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
SEPTEMBER 30, 1996
CELLULAR TECHNICAL SERVICES COMPANY, INC.
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 11-2962080
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2401 FOURTH AVENUE, SEATTLE, WASHINGTON 98121
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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
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22,212,708 Common Shares were outstanding as of November 8, 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 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)
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,794,682 $ 9,448,255
Accounts receivable, net 7,102,405 508,238
Inventories, net 3,991,903 1,947,060
Prepaid expenses and other current assets 714,870 827,712
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Total Current Assets 15,603,860 12,731,265
PROPERTY AND EQUIPMENT, net 2,631,270 2,292,632
SOFTWARE DEVELOPMENT COSTS, net 3,599,851 3,346,748
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TOTAL ASSETS $ 21,834,981 $ 18,370,645
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 4,308,105 $ 1,154,396
Payroll related liabilities 530,097 223,222
Taxes (other than payroll and income) 349,871 197,843
Deferred revenue and customers' deposits 2,113,150 61,973
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Total Current Liabilities 7,301,223 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, 22,208,508
shares issued and outstanding in 1996 and
21,602,768 in 1995 22,209 21,603
Additional paid-in capital 22,574,580 20,337,872
Deficit (8,063,031) (3,626,264)
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Total Stockholders' Equity 14,533,758 16,733,211
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,834,981 $ 18,370,645
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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
------------- ------------ ------------- ------------
REVENUES
Systems $ 10,256,842 $ 1,056,857 $ 13,246,362 $ 6,762,048
Services 193,088 809,547 749,171 2,120,124
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Total Revenues 10,449,930 1,866,404 13,995,533 8,882,172
COSTS AND EXPENSES
Costs of Systems and Services 7,809,833 1,211,432 10,493,795 3,755,452
Sales and marketing 822,921 556,263 2,320,433 1,644,027
General and administrative 460,424 422,766 2,130,652 1,584,553
Research and development 1,349,264 999,654 3,702,213 2,696,756
------------- ------------ ------------- ------------
Total Costs and Expenses 10,442,442 3,190,115 18,647,093 9,680,788
------------- ------------ ------------- ------------
INCOME (LOSS) FROM OPERATIONS 7,488 (1,323,711) (4,651,560) (798,616)
INTEREST INCOME 46,742 125,290 214,793 350,832
------------- ------------ ------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 54,230 (1,198,421) (4,436,767) (447,784)
BENEFIT FOR INCOME TAXES (15,000)
------------- ------------ ------------- ------------
NET INCOME (LOSS) $ 54,230 $ (1,183,421) $ (4,436,767) $ (447,784)
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
NET INCOME (LOSS) PER SHARE $ .00 $ (.06) $ (.20) $ (.02)
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
WEIGHTED AVERAGE SHARES OUTSTANDING 23,588,725 20,364,070 21,857,357 20,004,200
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The accompanying notes are an integral part of these financial statements.
Page 4
CELLULAR TECHNICAL SERVICES COMPANY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1996 1995
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OPERATING ACTIVITIES
Net income (loss) $ (4,436,767) $ (447,784)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization of property and equipment 576,551 394,074
Amortization of software development costs 820,488 759,742
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (6,594,167) 1,063,734
(Increase) in inventories (2,044,843) (752,377)
Decrease (increase) in prepaid expenses and other current assets 112,842 (389,733)
Increase (decrease) in accounts payable and accrued liabilities 3,153,709 (36,371)
Increase (decrease) in payroll related liabilities 306,875 (265,021)
Increase (decrease) in taxes (other than payroll and income) 152,028 (89,559)
Increase (decrease) in deferred revenue and customers' deposits 2,051,177 (69,470)
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NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (5,902,107) 167,235
INVESTING ACTIVITIES
Purchase of property and equipment (915,189) (1,281,122)
Capitalization of software development costs (1,073,591) (1,393,847)
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NET CASH USED IN INVESTING ACTIVITIES (1,988,780) (2,674,969)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 2,237,314 2,863,073
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NET CASH PROVIDED BY FINANCING ACTIVITIES 2,237,314 2,863,073
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,653,573) 355,339
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,448,255 9,041,985
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,794,682 $ 9,397,324
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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. Certain reclassifications have been made in the prior period's
financial statements to conform to the current period's presentation. The
operating results for the three- and nine-month periods ended September 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 and Forms 10-Q for the
three months ended March 31, 1996, and June 30, 1996, respectively.
NOTE B - CONTINGENCIES:
The Company is involved in 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 liquidity results
of operations or its financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Prior to the current period, the Company's 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. 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 the Blackbird Products. Since that time, the Company has signed
contracts with AirTouch Cellular ("AirTouch"), Bell Atlantic NYNEX Mobile
("BANM"), GTE Mobilnet of California, L.P. ("GTE") and Ameritech Mobile
Communications, Inc. ("Ameritech") to install the Blackbird Products.
During the current period, the Company recorded its first substantial
revenues from two of the contracts noted above. Revenue recognition for the
Company's systems is based upon performance criteria which vary from customer
to customer and product to product. Physical hardware and software delivery,
definitions of system delivery, and customer acceptance are generally the
significant factors used in determining revenue recognition. As a result of
such performance criteria, only a portion of the system revenues and the
majority of the system costs are recorded during the early stages of a system
deployment. 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 deployments under new
contracts. The resulting deferral of revenue will be recorded in subsequent
periods as the performance criteria specified in the applicable contract is
met.
Page 6
In addition, the Company has incurred substantial operating expenses during
the early deployments, primarily in the areas of sales and marketing,
installation and customer support, and in research and development.
Moreover, the Company expects that its costs and expenses will continue to
increase in the future, due to a continual need to expend substantial monies
on research and development, enhanced sales and marketing activities, and
expansion of customer support capabilities needed to service its products.
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, recognize and successfully adapt to the rapid
changes in the wireless communications industry (including the anticipated
growth of digital services) and enhance and expand its manufacturing
activities concurrent with its growth.
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 and Forms 10-Q for the three months ended
March 31, 1996, and June 30, 1996, respectively.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995.
Total revenues increased 460% to $10,449,930 for the three months ended
September 30, 1996 from $1,866,404 for the three months ended September 30, 1995
and the Company had net income of $54,230 , or $.00 per share, compared to a net
loss of $1,183,421, or $.06 per share, for the three months ended September 30,
1995. The improvement in operating results was primarily attributable to the
initial deployment of the Company's Blackbird Products in the BANM and AirTouch
markets, as previously discussed.
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 sales revenues increased 871% to $10,256,842 for the three months ended
September 30, 1996 from $1,056,857 for the three months ended September 30,
1995.
Revenues from Blackbird systems amounted to $9,660,000 for the three month
period ended September 30, 1996 and were derived from sales under the agreements
with BANM and AirTouch. There were no corresponding revenues during the three
month period ended September 30, 1995.
Revenues from Hotwatch systems decreased 32% to $577,000 for the three months
ended September 30, 1996 from $850,000 for the three months ended September
30, 1995. These revenues principally originate from agreements with three
customers - 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 a license agreement with 360DEG. Communications Company
(formerly Sprint Cellular Company) ("360DEG. CC"). The decrease in revenues
from Hotwatch systems is primarily due to non-recurring third party equipment
sales recorded during the 1995 period associated with the initial deployment
of the Hotwatch Products into certain 360DEG. CC markets and due to the
non-recurring license sale to a LIN/ACC market in 1995.
Service revenues are derived primarily from maintenance, system monitoring and
related professional services provided in support of the Company's currently
deployed product base. Service revenues decreased 76% to
Page 7
$193,088 for the three months ended September 30, 1996 from $809,547 for the
three months ended September 30, 1995. This decrease is primarily due to
approximately $511,000 of non-recurring Hotwatch programming services and
initial Blackbird Product evaluation revenues recorded during the 1995
period. The Company anticipates that service revenues during the remainder
of 1996 will increase above the amounts recorded during the three month
period ended September 30, 1996 as a result of the initial deployment of the
Company's Blackbird systems.
Costs of systems and services are primarily comprised of the cost of proprietary
and third party equipment, amortization of capitalized software development
costs, integration and manufacturing overhead costs incurred in the preparation
and deployment of such systems, and professional service overhead costs incurred
to provide ongoing systems support. Cost of systems and services increased 545%
to $7,809,833 for the three months ended September 30, 1996 from $1,211,432 for
the three months ended September 30, 1995. This increase is primarily due to
the direct costs of Blackbird systems sold during the 1996 period that amounted
to approximately $6,825,000. Costs of systems and services, as a percent of
total revenues, were 75% and 65% for the 1996 and 1995 periods, respectively.
The increase in 1996 is attributable to: (i) the higher hardware component
costs of system sales for Blackbird Products as compared to Hotwatch Products,
and (ii) deferred revenues that will be recognized in future quarters in
accordance with the Company's revenue recognition practices discussed in the
overview section above.
Sales and marketing expenses increased 48% to $822,921 for the three months
ended September 30, 1996 from $556,263 for the three months ended September 30,
1995. This increase is primarily 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 during both pre- and post-sales
Blackbird contract activities. To a lesser extent, variable sales incentive
compensation contributed to the 1996 increased expenses.
General and administrative expenses increased 9% to $460,424 for the three month
period ended September 30, 1996 from $422,766 for the three months ended
September 30, 1995 principally due to increased personnel related 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
included in the Company's current and future product lines. Research and
development costs increased 35% to $1,349,264 for the three months ended
September 30, 1996 from $999,654 for the three months ended September 30,
1995 primarily due to continued and expanded investment in the Blackbird
Products. Software development costs of $357,000 and $505,000 were
capitalized during the three months ended September 30, 1996 and September
30, 1995, respectively, and related primarily to the development of the
Blackbird Products. Capitalized development costs declined during the three
months ended September 30, 1996 primarily due to an increase in
non-capitalizable research, design, and maintenance activities associated
with the Blackbird Products. Including capitalized software development
costs, and contract design and development costs recorded as costs of
services, gross research and development costs increased 7% to $1,711,000 for
the three month period ended September 30, 1996. This increase is
principally attributable to prototype development expenditures associated
with the Company's proprietary hardware and legal fees expended to protect
the Company's intellectual property both in the United States and abroad.
Interest income decreased 63% to $46,742 for the three months ended September
30, 1996 from $125,290. The decrease was attributable to lower average cash
balances invested at lower average interest rates for the three months ended
September 30, 1996 as compared to the three months ended September 30, 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Total revenues increased 58% to $13,995,533 for the nine months ended September
30, 1996 from $8,882,172 for the nine months ended September 30, 1995 and the
Company had a net loss of $4,436,767, or $.20 per share, compared to a net loss
of $447,784, or $.02 per share, for the nine months ended September 30, 1995.
While the increase in revenues is attributable to the Company's recording its
first substantial revenues for its Blackbird Products, the decline in operating
results was primarily attributable to: (i) inconsistent contract revenue
streams from the Hotwatch Products, (ii) increased efforts and expenditures in
both sales and marketing and research and
Page 8
development of the Blackbird Products, and (iii) lower system sales margin
resulting from higher initial costs and contract revenue deferrals associated
with early Blackbird system sales (as discussed above).
Systems revenues increased 96% to $13,246,362 for the nine months ended
September 30, 1996 from $6,762,048 for the nine months ended September 30, 1995.
Revenues from Blackbird systems amounted to $10,207,000 for the nine month
period ended September 30, 1996 and were derived from sales under the agreements
with BANM and AirTouch. There were no corresponding revenues during the nine
month period ended September 30, 1995.
Revenues from Hotwatch systems decreased 53% to $2,897,000 for the nine months
ended September 30, 1996 from $6,195,000 for the nine month period ended
September 30, 1995. Revenues during both periods were primarily derived from
sales under the AWS, LIN/ACC and 360DEG. CC Agreements. Amounts recorded
during the period ended September 30, 1995 included non-recurring revenues of
approximately $1,522,000 under the AWS Agreements and $1,172,000 under the
360DEG. CC Agreement. Additionally, sales under the LIN/ACC Agreement
decreased 31% to $639,000 for the nine month period ended September 30, 1996
which is consistent with previously disclosed expectations.
Service revenues decreased 65% to $749,171 for the nine months ended September
30, 1996 from $2,120,124 for the nine months ended September 30, 1995. This
decrease is primarily due to approximately $1,090,000 of non-recurring
programming service and Blackbird system evaluation revenues recorded during the
1995 period.
Cost of systems and services increased 179% to $10,493,795 in 1996 from
$3,755,452 in 1995. This increase is primarily due to the direct costs of
Blackbird systems sold during the 1996 period that amounted to approximately
$7,868,000. Costs of systems and services, as a percent of total revenues, was
75% and 42% for the 1996 and 1995 periods, respectively. The increase in 1996
is attributable to: (i) the higher hardware component of system sales for
Blackbird Products as compared to Hotwatch Products, (ii) deferred revenues that
will be recognized in future quarters in accordance with the Company's revenue
recognition practices discussed in the overview section above, and (iii) a
higher percentage of Hotwatch software license fee revenues in 1995, which had
no corresponding hardware costs.
Sales and marketing expenses increased 41% to $2,320,433 for the nine months
ended September 30, 1996 from $1,644,027 for nine months ended September 30,
1995 as a result of increased personnel and related costs incurred in connection
with the Company's increased efforts to generate demand for its products and the
costs incurred during both pre- and post-sales Blackbird contract activities.
General and administrative expenses increased 34% to $2,130,652 for the nine
month period ended September 30, 1996 from $1,584,553 for the nine months ended
September 30, 1995. Amounts recorded in the nine months ended September 30,
1996 included approximately $400,000 incurred during the second quarter with
regard to the Company's proposed public offering which was subsequently
withdrawn due to unfavorable stock market conditions. Additional amounts
recorded during the nine months ended September 30, 1996 included additional
personnel related and overhead costs associated with the continued expansion of
the Company's business.
Research and development costs increased 37% to $3,702,213 for the nine
months ended September 30, 1996 from $2,696,756 for the nine months ended
September 30, 1995 primarily due to continued and expanded investment in the
Blackbird Products. Software development costs of $1,073,591 and $1,393,847
were capitalized during the nine months ended September 30, 1996 and
September 30, 1995, respectively, and related primarily to the development of
the Blackbird Products. Capitalized development costs declined during the
nine months ended September 30, 1996 primarily due to an increase in
non-capitalizable research, design, and maintenance activities associated
with the Blackbird Products. Including capitalized software development
costs, and contract design and development costs recorded as costs of
services, gross research and development costs increased 4% to $4,756,000 for
the nine month period ended September 30,
Page 9
1996. This increase is principally attributable to additional legal fees
expended to protect the Company's intellectual property both in the United
States and abroad.
Interest income decreased 39% to $214,793 for the nine months ended September
30, 1996 from $350,832. The decrease was attributable to lower average cash
balances invested at lower average interest rates for the nine months ended
September 30, 1996 as compared to the nine months ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have consisted primarily of funding
software development, property and equipment requirements, working capital
and the Company's operating losses. 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 September 30, 1996 the Company's cash balance was $3,794,682 as
compared to $9,448,255 on December 31, 1995. The Company's working capital
decreased to $8,302,637 at September 30, 1996 from $11,093,831 at December
31, 1995.
Cash used by operating activities amounted to $5,902,107 for the nine months
ended September 30, 1996, as compared to cash provided by operating
activities of $167,235 during the same period in 1995. This increased
utilization of cash resulted primarily from the increased loss for the nine
month period ended September 30, 1996, as compared to the same period in
1995, and to a lesser extent, the net changes in the balances of working
capital components; (i) accounts receivable increased as a result of the
initial Blackbird System revenues, (ii) the Company continues to increase its
proprietary Blackbird hardware inventory to meet anticipated sales demand for
Blackbird Products during the latter part of 1996 and beyond, (additional
inventory at September 30, 1996 in an amount exceeding $4,000,000, was on
order), (iii) the increase in the accounts payable and accrued liabilities
reflects the increased level of inventory purchases and operating expenses
associated with the expansion of the Company's operations, and (iv) the
increase in deferred revenue and customer deposits reflects billings and/or
cash received in advance of revenues recognized. During the early stages of
deploying the Blackbird contracts discussed above, the Company may experience
uneven cash flow and operating results. These factors originate from the
deferred revenue recognition and payment terms contained in these contracts.
Cash utilized by investing activities totaled $1,988,780 and $2,674,969 during
the nine months ended September 30, 1996 and September 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 and 1997 at or above the current levels. At
September 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 nine months ended September 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 $2,237,314 and $2,863,073 for the nine months ended September 30, 1996
and 1995, 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
$6,500,000. The Company has agreed to file a registration statement for the
resale of such shares.
Also, in November 1996, the Company obtained a $5,000,000 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 3/4% and expires September 30, 1997.
Page 10
The proceeds from the stock sale and the line of credit will 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 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. The Company believes that cash flow anticipated from
its operating activities, existing cash balances, proceeds from the stock sale
(as described above) and cash available under the line of credit (also discussed
above), are sufficient to fund its operations for at least the next 12 months.
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 2. CHANGES IN SECURITIES
On November 12, 1996, the Company sold an aggregate of 400,000 shares of
Common Stock, par value $.001 per share, for an aggregate cash purchase price
of $6,500,000 in reliance on the exemption provided by Section 4(2) of the
Securities Act of 1933 (the "Securities Act"). There was no underwriter or
placement agent involved in the transaction. In issuing the securities, the
Company relied on, among other matters, the representation made by each
purchaser that such purchaser was an "accredited investor" as defined in Rule
501 of Regulation D promulgated under the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
4.3 Stock Purchase Agreement dated as of November 11, 1996 among the
Company and the investors specified therein. (1)
10.1 Master Purchase and License Agreement between the Company and GTE
Mobilnet of California L.P. dated September 30, 1996 (2)
10.2 Master Purchase and License Agreement between the Company and
Ameritech Mobile Communications, Inc. dated October 14, 1996 (2)
10.3 Master Purchase and License Agreement between the Company and Bell
Atlantic NYNEX Mobile dated August 27, 1996 (2)
10.4 Credit Agreement between the Company and Chase Manhattan Bank dated
November 8, 1996 (1)
11.1 Computation of Earnings Per Share (1)
27 Financial Data Schedule (1)
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(1) Filed herewith.
(2) Filed herewith, confidential treatment requested pursuant to
Rule 24b-2 of the Securities and Exchange Commission.
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
November 14, 1996
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