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)
JUNE 30, 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 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
--- ---
21,955,708 Common Shares were outstanding as of August 2, 1996.
Page 1
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. . . . . . . . . . . . . . . . . . . . . . . . .12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . .12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . .12
Page 2
CELLULAR TECHNICAL SERVICES COMPANY, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
(unaudited)
JUNE 30, DECEMBER 31,
1996 1995
------------ -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,011,905 $ 9,448,255
Accounts receivable, net 769,713 508,238
Inventories, net 4,527,519 1,947,060
Prepaid expenses and other current assets 779,381 827,712
------------ -------------
Total Current Assets 11,088,518 12,731,265
PROPERTY AND EQUIPMENT, net 2,236,849 2,292,632
SOFTWARE DEVELOPMENT COSTS, net 3,517,945 3,346,748
------------ -------------
TOTAL ASSETS $ 16,843,312 $ 18,370,645
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 1,950,247 $ 1,154,396
Payroll related liabilities 569,468 223,222
Taxes (other than payroll and income) 174,280 197,843
Deferred revenue and customers'
deposits 885,750 61,973
------------ -------------
Total Current Liabilities 3,579,745 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,
21,947,748 shares issued and
outstanding in 1996 and 21,602,768 in 1995 21,948 21,603
Additional paid-in capital 21,358,880 20,337,872
Deficit (8,117,261) (3,626,264)
------------ -------------
Total Stockholders' Equity 13,263,567 16,733,211
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 16,843,312 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1996 1995 1996 1995
------------ ---------- ------------ ----------
REVENUES
License and service fees $ 2,388,032 $3,467,040 $ 3,033,654 $6,203,808
Equipment sales 422,787 199,148 511,951 811,960
Interest income 60,558 106,558 168,051 225,542
------------ ---------- ------------ ----------
Total Revenues 2,871,377 3,772,746 3,713,656 7,241,310
COSTS AND EXPENSES
Cost of license and service
fees 858,252 857,335 1,643,452 1,779,874
Cost of equipment sales 860,702 230,740 1,139,107 842,471
Sales and marketing 674,639 580,157 1,497,512 1,087,764
General and administrative 1,159,617 560,004 1,670,228 1,161,787
Research and development 1,308,605 1,042,000 2,254,354 1,618,777
------------ ---------- ------------ ----------
Total Costs and Expenses 4,861,815 3,270,236 8,204,653 6,490,673
------------ ---------- ------------ ----------
INCOME (LOSS) BEFORE INCOME
TAXES (1,990,438) 502,510 (4,490,997) 750,637
PROVISION FOR INCOME TAXES 10,000 15,000
------------ ---------- ------------ ----------
NET INCOME (LOSS) $ (1,990,438) $ 492,510 $ (4,490,997) $ 735,637
------------ ---------- ------------ ----------
------------ ---------- ------------ ----------
NET INCOME (LOSS) PER SHARE $ (.09) $ .02 $ (.21) $ .03
------------ ---------- ------------ ----------
------------ ---------- ------------ ----------
WEIGHTED AVERAGE SHARES
OUTSTANDING 21,898,426 22,687,380 21,753,664 22,423,034
------------ ---------- ------------ ----------
------------ ---------- ------------ ----------
- --------------
The accompanying notes are an integral part of these financial statements.
Page 4
CELLULAR TECHNICAL SERVICES COMPANY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED
JUNE 30,
------------ ------------
1996 1995
------------ ------------
OPERATING ACTIVITIES
Net income (loss) $(4,490,997) $ 735,637
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization of property
and equipment 368,987 276,959
Amortization of software development costs 545,017 480,228
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (261,475) 161,345
(Increase) in inventories (2,580,459) (470,561)
Decrease (increase) in prepaid expenses and
other current assets 48,331 (322,677)
Increase in accounts payable and accrued
liabilities 795,851 239,797
Increase (decrease) in payroll related
liabilities 346,246 (176,797)
(Decrease) increase in taxes (other than
payroll and income) (23,563) 80,396
Increase in deferred revenue and customers'
deposits 823,777 271,522
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES (4,428,285) 1,275,849
INVESTING ACTIVITIES
Purchase of property and equipment (313,204) (885,670)
Capitalization of software development costs (716,214) (888,868)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,029,418) (1,774,538)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 1,021,353 457,049
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,021,353 457,049
----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (4,436,350) (41,640)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,448,255 9,041,985
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,011,905 $ 9,000,345
----------- -----------
----------- -----------
- ----------------------
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 and six month periods ended June
30, 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.
NOTE B - STOCK SPLIT:
On June 14, 1996 the Company declared a two for one split of its Common Stock
$.001 par value per share, to be effected by a 100% stock dividend whereby
each holder of Common Stock on June 24, 1996, the record date, would receive
one additional share of Common Stock for each share held. The additional
shares were distributed on June 27, 1996. All outstanding common shares and
per share amounts in the accompanying financial statements have been
retroactively adjusted to give effect for the two for one stock split.
NOTE C - CONTINGENCIES:
The Company is involved in certain legal actions and claims arising in the
ordinary course of business. It is the opinion of management that such
litigation will be resolved without a material adverse effect on the
Company's future results of operations or its financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues to date have been primarily derived from the Company's
Hotwatch-Registered Trademark- Platform and related application products and
services ("Hotwatch Products") and phone rental products (the latter of which
are no longer being marketed by the Company). To address the wireless
communications industry's increasing need for a product to more effectively
combat cloning fraud, a major industry problem, the Company has developed the
Blackbird-Registered Trademark- Platform and related application products and
services ("Blackbird Products"). The Blackbird Platform has been engineered
with an open architecture design to allow the Company and others to develop
application products which could run on or exchange information with it.
In 1995, the Company began conducting trials for the purpose of testing and
evaluating its Blackbird Products. These trials recently resulted in the
signing of contracts with AirTouch Cellular ("AirTouch") and Bell Atlantic NYNEX
Mobile ("BANM"), and a letter of intent with GTE Mobilnet of California, L.P.
("GTE"), for installation of the Blackbird Products in over 1,000 cell sites,
subject to the Blackbird Products compliance with contractual performance
requirements.
The Company sustained a loss of $4,490,997 during the six months ended June 30,
1996. Although the Company anticipates that it will begin to recognize revenues
from AirTouch, BANM, GTE, and others for the Blackbird Products during the
second half of 1996, it cannot predict the actual timing or amount of such
revenues. Moreover, the Company expects increases in its costs and expenses
during such period and in the future due to increased research and development,
sales and marketing activities and expansion of customer support capabilities.
The Company's revenue and customer base is currently concentrated among a few
large domestic cellular carriers due to the significant concentration of
ownership and/or control of cellular licenses. As the Company expands its
domestic and international marketing efforts, and as the wireless communications
industry expands beyond cellular telephony to include other wireless
communication services, the Company believes that it will be able to diversify
its revenue and customer base. The Company's success in exploiting these
expanded markets and in achieving profitability will depend, among other things,
on its ability to make its existing and future technology commercially
acceptable, deal successfully with rapid changes in the wireless communications
industry (including the anticipated growth of digital services) and enhance and
expand its manufacturing activities.
Page 6
The following discussion and analysis 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 JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Total revenues decreased 24% to $2,871,377 for the three months ended June 30,
1996, from $3,772,746 for the three months ended June 30, 1995, and the Company
had a net loss of $1,990,438, or $.09 per share, compared to net income of
$492,510, or $.02 per share, for the three months ended June 30, 1995. This
decline in operating results was primarily attributable to: (i) long sales
cycles, (ii) inconsistent contract revenue streams from the Hotwatch Products,
(iii) increased efforts and expenditures in both sales and marketing and
research and development of the Blackbird Products, and (iv) certain non-
recurring general and administrative expenses incurred during the current
period.
License and service fees were derived principally from the Company's Hotwatch
Products and originate from agreements with four customers. These agreements
are the AWS Axys agreements and the AWS Hotwatch Products agreement
(collectively, the "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"). License and service fees from the Company's
Hotwatch Products decreased 30% to $2,320,000 for the three months ended June
30, 1996, from $3,334,000 for the three months ended June 30, 1995.
Hotwatch license and service fee revenues under the AWS Agreements totaled
$1,932,000 and $2,412,000 for the three months ended June 30, 1996, and June
30, 1995, respectively. This decrease was due to completion of various
phases of these contracts during the three months ended June 30, 1995 which
included larger non-recurring service and implementation fees. As of June
30, 1996, the Company had earned the contractual minimums under the August
1994 AWS Axys agreements. Future revenues under the agreements are contingent
upon AWS or its affiliates deploying Axys in certain named affiliate markets
or in newly acquired domestic and/or international markets, or the licensing
of Axys by AWS to third parties. The Company does not currently expect
additional revenue under the Axys agreements for the remainder of 1996.
Further, as a result of a change in business strategy. AWS ceased using the
Company's Hotwatch Products under its November 1994 agreement. Recurring
service revenues, which approximated $67,000 during the second quarter, have
ceased. Future revenues under the agreement are contingent upon AWS deploying
the Hotwatch Products in its markets. The Company does not currently expect
additional revenue under the agreement for the remainder of 1996. License and
service fees under the LIN/ACC Agreement continued their expected decline
decreasing 26% to $283,000 during the three months ended June 30, 1996, from
$385,000 for the three months ended June 30, 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 competitive fraud management system in some or all of
the LIN/ACC markets covered under this agreement. Additionally, license and
service fees under the 360DEG. CC agreement declined 85% to $76,000 for the
three months ended June 30, 1996 from $506,000 for the three months ended
June 30, 1995, principally due to large non-recurring license and
implementation fees recorded during the 1995 period.
License fees from the Company's phone rental products decreased 85% to $35,000
for the three months ended June 30, 1996 from $228,000 for the three months
ended June 30, 1995. Marketing and 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 which 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.
Equipment sales, which primarily consist of the sale of third-party computer
systems (generally non-recurring) and various peripheral and hardware
components, increased 112% to $422,787 for the three months ended June 30, 1996
from $199,148 for the three months ended June 30, 1995. Revenues for the three
months ended June 30, 1996 were primarily derived from equipment sales
associated with the initial deployment of the Company's Blackbird products.
Interest income decreased 43% to $60,558 for the three months ended June 30,
1996 from $106,558. The decrease was attributable to lower average cash
balances invested at lower average interest rates for the three months ended
June 30, 1996 as compared to the three months ended June 30, 1995.
Page 7
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 of $858,252
for the three months ended June 30, 1996 were comparable in the aggregate to
$857,335 for the three months ended June 30, 1995. However, changes in the
components of these costs varied between the periods and were represented by:
(a) a 32% increase to $585,000 for the three months ended June 30, 1996, from
$442,000 for the three month period ended June 30, 1995, for personnel and
overhead related costs incurred in supporting anticipated growth in new
customers and products, (b) an 11% increase to $265,000 for the three months
ended June 30, 1996, from $238,000 for the three months ended June 30, 1995 in
amortization of software development costs primarily attributable to the release
of the first phase of the Blackbird Products for which no license revenues were
recorded. These increases were partially offset by (c) approximately $177,000
of non-recurring design and development costs associated with service revenues
under the AWS agreements recorded during the three months ended June 30, 1995.
Cost of equipment sales increased 273% to $860,702 for the three months ended
June 30, 1996 from $230,740 for the three months ended June 30, 1995. Cost of
equipment sales, which includes purchased hardware and allocated engineering and
installation costs, and, more recently, manufacturing overhead costs, has
historically exceeded the related revenues from equipment sales. The cost to
sales ratio increased to 204% for the three months ended June 30, 1996 from 116%
for the three months ended June 30, 1995. The negative margins were primarily
attributable to fixed engineering and installation overhead, and manufacturing
overhead costs that were not recovered from sales of the Company's proprietary
equipment, and, for the three months ended June 30, 1996, reflect overhead-
related costs associated with the Blackbird Products being deployed under both
sales contracts and trial agreements for which minimal revenues were recorded.
In addition, inventory reserves of $150,000 were recorded during the three
months ended June 30, 1996 and reflect current estimates for manufacturing
rework and replacement costs associated with upgrading existing inventory to
meet new design requirements. Such reserves were minimal in 1995.
Sales and marketing expenses increased 16% to $674,639 for the three months
ended June 30, 1996 from $580,157 for the same period last year. This increase
is directly attributable to personnel and related costs incurred in connection
with the Company's increased efforts to generate demand for its products and the
costs incurred associated with the deployment of the Blackbird Products under
both sales contracts and trial agreements discussed above.
General and administrative expenses increased 107% to $1,159,617 for the three
months ended June 30, 1996, from $560,004 for the three months ended June 30,
1995. Amounts recorded in the three months ended June 30, 1996 included
approximately $400,000 incurred with regard to the Company's proposed public
offering which was subsequently withdrawn due to unfavorable stock market
conditions. Additional amounts recorded during the three months ended June 30,
1996 included employee and management related expenses incurred in connection
with the expansion of the Company's business and included the accrual of
$110,000 for executive incentive compensation that represents a portion of such
expenses estimated for 1996 that are tied to the Company's performance.
Research and development costs increased 26% to $1,308,605 for the three months
ended June 30, 1996 from $1,042,000 for the three months ended June 30, 1995
primarily due to continued and expanded investment in the Blackbird Products.
Software development costs of $282,000 and $475,000 were capitalized during the
three months ended June 30, 1996 and the three months ended June 30, 1995,
respectively, and related primarily to the development of the Blackbird
Products. Capitalized development costs declined during the three months ended
June 30, 1996 primarily due to an increase in non-capitalizable research,
design, and maintenance activities associated with the Blackbird Products. In
addition, expenditures of $177,000 related primarily to billable design and
development services under the AWS Agreements were expensed as costs of services
for the three months ended June 30, 1995. Such expenses for the three months
ended June 30, 1996, were minimal. Including capitalized software development
costs and contract design and development costs, the Company incurred gross
research and development expenditures of $1,599,000 for the three month period
ended June 30, 1996, which
Page 8
represented a 6% decrease from the three month period ended June 30,
1995. The decrease is primarily attributable to reduced contract design,
development and prototype costs associated with the Company's proprietary
hardware which became commercially deployable in 1996.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Total revenues decreased 49% to $3,713,656 for the six months ended June 30,
1996, from $7,241,310 for the six months ended June 30, 1995, and the Company
had a net loss of $4,490,997, or $.21 per share, compared to net income of
$735,637, or $.03 per share, for the six months ended June 30, 1995. This
decline in operating results was primarily attributable to: (i) long sales
cycles, (ii) inconsistent contract revenue streams from the Hotwatch Products,
and (iii) increased efforts and expenditures in both sales and marketing and
research and development of the Blackbird Products.
License and service fees from the Company's Hotwatch Products decreased 52% to
$2,829,000 for the six months ended June 30, 1996, from $5,846,000 for the six
months ended June 30, 1995. Such revenues under the AWS Agreements totaled
$2,038,000 and $4,249,000 for the six months ended June 30, 1996, and June 30,
1995, respectively. This decrease was due to completion of various phases of
these contracts during the six months ended June 30, 1995 that included larger
non-recurring license, service and implementation fees. License and service
fees under the LIN/ACC Agreement continued their expected decline as they
decreased 25% to $575,000 for the six months ended June 30, 1996 from $770,000
for the six months ended June 30, 1995. Additionally, license and service fees
under the 360DEG. CC agreement declined 80% to $158,000 for the six months
ended June 30, 1996 from $774,000 for the six months ended June 30, 1995,
principally due to large non-recurring license and implementation fees recorded
during the 1995 period.
License fees from the Company's phone rental products continued their expected
decline as they decreased 61% to $183,000 for the six months ended June 30, 1996
from $465,000 for the six months ended June 30, 1995.
Equipment sales, which primarily consist of the sale of third-party computer
systems (generally non-recurring) and various peripheral and hardware
components, decreased 37% to $511,951 for the six months ended June 30, 1996
from $811,960 for the six months ended June 30, 1995. Revenues for the six
months ended June 30, 1996 were primarily derived from equipment sales
associated with the initial deployment of the Company's Blackbird Products.
Interest income decreased 25% to $168,051 for the six months ended June 30, 1996
from $225,542. The decrease was attributable to lower average cash balances
invested at lower average interest rates for the six months ended June 30, 1996
as compared to the six months ended June 30, 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 to
$1,643,452 for the six months ended June 30, 1996 from $1,779,874 for the six
months ended June 30, 1995. The decrease was principally attributable to the
elimination of $401,000 of design and development costs associated with service
revenues under the AWS agreements during the six months ended June 30, 1995,
which decrease was partially offset by (a) a 19% increase to $1,073,000 for the
six months ended June 30, 1996, from $899,000 for the six month period ended
June 30, 1995, for personnel and overhead related costs incurred in supporting
anticipated growth of new customers and products, and (b) a 13% increase to
$545,017 for the six months ended June 30, 1996, from $480,228 for the six
months ended June 30, 1995 in amortization of software development costs
primarily attributable to release of the first phase of the Blackbird Products
for which no license revenues were recorded.
Cost of equipment sales increased 35% to $1,139,107 for the six months ended
June 30, 1996 from $842,471 for the six months ended June 30, 1995. Cost of
equipment sales, which includes purchased hardware and allocated engineering and
installation costs, and, more recently, manufacturing overhead costs, has
historically exceeded
Page 9
the related revenues from equipment sales. The cost to sales ratio increased
to 223% for the six months ended June 30, 1996 from 104% for the six months
ended June 30, 1995. The negative margins were primarily attributable to
fixed engineering and installation overhead, and manufacturing overhead costs
that were not recovered from sales of the Company's proprietary equipment,
and, for the six months ended June 30, 1996, included overhead-related costs
associated with the Blackbird Products which are being deployed under both
sales contracts and trial agreements for testing and evaluation in several
markets and for which minimal revenues were recorded. In addition, inventory
reserves of $180,000 were recorded during the six months ended June 30, 1996
and reflect current estimates for manufacturing rework and replacement costs
associated with upgrading existing inventory to meet new design requirements.
Such reserves were minimal in 1995.
Sales and marketing expenses increased 38% to $1,497,512 for the six months
ended June 30, 1996 from $1,087,764 for the six months ended June 30, 1995, as a
result of increased personnel and related costs incurred in connection with the
Company's increased efforts to generate demand for the Company's products and
costs incurred associated with the deployment of the Blackbird Products under
both sales contracts and trial agreements for testing and evaluation in several
markets for which only minimal revenues were recorded.
General and administrative expenses increased 44% to $1,670,228 for the six
months ended June 30, 1996, from $1,161,787 for the six months ended June 30,
1995. Amounts recorded in the six months ended June 30, 1996 included
approximately $400,000 incurred with regard to the Company's proposed public
offering which was subsequently withdrawn due to unfavorable stock market
conditions. Additional amounts recorded during the six months ended June 30,
1996 included employee and management related expenses incurred in connection
with the expansion of the Company's business and included the accrual of
$110,000 for executive incentive compensation that represents a portion of such
expenses estimated for 1996 that are tied to the Company's performance.
Research and development costs increased 39% to $2,254,354 for the six months
ended June 30, 1996 from $1,618,777 for the six months ended June 30, 1995
primarily due to continued and expanded investment in the Company's Blackbird
Products. Software development costs of $716,214 and $888,868 were capitalized
during the six months ended June 30, 1996 and the six months ended June 30,
1995, respectively, and related primarily to the development of the Blackbird
Products. Capitalized development costs declined during the six months ended
June 30, 1996 primarily due to an increase in non-capitalizable research,
design, and maintenance activities associated with the Company's Blackbird
Products. In addition, expenditures of $401,000 related primarily to billable
design and development services under the AWS Agreements were expensed as costs
of services for the six months ended June 30, 1995. Such expenses for the six
months ended June 30, 1996 were minimal. Including capitalized software
development costs and contract design and development costs, the Company
incurred gross research and development expenditures of $2,996,000 for the six
month periods ended June 30, 1996, which represented a 3% increase over the six
month period ended June 30, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have consisted primarily of funding software
development, property and equipment requirements, working capital and funding
the Company's operating losses. The Company has historically funded these
capital requirements through issuance of Common Stock (including proceeds from
the exercise of warrants and options) and from operating profits generated in
certain periods. On June 30, 1996 the Company's cash balance was $5,011,906 as
compared to $9,448,255 on December 31, 1995. The Company's working capital
decreased to $7,508,773 at June 30, 1996 from $11,093,831 at December 31, 1995.
Cash used by operating activities amounted to $4,428,285 for the six months
ended June 30, 1996, as compared to cash provided by operating activities
amounting to $1,275,849 during the same period in 1995. This increased
utilization of cash was reflected primarily from the loss for the six months
ended June 30, 1996, as compared to a profit in the corresponding 1995 period,
increased inventory, and to a lesser extent, from changes in depreciation,
Page 10
amortization, and the balances of other operating assets and liabilities.
The Company continues to increase its proprietary Blackbird hardware
inventory to meet anticipated sales demand for Blackbird Products during
1996. Additional inventory at June 30, 1996 in an amount exceeding
$4,100,000, was on order and was expected to be funded by customer payments
under existing and future contracts, cash generated from operating activities
and/or from cash balances. 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 $1,029,418 and $1,774,538 during
the six months ended June 30, 1996 and June 30, 1995, respectively. The
Company's capital requirements during such periods were (i) software
development, particularly with respect to the Blackbird products and (ii)
property and equipment, primarily for furniture, leaseholds, and equipment
associated with expanding the Company's business. These expenditure levels are
expected to continue in 1996 at or above the levels of 1995. At June 30, 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.
During the six months ended June 30, 1996 and 1995, cash provided by financing
activities was generated from the exercise of stock options issued to the
Company's directors, officers and employees. Proceeds from these activities
totaled $1,021,353 and $457,049 for the six months ended June 30, 1996 and 1995,
respectively.
The Company expects to continue to incur substantial expenses in support of
research and development activities, growth of its sales and marketing
organization, support for new products and the anticipated expanded customer
base, enhancing the hardware design and manufacturing processes and
administrative activities. Although the Company believes that cash flow
anticipated from its operating activities, together with existing cash will be
sufficient to fund its operations for at least the next 12 months, there can be
no assurance that the Company will not require additional financing within such
period. Significant sales growth requiring working capital beyond current
estimates and other changes in the Company's operating activities may require
additional financing. The Company is currently exploring such financing which
may include debt, equity or a combination of both.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
A number of statements contained in this discussion and analysis are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties that could
cause actual results to differ materially from those expressed or implied in the
applicable statements. These risks and uncertainties include but are not
limited to: the Company's dependence on the cellular communications market; its
vulnerability to rapid industry change and technological obsolescence; the
limited nature of its product life, and the uncertainty of market acceptance of
its products; the unproven status of its products in widespread commercial use,
including the risks that its current and future products may contain errors that
would be difficult and costly to detect and correct and that technological
difficulties may in general hinder or prevent commercialization of its present
and future products; potential manufacturing difficulties; potential
difficulties in managing growth; dependence on key personnel; the Company's
limited customer base and reliance on a relatively small number of customers;
the possible impact of competitive products and pricing; the uncertain level of
actual purchases of its products by current and prospective customers under
existing and future agreements; uncertainties in the Company's ability to
implement these agreements sufficiently to permit it to recognize revenue under
is accounting policies (including its ability to meet product performance
criteria contained in such contracts); the results of financing efforts;
uncertainties with respect to the Company's business strategy; general economic
conditions; and other risks described in the Company's Securities and Exchange
Commission filings.
Page 11
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1996 annual meeting of stockholders of the Company was held on June 10,
1996.
ELECTION OF TWO CLASS II DIRECTORS
Jay Goldberg and Lawrence Howard were elected as Class II directors to the
Company's Board of Directors to hold office until the Company's third annual
meeting of the stockholders following the election or until their successors are
duly elected and qualified. In late June 1996, subsequent to the annual
meeting, Mr. Howard resigned from the Board of Directors. The other directors,
whose terms of office continued after the meeting are Stephen Katz and Robert P.
Dahut. In connection with the election of directors, the stockholders vote was:
NOMINEE FOR WITHHELD BROKER NON-VOTES
- ------- --- -------- ----------------
Jay Goldberg 9,239,469 218,062 0
Lawrence Howard 8,104,823 1,352,708 0
APPROVAL OF THE 1996 STOCK OPTION PLAN
For 3,817,997 Against 1,109,233 Abstained 34,937 Broker Non-Votes 4,495,364
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
11.1 Computation of Earnings Per Share
27 Financial Data Schedule
B) No reports on Form 8-K were 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
August 13, 1996
Page 12
EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE
CELLULAR TECHNICAL SERVICES COMPANY, INC.
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1996 1995 1996 1995
------------ ----------- ------------ -----------
Primary earnings per share:
Net income (loss) for
calculation of primary
earnings per share $(1,990,438) $ 492,510 $(4,490,997) $ 735,637
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Weighted average number of
shares outstanding 21,898,426 19,895,720 21,753,664 19,824,264
Dilutive effect of outstanding
stock options - based upon the
Treasury Stock Method using
average market price(1) 2,791,660 2,598,770
------------ ----------- ------------ -----------
Weighted average number of
shares, as adjusted, for
calculation of primary
earnings per share 21,898,426 22,687,380 21,753,664 22,423,034
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Primary earnings (loss) per
share(2) $ (.09) $ .02 $ (.21) $ .03
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
(1) Common Stock equivalent shares have not been considered in the calculations
for the three and six month periods ended June 30, 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 13
5
0000876378
CELLULAR TECHNICAL SERVICES
6-MOS
DEC-31-1996
JUN-30-1996
5,011,905
0
775,928
6,215
4,527,519
11,088,518
4,673,582
2,436,733
16,843,312
3,579,745
0
0
0
21,948
13,241,619
16,843,312
511,951
3,713,656
1,139,107
8,204,653
0
0
0
(4,490,997)
0
(4,490,997)
0
0
0
(4,490,997)
(0.21)
(0.21)
