will cause a 100% deferral of the
sale. Amounts billed and received on sales contracts before products are
delivered or before revenue is recognized or recognizable are recorded as
customer deposits or deferred revenue. The significant factors used in
determining revenue recognition generally include physical hardware and software
delivery, definitions of system delivery and customer acceptance. For those
agreements which provide for payment based upon meeting actual performance
criteria, the Company may record a portion of the systems revenue and the
majority of the systems costs at shipment or during the early stages of a system
deployment. In certain cases no systems revenue or cost may be recorded at time
of shipment, while certain operating costs may be recorded during the deployment
process. Accordingly, revenue and direct margin recorded by the Company can be
expected to be lower in earlier periods of deployment and inconsistent from
quarter to quarter, especially during the initial market deployments under new
agreements. The resulting deferral of revenue is recognized in subsequent
periods upon meeting the performance criteria specified in the applicable
agreement. The Company does not operate with a significant revenue backlog.
Page 9
COSTS AND EXPENSES
Costs of systems and services are primarily comprised of the costs of: (i)
equipment, which includes both proprietary and third-party hardware and, to a
lesser extent, manufacturing overhead and related expenses; (ii) amortization of
capitalized software development costs; (iii) system integration and
installation; (iv) royalty fees related to the licensing of intellectual
property rights from others; (v) customer support; and (vi) activities
associated with the evaluation, rework and testing of replacement inventory
parts returned from the field in connection with the Company's ongoing hardware
maintenance service activities.
Research and development expenditures include the costs for research, design,
development, testing, preparation of training and user documentation and fixing
and refining features for the software and hardware components included in the
Company's current and future product lines.
The Company expects that its costs and expenses in these and other areas will be
lower in 1999 as compared to 1998, but will continue to be incurred in the
future, due to the ongoing need to: (i) make investments in research and
development; (ii) enhance its sales and marketing activities; (iii) enhance
hardware maintenance processes; (iv) enhance its customer support capabilities;
and (v) enhance its general and administrative activities.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Overview
Total revenue decreased 19% to $2,764,000 in 1999 from $3,422,000 in 1998. Net
income was $515,000, or $0.23 per share, in 1999 compared to a loss of
$1,789,000, or $0.78 per share, in 1998.
While the Company enjoyed increased service revenue as described below, the
Company attributes the total lower revenue to: (i) a reduction in domestic
market opportunities for the Company's cloning fraud prevention technology, due
to the effectiveness of this and other authentication-based products in
combating cloning fraud; (ii) lower penetration than originally planned of
Blackbird Platform Products into existing customers' markets and to new and/or
additional markets; and (iii) the lack of additional new domestic and
international customers.
The improved operating results are attributable to: (i) increased service
revenue originating from an increased installed base of systems; (ii) additional
recurring services offered by the Company during 1998; and (iii) cost reductions
attributable to the benefits of the Company's 1998 restructuring plan, that
included, among other initiatives, streamlining the Company's operations and
reducing its workforce.
Systems Revenue
Systems revenue decreased 68% to $557,000 in 1999 from $1,742,000 in 1998 due to
the factors discussed above, and represents revenue from customers for the
Company's Blackbird Platform Products.
Service Revenue
Service revenue increased 31% to $2,207,000 in 1999 from $1,680,000 in 1998.
Approximately 94% and 93%, respectively, of the 1999 and 1998 total service
revenue was derived from the Blackbird Platform Products. This increase is
directly attributable to growing service revenue originating from a larger
installed base of Blackbird Platform Products in the current period as compared
to 1998.
Page 10
Costs of Systems and Services
Costs of systems and services, the majority of which relate to the Company's
Blackbird Platform Products, decreased 57% to $1,078,000 in 1999 from $2,495,000
in 1998. Costs of systems and services, as a percent of total revenue, were 39%
and 73% for the 1999 and 1998 periods, respectively. The decrease in the amounts
and percentages of costs for 1999 relative to 1998 reflects:
(i) lower costs associated with the decrease in systems revenue in 1999 as
discussed above;
(ii) a decrease in the amount of amortization of capitalized software
development costs resulting from the acceleration of the amortization
of these costs in 1998 based on a reduction of future sales projections
for such software;
(iii) increased service revenue in 1999, resulting from an increased
leveraging of its fixed customer support operating expenses; and
(iv) cost reductions implemented in 1998 in connection with the Company's 1998
restructuring plan.
Sales and Marketing Expenses
Sales and marketing expenses decreased 56% to $170,000 in 1999 from $389,000
million in 1998. Sales and marketing expenses, as a percent of total revenue,
decreased to 6% in 1999 from 11% in 1998. Both the dollar and percentage
decreases in sales and marketing expenses are attributable primarily to
reductions in staffing levels and related expenses in connection with the
Company's 1998 restructuring plan.
General and Administrative Expenses
General and administrative expenses decreased 31% to $589,000 in 1999 from
$848,000 in 1998 and primarily reflect a reduction in staffing levels and
related expenses in connection with the Company's 1998 restructuring plan.
Research and Development Expenditures
Research and development costs decreased 70% to $445,000 in 1999 from $1,503,000
in 1998. The decrease in expenditures in 1999 was primarily attributable to
reduced staffing levels in connection with the Company's 1998 restructuring plan
and was partially offset by increased spending on product enhancements and new
product research.
Interest Income, net
Interest income increased 38% to $33,000 in 1999 from $24,000 in 1998. Interest
income from financing customer receivables was partially offset by lower average
cash balances during the 1999 period.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company's capital requirements have consisted primarily of funding software
and hardware research and development, property and equipment requirements,
working capital and the Company's operating expenses. The Company historically
has funded these requirements through issuance of common stock (including
proceeds from the exercise of warrants and options) and from operating profits
in certain periods. On March 31, 1999, the Company's cash balance was $2,495,000
as compared to $1,567,000 on December 31, 1998. The Company's working capital
increased to $1,506,000 at March 31, 1999 from $596,000 at December 31, 1998.
Page 11
Cash Provided by Operating Activities
Cash provided by operating activities amounted to $927,000 in 1999, as compared
to cash used in operating activities of $1,450,000 in 1998. The major factors
contributing to the Company's increased cash flow from operating activities in
the 1999 period were: (i) the $515,000 net income recorded in 1999 as compared
to a $1,789,000 net loss in 1998; and (ii) the net changes in the balances of
the major working capital components affecting cash flow from operating
activities, including:
(a) Accounts receivable, which increased 13%, or $374,000 in 1999 primarily due
to timing differences arising from billing and payment cycles and terms of
recurring service agreements;
(b) Current liabilities (except deferred revenue and customers' deposits) which
decreased 13%, or $264,000, due to a lower fixed cost structure resulting
from the implementation of the Company's 1998 restructuring plan; and
(c) Deferred revenue and customers' deposits, which increased 23%, or $696,000,
and resulted from the growth of prepaid maintenance and service revenue for
the installed base of Blackbird Platform Products.
Cash Provided by Investing Activities
Cash provided by investing activities totaled $1,000 in 1999, compared to cash
used in investing activities of $530,000 in 1998. The amounts in the 1998 period
were for: (i) purchase of property and equipment, primarily for furniture,
leaseholds, and equipment associated with maintaining the Company's business;
and (ii) capitalization of software development of the Blackbird Platform
Products, which ceased during the second quarter of 1998. At March 31, 1999, the
Company had no significant commitments for capital expenditures.
Operating Trends
The Company earned $515,000 in the first quarter of 1999, compared to operating
losses of $10,860,000 and $5,046,000 for the years ended December 31, 1998 and
1997, respectively. Net non-cash charges included in the operating losses were
$9,950,000 and $5,528,000 in 1998 and 1997, respectively. As of March 31, 1999,
the Company had an accumulated deficit of $26,365,000, the majority of which has
accumulated during the three years ended December 31, 1998.
Page 12
During 1998, in response to such unfavorable operating results, the Company
implemented its 1998 restructuring plan, which is described elsewhere in this
report. Through the end of the first quarter of 1999, the results of the
Company's 1998 plan showed significant improvement in profitability and cash
flow, as reflected in the following table:
Unaudited operating information for the past seven quarters (in 000's)
CASH PROVIDED FROM
(USED IN)
NET OPERATING
THREE MONTHS ENDED: REVENUE INCOME (LOSS) ACTIVITIES EBITDA+
------------------------- ----------------- ---------------- -------------------- --------------
September 30, 1997 $2,379 ($4,749) ($3,432) ($3,376)
December 31, 1997 3,783 (3,715) 560 (1,643)
March 31, 1998 3,422 (1,789) (1,450) (1,036)
June 30, 1998 3,423 (3,916) 1,185 (527)
September, 30 1998 2,416 (2,447) (634) 34
December 31, 1998 2,712 (2,706) (530) 532
March 31, 1999 2,764 515 928 964
The EBITDA+ information shown above reflects earnings (loss) before interest and
taxes, and certain non-cash charges to operations for depreciation,
amortization, loss on disposal of assets and inventory reserves. This is one of
the Company's important cash flow monitoring tools in evaluating the
effectiveness of its 1998 restructuring plan and its current operations. The
positive trends experienced during each of the last six quarterly periods show
the effectiveness of the 1998 restructuring plan towards achieving the Company's
goals of both positive cash flow by the end of 1998 and profitability during
1999. While the Company believes that its current cash reserves and projected
cash flow from operations provide sufficient cash to fund its operations for at
least the next twelve months, unanticipated changes in customer needs and/or
other external factors may require additional financing and/or further expense
reductions.
Year 2000 Compliance
The Company is currently utilizing internal resources and, where appropriate,
outside resources to comprehensively identify and resolve, in a timely manner,
the potential impact of the year 2000 and beyond processing of date-sensitive
information as it applies to the Company's business. Generally, year 2000
processing issues are the result of systems that use two digits (rather than
four digits) to define the applicable year. Thus, for example, any system that
utilizes date-sensitive coding may recognize a date using "00" as the year 1900
rather than the year 2000, which could result in miscalculations or system
failures. Year 2000 processing issues also may arise in other contexts, such as
certain leap year calculations and in systems that use certain dates to provide
special functionality. The Company believes that it has completed the majority
of work required to address its year 2000 processing issues.
The Company's systems that process date-sensitive information can be divided
into the following three categories: (i) Blackbird Platform Products; (ii)
Hotwatch Platform Products; and (iii) systems used in the Company's internal
operations. Each of these categories may include internally-developed
applications, third-party applications, operating systems, outsourced systems
and interfaces with external systems. The general status of each of these
categories is described below.
Blackbird Platform Products - The Company has substantially completed its
assessment of year 2000 compliance for its Blackbird Platform Products. The
Company believes that its software incorporated in these products is year 2000
compliant, so long as all necessary software and hardware with which it operates
is also Year 2000 compliant. With respect to third-party software incorporated
in these products, all vendors of such software have indicated that their
software is year 2000 compliant. In addition, the Company has tested and
verified that the Blackbird Platform Products, when used in conjunction with
such third-party software, is year 2000 compliant in all material respects.
Page 13
Hotwatch Platform Products - The Company's Hotwatch Platform Products, which
revenue is not currently material to the Company's financial position, results
of operations, or cash flows, are not currently year 2000 compliant. The Company
has identified the aspects of these products that would require enhancements to
become year 2000 compliant, and is in the process of determining with its
customers whether it will perform such enhancements. Currently, the Company
expects that revenue from its Hotwatch Platform Products, as currently deployed,
will be minimal in 1999 and beyond. The Company expects that any year 2000
compliance project for these products, if initiated, will be completed in a
timely manner and that all related costs will be borne by its customers of these
products.
Internal Systems - The Company continues to assess and test all systems used in
the Company's internal operations for year 2000 compliance. To date, most of
these systems have been confirmed to be either presently year 2000 compliant in
all material respects, or year 2000 compliant with the purchase of
readily-available software upgrades or alternatives that are currently
identified to be year 2000 compliant. The Company expects that all of its year
2000 compliance projects for internal systems will be completed in a timely
manner.
Costs incurred to date for year 2000 compliance issues have not been significant
and costs to complete are not currently expected to have a material adverse
impact on the Company's financial position, results of operations, or cash flows
in future periods. If, however, the Company, its customers, or its vendors are
unable to adequately resolve any year 2000 compliance issues not yet addressed
in a timely manner, the Company's business, financial condition and results of
operations may be adversely affected. In addition, the Company has on occasion
agreed to warrant and/or indemnify certain of its customers for claims and
losses arising out of the failure of its products to be year 2000 compliant.
There can be no assurance that the Company's current and future products and
internal systems do not contain undetected errors related to year 2000
processing that may result in material additional costs or liabilities that
could have a material adverse effect on the Company's business, financial
condition and results of operations. Further, to the extent that the Company is
not able to test the technology provided to it by third parties for its own use
or for redistribution, or to obtain adequate assurances from such third parties
that their products are year 2000 compliant, the Company may experience material
additional costs or liabilities that could have a material adverse effect on the
Company's business, financial condition and results of operations.
Page 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
27. Financial Data Schedule - filed only with EDGAR submission.
B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K, dated March 16, 1999,
under Item 5 of such Report, relating to the Company's legal
proceedings. No financial statements were included in such Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELLULAR TECHNICAL SERVICES COMPANY, INC.
By: /s/ Bruce R. York
-----------------
Bruce R. York
Vice President and Chief Financial Officer
May 14, 1999
Page 15
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as.................................'TM'
The registered trademark symbol shall be expressed as...................... 'r'
The service mark symbol shall be expressed as..............................'sm'
5
1,000
3-MOS
DEC-31-1999
JAN-01-1999
MAR-31-1999
2,495
0
3,280
46
915
6,968
5,032
3,329
9,051
5,462
0
0
0
23
3,566
9,051
557
2,764
1,078
2,282
0
0
0
482
0
482
0
0
0
515
0.23
0.23
