<PAGE>
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, DC. 20549
FORM 10-Q
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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, 1997 -------
- -------------
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
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (206) 443-6400
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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
--- ---
22,792,892 shares of the Registrant's Common Stock were outstanding as of
August 11, 1997.
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CELLULAR TECHNICAL SERVICES COMPANY, INC.
TABLE OF CONTENTS FOR FORM 10-Q
<TABLE>
<S> <C>
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. . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . 14
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CELLULAR TECHNICAL SERVICES COMPANY, INC.
CONDENSED BALANCE SHEETS
(in 000's, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,791 $ 4,854
Accounts receivable, net 6,752 11,616
Inventories, net 6,224 8,275
Prepaid expenses and other current assets 552 831
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Total Current Assets 21,319 25,576
PROPERTY AND EQUIPMENT, net 4,055 3,177
SOFTWARE DEVELOPMENT COSTS, net 3,780 3,599
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TOTAL ASSETS $29,154 $ 32,352
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,823 $ 6,365
Payroll related liabilities 1,036 735
Taxes (other than payroll and income) 562 660
Customers' deposits 38 4,626
Deferred revenue 3,380 1,781
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Total Current Liabilities 6,839 14,167
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 authorized, 22,749 shares issued and
outstanding in 1997 and 22,636 in 1996 23 23
Additional paid-in capital 29,850 29,138
Deficit (7,558) (10,976)
------- --------
Total Stockholders' Equity 22,315 18,185
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,154 $ 32,352
------- --------
------- --------
</TABLE>
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The accompanying notes are an integral part of these financial statements.
Page 3
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CELLULAR TECHNICAL SERVICES COMPANY, INC.
STATEMENTS OF OPERATIONS
(in 000's, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED,
JUNE 30, JUNE 30
---------------------- ----------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Systems $ 5,612 $ 2,556 $22,439 $ 2,988
Services 1,113 254 1,654 557
------- ------- ------- -------
Total Revenues 6,725 2,810 24,093 3,545
COSTS AND EXPENSES
Cost of systems and services 3,737 1,665 12,112 2,678
Sales and marketing 989 675 2,383 1,498
General and administrative 877 1,160 1,771 1,671
Research and development 2,162 1,361 4,501 2,357
------- ------- ------- -------
Total Costs and Expenses 7,765 4,861 20,767 8,204
------- ------- ------- -------
INCOME (LOSS) FROM
OPERATIONS (1,040) (2,051) 3,326 (4,659)
INTEREST INCOME 44 61 92 168
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES (996) (1,990) 3,418 (4,491)
PROVISION FOR INCOME TAXES 0 0 0 0
------- ------- ------- -------
NET INCOME (LOSS) $ (996) $(1,990) $ 3,418 $(4,491)
------- ------- ------- -------
------- ------- ------- -------
NET INCOME (LOSS) PER SHARE $ (.04) $ (.09) $ .15 $ (.21)
------- ------- ------- -------
------- ------- ------- -------
WEIGHTED AVERAGE SHARES OUTSTANDING 22,696 21,898 23,204 21,754
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
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The accompanying notes are an integral part of these financial statements.
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CELLULAR TECHNICAL SERVICES COMPANY, INC.
STATEMENTS OF CASH FLOWS
(in 000's, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 3,418 $(4,491)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization of property and equipment 580 369
Amortization of software development costs 610 545
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 4,864 (261)
Decrease (increase) in inventories 2,051 (2,580)
Decrease in prepaid expenses and other current assets 279 48
(Decrease) increase in accounts payable and accrued liabilities (4,542) 796
Increase in payroll related liabilities 301 346
Decrease in taxes (other than payroll and income) (98) (24)
(Decrease) increase in customers' deposits (4,588) 851
Increase (decrease) in deferred revenue 1,599 (27)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 4,474 (4,428)
INVESTING ACTIVITIES
Purchase of property and equipment (1,458) (313)
Capitalization of software development costs (791) (716)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (2,249) (1,029)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 712 1,021
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 712 1,021
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,937 (4,436)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,854 9,448
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,791 $ 5,012
------- -------
------- -------
</TABLE>
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The accompanying notes are an integral part of these financial statements.
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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, 1996
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, including 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, 1997 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 1997. 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, 1996.
NOTE B - INVENTORIES:
Inventory consists of the following (in 000's):
JUNE 30, DECEMBER 31,
1997 1996
------- ------------
Raw materials and components $2,855 $2,723
Work in process and finished components 4,079 6,014
------ ------
6,934 8,737
Less inventory reserves (710) (462)
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$6,224 $8,275
------ ------
------ ------
NOTE C - EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share (which will be called "basic" earnings per share), the dilutive effect
of stock options will be excluded. The impact of Statement No. 128 is not
expected to result in a material change in either primary or fully diluted
earnings per share for the three and six months periods ended June 30, 1997
and June 30, 1996, respectively.
NOTE D - RECLASSIFICATIONS:
Certain reclassifications have been made to the prior year financial
statements to conform to the current period's presentation.
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NOTE E - CONTINGENCIES:
In July 1997 several lawsuits were filed against the Company and its Chairman
of the Board of Directors and Chief Executive Officer in the United States
District Court for the Western District of Washington at Seattle. The
lawsuits are similar in nature and each purports to be a class action on
behalf of all persons who purchased the Company's common stock between
November 14, 1996 and June 30, 1997. The lawsuits allege that defendants
made false and misleading statements which deceived the investing public
regarding the business, financial condition and prospects of the Company
resulting in an artificially inflated market price of the Company's stock.
The complaints allege violations of certain federal securities laws and seek
damages in unspecified amounts. The Company believes that the lawsuits are
without merit and intends to vigorously defend against such suits.
On July 29, 1997 an additional lawsuit was filed against the Company, its
Chairman of the Board of Directors and Chief Executive Officer and its former
President and Chief Operating Officer in the United States District Court for
the Western District of Washington at Seattle. The lawsuit, which purports
to be a class action on behalf of all persons who purchased the Company's
common stock between March 31, 1995 and July 28, 1997, alleges that the
defendants made false and misleading statements, and failed to disclose
material facts, about the ownership of key patents and trade secrets and that
the individual defendants profited from these statements and omissions by
selling shares of common stock of the Company owned by them. The complaint
alleges violations of certain federal securities laws and seeks damages in an
unspecified amount. The Company believes that the lawsuit is without merit
and intends to vigorously defend against such suit.
Page 7
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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
A number of statements contained in this report 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;
uncertainties in duration of the life cycle of its products; risks involved
in the early stages of the life cycle of its products, including worldwide
commercial market acceptance and the risks that its current and future
products may contain errors or be affected by technical problems that would
be difficult and costly to detect and correct; 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 domestic and international customers under existing and future
agreements; uncertainties in the Company's ability to implement these
agreements sufficiently to permit it to recognize revenue under its
accounting policies (including its ability to meet product performance
criteria contained in such agreements); the results of financing efforts; the
results of pending litigation; uncertainties with respect to the Company's
business strategy; general economic conditions; and other risks described in
the Company's filings with the Securities and Exchange Commission.
OVERVIEW
To address the wireless communications industry's increasing need for
products 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. Prior to the Company's third quarter of
1996, revenues had been primarily derived from the Company's
Hotwatch-Registered Trademark- Platform and related application products and
services ("Hotwatch Products") and, to a lesser extent, phone rental products
which are no longer being marketed by the Company.
In 1995, the Company began conducting trials for the purpose of testing and
evaluating the Blackbird Products. Since that time, and beginning in 1996,
the Company has signed agreements with AirTouch Cellular ("AirTouch"), Bell
Atlantic NYNEX Mobile ("BANM"), GTE Mobilnet of California Limited
Partnership ("GTE-California"), GTE Mobilnet Service Corp. ("GTE Corp."),
Ameritech Mobile Communications, Inc. ("Ameritech") and SNET Mobility
("SNET") to deploy and support the Blackbird Products. During the last half
of 1996, the Company recorded its first substantive Blackbird Product
revenues from AirTouch and BANM. During 1997, the Company has recorded
revenues from all of the customers noted above. In addition, the Company has
signed letters of intent with two domestic carriers and one international
carrier to deploy the Blackbird Products. The Company is currently
negotiating contracts with these carriers.
Revenue recognition for the Company's systems is based upon performance
criteria which vary by customer and/or by product. The significant factors
used in determining revenue recognition generally include physical hardware
and software delivery, definitions of system delivery, and customer
acceptance. As a result of such performance criteria, the Company may record
a portion of the systems revenues and the majority of the system
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costs at shipment or during the early stages of a system deployment. In
certain cases no systems revenues may be recorded at time of shipment, while
certain operating costs may be recorded during the deployment process.
Accordingly, revenues and direct margins 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.
In addition, the Company has incurred substantial operating expenses during
the early deployments, primarily in the areas of sales and marketing,
installation, customer support, and in research and development. The Company
expects that its costs and expenses will continue to increase in the future,
due to a continual need to (i) make substantial investments in research and
development, (ii) enhance its sales and marketing activities, (iii) expand
and enhance its customer support capabilities needed to service the
anticipated product deployments in both domestic and international markets
and (iv) enhance its general and administrative activities to support the
expansion of the Company's business. In addition, the Company anticipates
that it may incur increased legal fees in connection with various class
action lawsuits recently filed.
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. Furthermore, the Company's
Blackbird Products currently are used exclusively for analog cellular
networks. As the Company expands its domestic and international marketing
efforts, and as it expands its technology to meet the wireless communications
industry's continued expansion beyond analog cellular telephony to include
other wireless communication services, the Company believes that it will be
able to diversify its revenue and customer base. To date, the Company's
sales have been generated by the Company's in-house sales force. The Company
currently uses and expects to continue using agents and/or distributors in
conjunction with its in-house sales efforts for sales in the international
marketplace. While the Company has signed an international distribution
agreement in the Pacific Rim area, it has not shipped any completed systems
for commercial deployment in that area, nor has it signed any other
international sales agreements. The Company is in the process of exploring
and identifying limitations that may be placed upon it by foreign operations
and the expected resulting impact upon the Company's results of operations
and liquidity. Its success in exploiting these expanded markets and in
achieving and maintaining profitability on both domestic and international
operations, will depend on, among other things, its ability to: (i) make its
existing and future technology commercially acceptable, (ii) recognize and
successfully adapt to the rapid changes in the wireless communications
industry (including digital services), (iii) enhance and expand its
manufacturing activities concurrent with its growth, (iv) comply with foreign
regulatory requirements without negatively affecting the Company's results of
operations or liquidity, (v) manage intellectual property protection both
domestically and in foreign countries, (vi) manage foreign currency exchange
rate fluctuations that may be attributed to international sales contracts,
and (vii) engage additional sales agents and/or distributors on a timely and
economic basis. These and other factors could delay revenues and/or increase
the cost of doing business.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
TOTAL REVENUES increased 139% to $6.7 million in 1997 from $2.8 million in
1996 and the Company incurred a net loss of $1.0 million, or $0.04 per share
in 1997 compared to a net loss of $2.0 million, or $0.09 per share in 1996.
The increase in revenues and the reduction in net loss is directly
attributable to the Company's deployment and commercial acceptance of its
Blackbird Products.
SYSTEMS REVENUES are generated from licensing and sales of the Company's
proprietary software and hardware products, from the sale of third party
equipment sold in support of the proprietary systems, and to a lesser extent,
fees earned associated with the installation and deployment of such systems.
Systems revenues increased 120%
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to $5.6 million in 1997 from $2.6 million in 1996 and represent revenues
primarily from Blackbird Products. There were $0.4 million of system
revenues from Blackbird Products during 1996 relating primarily to third
party hardware shipments. System revenues from Hotwatch Products, which were
$0.1 million in 1997 compared to $2.1 million in 1996, are not expected to
contribute significantly to revenues in the future.
SERVICE REVENUES are derived primarily from hardware and software
maintenance, software upgrades and new releases, No Clone Zone-SM- roaming
fraud protection services, system monitoring and related professional
services provided in support of the Company's currently deployed product
base. These revenues increased 338% to $1.1 million in 1997 from $0.3
million in 1996 with approximately 90% of the 1997 revenues derived from the
Blackbird Products. This increase is directly attributable to growing service
revenues originating from Blackbird Product deployments in late 1996 and
early 1997. The Company anticipates that total service revenues during 1997
and beyond will continue to increase as a result of continued deployment of
the Company's Blackbird Products.
COSTS OF SYSTEMS AND SERVICES increased 124% to $3.7 million in 1997 from
$1.7 million in 1996. Costs of systems and services are primarily comprised
of the costs of: (i) equipment (which primarily includes both proprietary and
third party hardware, and to a lesser extent, manufacturing overhead, and
related expenses), (ii) amortization of capitalized software development,
(iii) system integration and installation, (iv) royalty fees related to the
licensing of intellectual property rights from others, and (v) customer
support. While the 1997 costs relate primarily to Blackbird Products, the
1996 costs relate to both the Blackbird and Hotwatch Products. Costs of
systems and services for 1996 were primarily comprised of (i) direct costs
related to the third party equipment revenues discussed above, (ii) costs
associated with the deployment of Blackbird Products under various customer
agreements whose revenues were recorded in subsequent periods, and (iii)
ongoing support costs of the Hotwatch Products. Costs of systems and
services, as a percent of total revenues, were 56% and 59% for the 1997 and
1996 periods, respectively. The improved cost to revenue ratio in 1997 is
attributable to (i) increased service revenues (described above) which carry
a lower cost component resulting from leveraging the Company's fixed customer
support operating expenses, (ii) reduction of inventory reserves resulting
from the sale of certain previously reserved component parts to the Company's
Asia Pacific distributor (who obtained the manufacturing rights for such
component parts), and (iii) reduction of previously accrued royalty fees,
with the reduction based upon the continual review and assessment of the
Company's royalty fee liabilities.
SALES AND MARKETING EXPENSES increased 47% to $1.0 million in 1997 from $0.7
million in 1996. This increase is primarily attributable to (i) personnel
and related costs incurred in connection with the Company's increased efforts
to generate and maintain demand for its products, (ii) the costs incurred
during both pre- and post-sales contract activities related to the Blackbird
Products, and (iii) variable sales incentive compensation. Sales and
marketing expenses, as a percent of revenues, decreased to 15% in 1997 from
24% in 1996 and is attributable to leveraging the Company's fixed costs in
generating the 139% increase in revenues discussed above.
GENERAL AND ADMINISTRATIVE EXPENSES decreased 24% to $0.9 million in 1997
from $1.2 million in 1996. However, excluding (i) $0.4 million of
non-recurring 1996 expenses related to the Company's 1996 proposed public
offering which was subsequently withdrawn due to unfavorable stock market
conditions, and (ii) $0.2 million of reduced performance based incentive
compensation expenses resulting from lower than expected 1997 operating
results, general and administrative expenses increased $0.3 million, or 50%,
from the $0.6 million incurred in 1996. The increase was principally due to
increased personnel related costs (including recruiting and relocation costs)
associated with the continued expansion of the Company's business.
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
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included in the Company's current and future product lines. Research and
development costs increased 59% to $2.2 million in 1997 from $1.4 million in
1996. Software development costs of $0.4 million and $0.3 million were
capitalized during 1997 and 1996 respectively and related to the development
of the Blackbird Products. Capitalized development costs did not increase in
1997 at the same rate as did research and development expenses primarily due
to an increase in the non-capitalizable research, design, and maintenance
activities associated with the Blackbird Products either deployed or new
and/or enhanced products in the research and design stages. Including
capitalized software development costs, gross research and development
expenditures increased 53% to $2.6 million in 1997 from $1.7 million in 1996,
primarily due to expanded investment in the Blackbird Products.
INTEREST INCOME decreased 28% to $0.04 million in 1997 from $0.06 million in
1996. The decrease was attributable to lower average cash balances invested
at lower average interest rates during 1997 as compared to 1996.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
TOTAL REVENUES increased 580% to $24.1 million in 1997 from $3.5 million in
1996 and the Company generated net income of $3.4 million, or $0.15 per share
in 1997 compared to net loss of $4.5 million, or $0.21 per share in 1996.
The increase in revenues and resulting net income is directly attributable to
the Company's deployment and commercial acceptance of its Blackbird Products.
SYSTEMS REVENUES increased 651% to $22.4 million in 1997 from $3 million in
1996 and represent revenues primarily from Blackbird Products. Systems
revenues from Hotwatch Products, which were $0.5 million in 1997 and $2.5
million in 1996, are not expected to contribute significantly to future
revenues.
SERVICE REVENUES increased 197% to $1.7 million in 1997 from $0.6 million in
1996 with approximately 85% of the 1997 revenues derived from the Blackbird
Products. This increase is directly attributable to growing service revenues
originating from Blackbird Product deployments in late 1996 and early 1997.
The Company anticipates that total service revenues during 1997 and beyond
will continue to increase as a result of the continued deployment of the
Company's Blackbird Products.
COSTS OF SYSTEMS AND SERVICES increased 352% to $12.1 million in 1997 from
$2.7 million in 1996. Costs of systems and services, as a percent of total
revenues, were 50% and 76% for the 1997 and 1996 periods, respectively. The
improvement in 1997 is primarily attributable to (i) an increased volume of
system sales that carried higher direct variable margins, (ii) leveraging
fixed overhead costs relating to manufacturing, installation and system
integration, and (iii) increased service revenues that benefited from
leveraging fixed customer support operating expenses.
SALES AND MARKETING EXPENSES increased 59% to $2.4 million in 1997 from $1.5
million in 1996. This increase is primarily attributable to (i) personnel and
related costs incurred in connection with the Company's increased efforts to
generate and maintain demand for its products, (ii) the costs incurred during
both pre- and post-sales contract activities related to the Blackbird
Products, and (iii) variable sales incentive compensation. Sales and
marketing expenses, as a percent of revenues, decreased to 10% in 1997 from
42% in 1996 and is attributable to leveraging the Company's fixed costs in
generating the 580% increase in revenues.
GENERAL AND ADMINISTRATIVE EXPENSES increased 6% to $1.8 million in 1997 from
$1.7 million in 1996. However, excluding $0.4 million of non-recurring 1996
expenses described above, general and administrative expenses increased $0.5
million, or 38%, from $1.3 million incurred in 1996. The increase was
principally due to increased personnel related costs associated with the
continued expansion of the Company's business.
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RESEARCH AND DEVELOPMENT COSTS increased 91% to $4.5 million in 1997 from
$2.4 million in 1996. Software development costs of $0.8 million and $0.7
million were capitalized during 1997 and 1996 respectively, and related to
the development of the Blackbird Products. Capitalized development costs did
not increase in 1997 at the same rate as did research and development
expenses primarily due to an increase in the non-capitalizable research,
design, and maintenance activities associated with the Blackbird Products
either deployed or new and/or enhanced products in the research and design
stages. Including capitalized software development costs, gross research and
development expenditures increased 75% to $5.3 million in 1997 from $3.1
million in 1996, primarily due to expanded investment in the Blackbird
Products.
INTEREST INCOME decreased 45% to $0.09 million in 1997 from $0.17 million in
1996. The decrease was attributable to lower average cash balances invested
at lower average interest rates during 1997 as compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have consisted primarily of funding
software and hardware development, property and equipment requirements,
working capital and the Company's operating losses in certain periods. The
Company has historically 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 June 30, 1997 the Company's cash
balance was $7.8 million as compared to $4.9 million on December 31, 1996.
The Company's working capital increased to $14.5 million at June 30, 1997
from $11.4 million at December 31, 1996.
CASH PROVIDED BY OPERATING ACTIVITIES amounted to $4.5 million in 1997, as
compared to cash used by operating activities of $4.4 million in 1996. The
major factor contributing to the Company's improved cash flow from operating
activities is the profit recorded in 1997 as compared to the loss incurred in
1996. Depreciation and amortization, which provides cash for operating
activities, increased moderately and is attributable to increased investments
in software development and property and equipment as discussed below. In
addition, the net changes in the balances of the major working capital
components affected cash flow from operating activities during 1997 and
included: (i) accounts receivable, which decreased as a result of a)
collection of older 1996 receivables originating from the initial deployments
of the Blackbird Products and b) more favorable payment terms on 1997 system
shipments as compared to payment terms for the initial 1996 system shipments,
(ii) inventories, which decreased due to the Company's inventory balancing
efforts undertaken after the significant inventory build-up during the fourth
quarter of 1996 (notwithstanding these inventory balancing efforts, the
Company is beginning to place orders for fourth quarter 1997 and first
quarter 1998 production of hardware for expected sales to both its current
and prospective international and domestic customers), (iii) accounts
payable, which decreased primarily due to 1997 payments made for fourth
quarter 1996 inventory purchases, (iv) deferred revenue, which increased
primarily as a result of the growth of prepaid maintenance and service
contracts related to system sales of the Blackbird Products, and (v) customer
deposits, which decrease reflects application of 1996 payments (that
originated from 1996 shipments) against related revenues recorded in 1997.
During the early stages of deploying the Blackbird Products, the Company has
experienced uneven cash flow and operating results. These factors originate
from uneven quarterly sales, cash receipts associated with deferred revenue
recognition and varying payment terms contained in customer agreements.
CASH UTILIZED BY INVESTING ACTIVITIES totaled $2.2 million and $1 million in
1997 and 1996, respectively. The Company's capital requirements during such
periods were (i) software development of 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 be lower during the later half of 1997 but could
Page 12
<PAGE>
increase late in the year and more significantly in 1998 should the Company
experience significant growth or increase its expenditures for product
development or product acquisition related activities. At June 30, 1997, 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 and/or hardware technology in the event that an
attractive opportunity arises. The Company is currently evaluating such
opportunities complimentary to the Blackbird Products.
CASH PROVIDED BY FINANCING ACTIVITIES (exercise of stock options by the
Company's directors, officers and employees) totaled $0.7 million and $1
million during 1997 and 1996, respectively.
In November 1996, the Company sold 400,000 shares of common stock to
investors in a private placement with proceeds to the Company approximating
$6.4 million net of estimated expenses. A registration statement for the
resale of such shares was declared effective by the Securities and Exchange
Commission in April 1997. Also, in November 1996, the Company obtained a
$5.0 million line of credit from a major bank. The line, which is secured by
all personal property of the Company, bears interest at the prime rate plus
.75% and expires September 30, 1997. The proceeds from the stock sale have
been used and the line of credit may be used to fund the Company's growth and
provide additional working capital. No funds have been drawn on the line of
credit as of this date.
The Company expects to continue to incur substantial expenses in (i) support
of research and development activities, (ii) growth of its sales and
marketing organization, (iii) support for new products and the anticipated
expanded customer base, (iv) enhancing the hardware design and manufacturing
processes, and (v) administrative activities, including legal fees expected
to be incurred in connection with several recently filed class action
lawsuits. The Company believes that cash flow anticipated from its operating
activities, existing cash balances and cash available under its line of
credit, are sufficient to fund its operations for at least the next 12
months. However, uneven future operating results could require the Company
to seek additional financing from either debt or equity sources.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1997 several lawsuits were filed against the Company and its Chairman
of the Board of Directors and Chief Executive Officer in the United States
District Court for the Western District of Washington at Seattle. The
lawsuits are similar in nature and each purports to be a class action on
behalf of all persons who purchased the Company's common stock between
November 14, 1996 and June 30, 1997. The lawsuits allege that defendants
made false and misleading statements which deceived the investing public
regarding the business, financial condition and prospects of the Company
resulting in an artificially inflated market price of the Company's stock.
The complaints allege violations of certain federal securities laws and seek
damages in unspecified amounts. The Company believes that the lawsuits are
without merit and intends to vigorously defend against such suits.
On July 29, 1997 an additional lawsuit was filed against the Company, its
Chairman of the Board of Directors and Chief Executive Officer and its former
President and Chief Operating Officer in the United States District Court for
the Western District of Washington at Seattle. The lawsuit, which purports
to be a class action on behalf of all persons who purchased the Company's
common stock between March 31, 1995 and July 28, 1997, alleges that the
defendants made false and misleading statements, and failed to disclose
material facts, about the ownership of key patents and trade secrets and that
the individual defendants profited from these statements and omissions by
selling shares of common stock of the Company owned by them. The complaint
alleges violations of certain federal securities laws and seeks damages in an
unspecified amount. The Company believes that the lawsuit is without merit
and intends to vigorously defend against such suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on July 8, 1997.
ELECTION OF ONE CLASS III DIRECTOR
Stephen P. Katz was elected as Class III director 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 his successor is duly elected
and qualified. The other directors, whose terms of office continued after
the meeting are Jay Goldberg, Lawrence Schoenberg and William C. Zollner. In
connection with the election of directors, the stockholders vote was:
Nominee For Withheld Broker Non-Votes
- ------- --- -------- ----------------
Stephen P. Katz 15,518,546 2,721,007 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
11.1 Computation of Earnings Per Share (1)
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<PAGE>
27 Financial Data Schedule - filed only with EDGAR submission
- --------------------------------------------
(1) Filed herewith.
b) REPORTS ON FORM 8-K
During the fiscal quarter covered by this report, the Company filed a Current
Report on Form 8-K for an event that occurred on July 15, 1997 reporting on
Item 5. No financial statements were included in such filing.
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, 1997
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<PAGE>
EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE
CELLULAR TECHNICAL SERVICES COMPANY, INC.
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Primary earnings per share:
Net income (loss) for calculation of
primary earnings per share $(996) $(1,990) $ 3,418 $(4,491)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of shares
outstanding 22,696,280 21,898,426 22,667,773 21,753,664
Dilutive effect of outstanding stock
options - based upon the Treasury
Stock Method using average market
price(1) 535,995
---------- ---------- ---------- ----------
Weighted average number of shares, as
adjusted, for calculation of primary
earnings per share 22,696,280 21,898,426 23,203,768 21,753,664
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Primary earnings (loss) per share (2) $ (.04) $ (.09) $ .15 $ (.21)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- ----------
(1) Common Stock equivalent shares have not been considered in the
calculations for the three and six month periods ended June 30, 1996 and the
three month period ended June 30, 1997 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 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,791
<SECURITIES> 0
<RECEIVABLES> 6,965
<ALLOWANCES> 213
<INVENTORY> 6,224
<CURRENT-ASSETS> 21,319
<PP&E> 7,433
<DEPRECIATION> 3,378
<TOTAL-ASSETS> 29,154
<CURRENT-LIABILITIES> 6,839
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 22,292
<TOTAL-LIABILITY-AND-EQUITY> 29,154
<SALES> 22,439
<TOTAL-REVENUES> 24,093
<CGS> 9,912
<TOTAL-COSTS> 20,767
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,418
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,418
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,418
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
