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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
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For the quarterly period ended Commission File Number 0-19437
MARCH 31, 2000
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CELLULAR TECHNICAL SERVICES COMPANY, INC.
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(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 11-2962080
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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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
NOT APPLICABLE
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(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
--- ---
2,288,319 Common Shares were outstanding as of May 5, 2000.
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CELLULAR TECHNICAL SERVICES COMPANY, INC.
TABLE OF CONTENTS FOR FORM 10-Q
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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........................................................................13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.........................................................13
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CELLULAR TECHNICAL SERVICES COMPANY, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in 000's except per share amounts)
(unaudited)
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<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,060 $ 4,787
Accounts receivable, net of allowances of $5 in 2000 and $5 in 1999 2,168 2,647
Inventories, net 822 592
Prepaid expenses and deposits 291 124
-------- --------
Total Current Assets 10,341 8,150
PROPERTY AND EQUIPMENT, net 773 874
SOFTWARE DEVELOPMENT COSTS, net of accumulated amortization of $9,615 in 2000
and $9,526 in 1999 89 178
NOTE RECEIVABLE 1,000 1,000
-------- --------
TOTAL ASSETS $ 12,203 $ 10,202
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,118 $ 917
Payroll related liabilities 286 525
Taxes (other than payroll and income) 71 35
Customers' deposits 475 175
Deferred revenue 3,902 2,877
-------- --------
Total Current Liabilities 5,852 4,529
MINORITY INTEREST 11 --
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, 2,282 shares issued and outstanding at March
31, 2000 and December 31, 1999 23 23
Additional paid-in capital 29,934 29,933
Accumulated Deficit (23,617) (24,283)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 6,340 5,673
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,203 $ 10,202
======== ========
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The accompanying notes are an integral part of these financial statements.
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CELLULAR TECHNICAL SERVICES COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in 000's, except per share amounts)
(unaudited)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
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REVENUES
Systems $ 275 $ 557
Services 1,895 2,207
Phone cards 2,747 --
------ ------
Total Revenues 4,917 2,764
COSTS AND EXPENSES
Cost of systems, services and phone cards 3,155 1,078
Sales and marketing 313 170
General and administrative 558 591
Research and development 355 445
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Total Costs and Expenses 4,381 2,284
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INCOME FROM OPERATIONS 536 480
OTHER INCOME, net 24 2
INTEREST INCOME, net 132 33
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INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 692 515
PROVISION FOR INCOME TAXES 15 --
------ ------
NET INCOME BEFORE MINORITY INTEREST 677 515
MINORITY INTEREST (11) --
------ ------
NET INCOME $ 666 $ 515
======= ======
EARNINGS PER SHARE:
Basic $ .29 $ .23
======= ======
Diluted $ .28 $ .23
======= ======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 2,282 2,281
======= ======
Diluted 2,357 2,281
======= ======
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The accompanying notes are an integral part of these financial statements.
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CELLULAR TECHNICAL SERVICES COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000's)
(unaudited)
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THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
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OPERATING ACTIVITIES
Net income $ 666 $ 515
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 149 239
Amortization of software development costs 89 155
Loss (gain) on disposal of assets 0 (2)
Provision for inventory reserves 100 90
Minority interest 11 0
Other 0 2
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable 479 (374)
(Increase) Decrease in inventories (330) 9
Decrease in prepaid expenses and deposits (167) (139)
Increase (Decrease) in accounts payable and accrued liabilities 201 (98)
(Decrease) in payroll related liabilities (239) (86)
Increase (Decrease) in taxes (other than payroll and income) 36 (80)
Increase in deferred revenue and customers' deposits 1,325 696
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NET CASH PROVIDED BY OPERATING ACTIVITIES 2,320 927
INVESTING ACTIVITIES
Purchase of property and equipment (48) (1)
Proceeds for sale of property and equipment 0 2
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NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (48) 1
NET CASH PROVIDED BY FINANCING ACTIVITIES (Stock Option Exercises) 1 0
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NET INCREASE IN CASH AND CASH EQUIVALENTS 2,273 928
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,787 1,567
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,060 $ 2,495
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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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION:
The accompanying unaudited financial statements of Cellular Technical Services
Company, Inc., including the December 31, 1999 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, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2000. 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, 1999. Unless the context otherwise
requires, all references to the "Company" herein include Cellular Technical
Services Company, Inc. and any entity over which it has or shares operational
control.
NOTE B - INVENTORIES:
Inventory consists of the following (in 000's):
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<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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Inventory, primarily service parts $ 1,581 $1,589
Phone card inventory 333 0
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Total 1,914 1,589
Less inventory reserves (1,092) (997)
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$ 822 $ 592
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NOTE C - CONTINGENCIES:
The following legal matters are outstanding as of March 31, 2000:
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.
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NOTE D - EARNINGS PER SHARE:
The calculation of basic and diluted earnings per share is as follows (in 000's,
except per share amounts):
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THREE MONTHS ENDED MARCH 31,
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2000 1999
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Net income(A) $ 666 $ 515
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Weighted average number of shares outstanding(B) 2,282 2,281
Stock options** 75 --
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Weighted average number of shares outstanding(C) 2,357 2,281
====== ======
Earnings per share
Basic(A)/(B) $ .29 $ .23
====== ======
Diluted(A)/(C) $ .28 $ .23
====== ======
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** Excluded from the computation of diluted earnings per share given the
effects were anti-dilutive.
NOTE E- SEGMENT INFORMATION:
The Company has two reportable business segments for the first quarter of 2000
which offer distinctive products and services marketed through different
channels: (i) the Company's Blackbird'r' Platform product line, which includes
the Blackbird'r' Platform, PreTect'TM' cloning-fraud prevention application, No
Clone Zone'sm' roaming-fraud prevention service, and related application
products and services; and (ii) the Company's prepaid long-distance phone card
business, which is conducted through its majority-owned subsidiary, Isis Tele-
Communications, Inc. Management evaluates segment performance based upon segment
profit or loss before income taxes. The differences in the pretax segment profit
of $692,000 and net income of $666,000 include income tax expense of $15,000 and
minority interest of $11,000. There were no intercompany sales of products
between the segments. The Company's phone card business segment was not in
operation in the comparable prior year period.
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<CAPTION>
(in 000's) Segments
---------------------------- Consolidated
Blackbird Phone Totals
Platform cards ------
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Revenue from external customers $2,170 $2,747 $4,917
Intersegment revenue -- -- --
Pretax segment profit 636 56 692
Segment assets 11,964 239 12,203
Expenditures for segment assets 24 24 48
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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. Unless the context
otherwise requires, all references to the "Company" herein include Cellular
Technical Services Company, Inc. and any entity over which it has or shares
operational control.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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, 1999
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 develops, markets, distributes and supports a diversified mix of
products and services for the telecommunications industry. Over the past 11
years, the Company has developed expertise in real-time wireless call processing
and has created technologically advanced solutions for this industry, focusing
primarily in the area of wireless communications fraud management. During 1999
and the first quarter of 2000, the Company implemented a short and long-range
strategic plan to diversify its product mix, both within and outside of the
telecommunications industry. This diversification strategy is at the foundation
of the Company's growth plan for the future.
PRODUCTS
The Blackbird Platform Products
The Company's Blackbird'r' Platform product line includes a suite of radio
frequency ("RF") based platform solutions focusing on wireless fraud prevention.
Presently, it involves various forms of "pre-call" verification to ensure that
the use of an analog wireless telephone is legitimate before the device is
allowed to connect to a carrier's analog wireless communications network. In
this area, the Company is a leading provider of RF-based solutions for the
prevention of "cloning fraud." This term is used to describe the illegal
activity of using a scanning device to steal the electronic serial number and
mobile identification number of a legitimate wireless telephone while in use,
then reprogramming the stolen numbers into other phones. These reprogrammed
phones, or "clone phones," are then used to make illegal calls on a wireless
communications network, without payment for the wireless services rendered. The
Company's suite of RF-based 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
(collectively, the "Blackbird Platform Products"). The Company's Blackbird
Platform Products are currently deployed in approximately 2,000 cell sites in
most major metropolitan areas throughout the United States. The Company's
customers have reported up to a 98% reduction in cloning fraud activity in areas
served by the Blackbird Platform Products since its initial installation, and
continue to rely on its cloning prevention capabilities for their existing
analog wireless communications networks.
Prepaid Wireline Long-Distance Phone Cards
To stimulate revenue growth for the Company, and in alignment with its product
diversification strategy, the Company expanded into the prepaid long-distance
service arena in the fourth quarter of 1999. Through its new majority-owned
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subsidiary, Isis Tele-Communications, Inc., the Company markets and distributes
branded prepaid long-distance phone cards primarily under the Value Maxx'TM' and
Straight Talk'TM' brands in denominations generally ranging from $5 to $20 per
card. Isis specializes in targeted marketing programs and features local and
toll-free access numbers and aggressive domestic and international long-distance
rates. The Company expects that Isis will distribute cards through regional and
national multi-level distribution channels, using direct sales, third-party
distributors, vending machines, and telemarketing. The Company anticipates that
its ability to provide aggressive per-minute rates, broad multi-level
distribution coverage, and quality customer service will provide the key
ingredients to fueling revenue growth and future product expansion of this
product line for the Company. Isis presently has offices in Los Angeles, Boston,
New York, New Jersey, and Chicago.
Future Opportunities For Growth In Emerging Technologies
During the fourth quarter of 1999, and as part of the Company's long-term
diversification strategy, the Company made a strategic investment in KSI Inc., a
provider of development-stage wireless geo-location technology. The Federal
Communications Commission ("FCC") has required all wireless carriers to deploy
wireless geo-location technology by October 2001 to provide comparable 911
services to wireless telecommunications subscribers. Wireless geo-location
technology provides and identifies the specific geographic location (in latitude
and longitude measurements) of a wireless telephone, and can eventually be
applied to other wireless communications devices. The Company expects to
leverage its entrance into the geo-location marketplace by developing,
marketing, distributing, and supporting a suite of commercial geo-location
applications as the technology evolves and is deployed by all wireless carriers
to comply with the FCC's requirements. On February 28, 2000, TruePosition, Inc.,
a wholly owned subsidiary of Liberty Media (NYSE: LMG.A, LMG.B), announced its
proposed acquisition of KSI in a stock acquisition. We believe the planned
combination of TruePosition and KSI should enhance the return on our initial
investment in KSI and enable the Company to capitalize on future applications
with one of the premiere providers of wireless geo-location technology and
related services.
REVENUE AND EXPENSE
Revenue
During the first quarter of 2000, the Company generated revenue from three
sources: systems revenue, service revenue and prepaid phone card revenue.
Systems revenue is generated from licensing and sales of the Company's
proprietary software and hardware products, the sale of third-party products
sold in connection with the Company's proprietary products and, to a lesser
extent, fees earned in connection with the installation and deployment of these
products. Revenue is recognized when all of the following conditions are met:
(i) persuasive evidence of an arrangement exists;
(ii) delivery has occurred, including satisfaction of all contractual
obligations, and other elements that are essential to the functionality of
the delivered products have been satisfied;
(iii) the amount is fixed or determinable; and
(iv) collectability is probable.
Revenue is deferred if the above conditions are not met, based on vendor
specific objective evidence ("VSOE") of the fair value for all elements of the
arrangement. VSOE is 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 service, 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.
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Prepaid phone card revenue is derived from the sales of prepaid wireline
long-distance phone cards through Isis Tele-communications, Inc., the Company's
majority-owned subsidiary.
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 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.
Costs and Expenses
Costs of systems, services and phone cards are primarily comprised of the costs
of: (i) prepaid phone card activation costs; (ii) equipment, including both
proprietary and third-party hardware and, to a lesser extent, manufacturing
overhead and related expenses; (iii) amortization of capitalized software
development costs; (iv) system integration and installation; (v) royalty fees
related to the licensing of intellectual property rights from others; (vi)
customer support; and (vii) activities associated with the evaluation, repair
and testing of 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 products and services.
The Company expects that its costs and expenses in these and other areas will
continue to be incurred in the future, due to the ongoing need to: (i) make
investments in research and development to enhance existing products and
services and to develop new products and services to address emerging market
opportunities, such as those in the geo-location and prepaid phone card markets;
(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, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Overview
Total revenue increased 78% to $4,917,000 in 2000 from $2,764,000 in 1999. Net
income was $666,000, or $0.28 per diluted share, in 2000 compared to $515,000,
or $0.23 per diluted share, in 1999.
The increased revenue was primarily derived from the Company's new prepaid phone
card business, which commenced operations in December 1999, and which provided
$2.7 million in revenue in the first quarter of 2000, compared to zero revenue
in the comparable 1999 period. This increase was offset by decreased systems and
service revenue primarily from the Company's Blackbird Platform products due to:
(i) a reduction in domestic market opportunities for the Company's cloning fraud
prevention technology, (ii) the effectiveness of this and other
authentication-based products in combating cloning fraud, (iii) lower
penetration than originally planned of Blackbird Platform Products into existing
customers' markets and new and/or additional markets, (iv) the lack of
additional new domestic and international customers, and (v) the net reduction
in price and volume of services in connection with Blackbird Platform Products.
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The improved operating results are attributable to: (i) increased overall
revenue, (ii) higher margins on Blackbird Platform systems and services revenue
in 2000, (iii) continued cost reductions which streamlined the Company's
operations, consolidated its facilities and reduced its workforce, and (iv)
increased interest income.
Revenue
Systems revenue decreased 51% to $275,000 in 2000 from $557,000 in 1999, due to
the factors discussed above, and represents revenue from customers for sales of
the Company's Blackbird Platform Products.
Service revenue decreased 14% to $1,895,000 in 2000 from $2,207,000 in 1999. All
of the 2000 service revenue, and approximately 94% of the 1999 service revenue,
was derived from the Blackbird Platform Products. The decrease is due to the
factors discussed above and to the phase-out of service revenue from the
Company's Hotwatch product line in 1999. Hotwatch service revenue totaled
$126,000 in the first quarter of 1999.
Prepaid phone card revenue was $2,747,000 in 2000. Prepaid phone card sales
started in late December, 1999, so there was no comparable revenue from the
prior year quarter. Prepaid phone cards are sold through a nationwide network of
distribution channels.
Costs and Expenses
Costs of systems, services and prepaid phone cards increased by $2,077,000 to
$3,155,000 in 2000, from $1,078,000 in 1999. As a percent of total revenue, the
costs were 64% and 39% for the 2000 and 1999 periods, respectively. The increase
in the amounts and percentages of costs for 2000 relative to 1999 is primarily
due to the changed product mix including the new prepaid phone card business
which has lower gross margins as compared to our other products. There were no
prepaid phone card sales in the comparable quarter from 1999. Offsetting this
increase were decreases in amortization of capitalized software development
costs and expense reductions relating to reduced headcount and consolidation of
warehousing facilities.
Sales and marketing expenses increased 84% to $313,000 in 2000 from $170,000 in
1999, and remained at 6% of total revenue. The increase in sales and marketing
expenses is attributable to costs in selling and marketing prepaid phone cards
including establishing and staffing sales offices, offset by a decrease in sales
and marketing expenses for the Blackbird Platform products.
General and administrative expenses decreased 6% to $558,000 in 2000 from
$591,000 in 1999, and primarily reflects a reduction in staffing levels and
related expenditures from the prior year, partially offset by new spending to
develop the infrastructure of the Company's prepaid phone card business.
Research and development costs decreased 20% to $355,000 in 2000 from $445,000
in 1999. The decrease in expenditures in 2000 was primarily attributable to
reduced staffing levels and related expenditures from the prior year period,
partially offset by increased spending on product enhancements and new product
research.
Interest Income and Expense
Net interest income increased to $132,000 in 2000 from $33,000 in 1999. This
increase is attributable to: higher average cash balances on hand during the
2000 period, higher prevailing interest rates earned on invested cash, and
interest accrued on the Company's note receivable with KSI Inc., which was not
outstanding during the comparable 1999 period.
LIQUIDITY AND CAPITAL RESOURCES
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, 2000, the Company's cash balance was $7,060,000
as compared to $4,787,000 on December 31, 1999. The Company's working capital
increased to $4,489,000 at March 31, 2000 from $3,621,000 at December 31, 1999.
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Cash provided by operating activities amounted to $2,309,000 in 2000, as
compared to $927,000 in 1999. The major factors contributing to the Company's
increased cash flow from operating activities in the 2000 period were: (i) the
$666,000 net income recorded in 2000 as compared to $515,000 in 1999; 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 decreased 18%, or $479,000, in 2000 primarily
due to timing differences arising from billing and payment cycles and terms
of recurring service agreements;
(b) Accounts payable and accrued liabilities, which increased 22%, or $201,000,
in 2000, due the timing of payments and growth of the prepaid phone card
business; and
(c) Deferred revenue and customers' deposits, which increased 43%, or
$1,326,000, in 2000, and resulted from the timing of payments for prepaid
maintenance and service revenue for the installed base of Blackbird
Platform Products and from a customer deposit for software to be delivered
after the first quarter of 2000.
Cash used in investing activities totaled $48,000 in 2000, compared to cash
provided by investing activities of $1,000 in 1999. The amounts in the 2000
period were primarily for the purchase of computer hardware and software for the
Company's current and developing businesses. At March 31, 2000, the Company had
no significant commitments for capital expenditures.
Operating Trends
The Company earned $0.7 million in the first quarter of 2000, compared to
earnings of $2.6 million for the year ended December 31, 1999 and an operating
loss of $10.9 million for the year ended December 31, 1998. Net non-cash charges
included in the results were $0.3 million during the first quarter of 2000, and
$1.7 million and $9.9 million during the full-year 1999 and 1998 periods,
respectively. As of March 31, 2000, the Company had an accumulated deficit of
$23.6 million, which primarily accumulated during the three years ended December
31, 1998.
During 1996 and 1997, the Company deployed its initial Blackbird Platform
Products and incurred substantial operating expenses during such deployment.
Beginning in 1998, in response to unfavorable operating results, the Company
implemented a restructuring plan that included, among other initiatives,
streamlining the Company's operations to better balance expenses and revenues.
Beginning in 1999, the Company implemented a strategic plan for long-term growth
and product diversification. The core of this plan involves the broadening of
the Company's product and service offerings in order to diversify its customer
base and increase its overall growth potential. As part of this strategic plan,
the Company launched its prepaid phone card business in December 1999. In the
first quarter of 2000, revenue from prepaid phone cards and Blackbird Platform
Products represented 56% and 44%, respectively, of the Company's total revenue
for that period. By comparison, revenue from Blackbird Platform Products
represented substantially all of the Company's total revenue in 1999. While the
Company anticipates continued profitability from Blackbird Platform Products in
2000, it believes that revenue from Blackbird Platform Products will decline
over time.
Despite the Company's recent improvements in profitability, cash flow, and
product diversification, there can be no assurance that the Company's operations
will be profitable on a quarterly or annual basis in the future or that existing
revenue levels can be enhanced or sustained. Past and existing revenue levels
should not be considered indicative of future operating results. 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 to twenty-four months, unanticipated changes in customer needs and/or
other external factors may require additional financing and/or further expense
reductions.
Page 12
<PAGE>
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
None.
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 9, 2000
Page 13
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'
<TABLE> <S> <C>
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-1999
<CASH> 7,060
<SECURITIES> 0
<RECEIVABLES> 2,173
<ALLOWANCES> 5
<INVENTORY> 822
<CURRENT-ASSETS> 10,341
<PP&E> 4,333
<DEPRECIATION> 3,560
<TOTAL-ASSETS> 12,203
<CURRENT-LIABILITIES> 5,852
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 6,340
<TOTAL-LIABILITY-AND-EQUITY> 12,203
<SALES> 275
<TOTAL-REVENUES> 4,917
<CGS> 3,155
<TOTAL-COSTS> 4,381
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 681
<INCOME-TAX> 15
<INCOME-CONTINUING> 666
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 666
<EPS-BASIC> 0.29
<EPS-DILUTED> 0.28
</TABLE>
