<PAGE>
PROSPECTUS
2,600,000 SHARES
[LOGO]
COMMON STOCK
-----------------
ALL OF THE 2,600,000 SHARES OF COMMON STOCK (THE "NOTE WARRANT SHARES") OFFERED
HEREBY (THE "NOTE WARRANT OFFERING") ARE BEING SOLD BY THE COMPANY TO HOLDERS
ELECTING TO EXERCISE WARRANTS (THE "NOTE WARRANTS") ISSUED PURSUANT TO THE
WARRANT AGREEMENT DATED AS OF JUNE 15, 1995 AND AS SUPPLEMENTED BY THE FIRST
SUPPLEMENTAL WARRANT AGREEMENT DATED AS OF NOVEMBER 21, 1995, EACH AS AMENDED
(COLLECTIVELY, THE "NOTE WARRANT AGREEMENT") BETWEEN THE COMPANY AND THE
BANK OF NEW YORK AS WARRANT AGENT. THE NOTE WARRANTS WERE ORIGINALLY ISSUED
IN CONNECTION WITH THE COMPANY'S ISSUANCE OF 13% SENIOR DISCOUNT NOTES DUE
2005 (THE "SENIOR DISCOUNT NOTES"). THE SENIOR DISCOUNT NOTES AND NOTE
WARRANTS WERE ORIGINALLY OFFERED IN UNITS WHICH BECAME SEPARATELY
TRANSFERABLE ON THE DATE OF ORIGINAL ISSUANCE. IN CONNECTION WITH THE
INITIAL PUBLIC OFFERING (THE "OFFERING") OF ITS COMMON STOCK (THE
"SHARES"), THE COMPANY HAS REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, THE NOTE WARRANT SHARES ISSUABLE UPON EXERCISE OF THE NOTE
WARRANTS AS REQUIRED UNDER THE NOTE WARRANT AGREEMENT. THE NOTE
WARRANTS ARE EXERCISABLE AT ANY TIME BEGINNING ON THE CLOSING OF THE
OFFERING AND ENDING 270 DAYS THEREAFTER (THE "EXPIRATION DATE"). IF
NOT EXERCISED BY THE EXPIRATION DATE, THE NOTE WARRANTS TERMINATE AND
MAY NOT BE EXERCISED. THE NOTE WARRANT SHARES ARE CURRENTLY SUBJECT
TO A LOCK-UP AGREEMENTS WHICH PROHIBITS RESALE OF THE NOTE WARRANT
SHARES OF EACH HOLDER FOR 180 DAYS FROM THE CLOSING OF THE
OFFERING, PROVIDED, THAT ONE THIRD ( 1/3) OF SUCH SHARES BECOME
ELIGIBLE FOR SALE 120 DAYS FROM THE CLOSING OF THE OFFERING.
CONCURRENTLY WITH THE CLOSING OF THE OFFERING, THE COMPANY IS ISSUING SHARES OF
COMMON STOCK DIRECTLY TO CERTAIN PURCHASERS (THE "DIRECT PLACEMENTS"). THE
OFFERING AND THE DIRECT PLACEMENTS, WHICH WILL OCCUR CONCURRENTLY WITH THE
NOTE WARRANT OFFERING, ARE DESCRIBED HEREIN. REFERENCES HEREIN TO "THE
OFFERING" OR "THIS OFFERING" REFER TO THE COMPANY'S INITIAL PUBLIC
OFFERING OF ITS COMMON STOCK AND REFERENCES TO THE "NOTE WARRANT
OFFERING" REFER TO THE OFFERING MADE HEREBY. THE OFFERING, THE
DIRECT PLACEMENTS AND THE NOTE WARRANT OFFERING ARE COLLECTIVELY
REFERRED TO HEREIN AS THE "OFFERINGS".
------------------------
THE COMMON STOCK HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "CNDS."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON
PAGE 8 HEREOF.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
PRICE $0.005 A SHARE
-------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS
WARRANT HOLDERS AND COMMISSIONS PROCEEDS TO COMPANY
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
PER SHARE............................... $0.005 $-- $0.005
TOTAL................................... $13,000 $-- $13,000
</TABLE>
-------------------
THE NOTE WARRANTS MAY BE EXERCISED FOR CASH OR ON A CASHLESS BASIS ANY TIME
BEFORE THE EXPIRATION DATE. DELIVERY OF NOTE WARRANT SHARES UPON EXERCISE OF THE
NOTE WARRANT WILL BE MADE TO THE HOLDER IMMEDIATELY FOLLOWING RECEIPT BY THE
COMPANY OF THE ORIGINAL NOTE WARRANT CERTIFICATE, AN EXECUTED ELECTION TO
EXERCISE, AND PAYMENT OF THE AGGREGATE EXERCISE PRICE IF THE EXERCISE IS ON A
CASH BASIS. ANY HOLDER ELECTING TO EXERCISE ON A CASHLESS BASIS WILL RECEIVE THE
NUMBER OF NOTE WARRANT SHARES EQUAL TO THE PRODUCT OF THE NUMBER OF SHARES FOR
WHICH THE NOTE WARRANT IS EXERCISABLE AND THE CASHLESS EXERCISE RATIO AS DEFINED
IN THE WARRANT AGREEMENT. SEE "PLAN OF DISTRIBUTION."
SEPTEMBER 26, 1996
<PAGE>
<TABLE>
<S> <C>
MSA License Map--June 1996 CellNet holds 50 radio frequency licenses in 42 of the top 60
metropolitan statistical areas allowing it to target utilities
representing a majority of the electric, gas and water meters in
the United States. CellNet also has a number of other licenses
pending.
</TABLE>
Albany, NY
Allentown, PA
Austin, TX
Boston, MA
Buffalo, NY
Charlotte, NC
Cincinnati, OH
Cleveland, OH
Columbus, OH
Dayton, OH
Fresno, CA
Grand Rapids, MI
Greensboro, NC (2)
Hartford, CT
Honolulu, HI
Indianapolis, IN
Jacksonville, FL
Kansas City, MO
Las Vegas, NV
Los Angeles, CA
Louisville, KY
Memphis, TN
Miami, FL
Milwaukee, WI
Minneapolis, MN (2)
Norfolk, VA (2)
Oklahoma City, OK
Phoenix, AZ
Pittsburgh, PA (2)
Portland, OR (2)
Providence, RI (2)
Raleigh, NC
Richmond, VA
Salt Lake City, UT
San Antonio, TX
San Diego, CA
Scranton, PA
Seattle, WA
St. Louis, MO (3)
Tucson, AZ
Tulsa, OK
West Palm Beach, FL
[MAP: Map of United States showing the 42
MSAs in which the Company held radio
frequency licenses as of June 30,
1996]
-------------------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-
THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
The CellNet Network System Architecture
Utilities can quickly pinpoint and resolve outages with CellNet Network Meter
Reading services.
[Graphic: Simulation of computer monitor showing power outage application of
CellNet's system]
With real-time, on-line access to customer meter information, utilities can
offer customers new services such as real-time pricing, time-of-use rates, and
best-rate analysis.
[Graphic: Simulation of computer monitor showing best-rate analysis application
of CellNet's system]
Flexible, Scalable
Architecture
CellNet's open, standards-based system architecture is designed to
enable the integration of future systems and technologies to
accommodate changing needs while protecting a utility's existing
network infrastructure investments.
Isolating each underlying network technology provides a high degree of
adaptability; for example, in a rural area, the CellNet network may
employ satellite or telephone links in addition to other digital radio
links if needed.
Because the CellNet system is flexible and scalable, once deployment
begins, new capabilities can be easily added via remote software
upgrades, to meet growing capacity and/or service needs.
<PAGE>
[Graphic: CellNet Network System Architecture showing components and system
hierarchy]
System Controller Network
The System Controller collects data from throughout the system and loads it into
a relational database for access via application gateways using industry
standard TCP/IP protocols.
[Photo: System Controller]
Wireless Wide Area Network (WAN)
Each WAN is made up of microcellular LANs operating independently to provide
data communications from endpoint devices.
[Photo: CellMaster and MicroCell controller units]
Microcellular Local Area Network (LAN)
The LAN collects data from endpoints and forwards the data to a MicroCell
Controller at the center of each microcell.
[Photo: electric utility meter]
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL OCTOBER 21, 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE NOTE WARRANT
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
-------------------
For investors outside the United States: No action has been or will be taken
in any jurisdiction by the Company or any underwriter that would permit a public
offering of the Common Stock or possession or distribution of this Prospectus in
any jurisdiction where action for that purpose is required, other than in the
United States. Persons into whose possession this Prospectus comes are required
by the Company to inform themselves about and to observe any restrictions as to,
the offering of the Common Stock and the distribution of this Prospectus.
-------------------
In this Prospectus references to "dollars" and "$" are to United States
Dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 8
Use of Proceeds............................................................................................ 20
Direct Placements.......................................................................................... 20
Dividend Policy............................................................................................ 20
Capitalization............................................................................................. 21
Dilution................................................................................................... 22
Selected Consolidated Financial Data....................................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 24
Business................................................................................................... 30
Management................................................................................................. 48
Certain Transactions....................................................................................... 55
Principal Stockholders..................................................................................... 58
Description of Capital Stock............................................................................... 61
Shares Eligible for Future Sale............................................................................ 65
Plan of Distribution....................................................................................... 67
Legal Matters.............................................................................................. 68
Experts.................................................................................................... 68
Additional Information..................................................................................... 68
Glossary................................................................................................... A-1
Index to Consolidated Financial Statements................................................................. F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERINGS
(I) ASSUMES NO EXERCISE OF THE U.S. UNDERWRITERS' OVER-ALLOTMENT OPTION, (II)
REFLECTS THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF THE COMPANY'S
REDEEMABLE CONVERTIBLE PREFERRED STOCK AND CONVERTIBLE PREFERRED STOCK
(COLLECTIVELY, "PREFERRED STOCK") INTO COMMON STOCK EFFECTIVE UPON THE CLOSING
OF THE OFFERING, (III) ASSUMES THE EXERCISE OF WARRANTS TO PURCHASE 4,132,970
SHARES OF COMMON STOCK EFFECTIVE UPON THE CLOSING OF THE OFFERING WHICH INCLUDES
THE ASSUMED EXERCISE OF ALL NOTE WARRANTS ON A CASH BASIS, (IV) GIVES EFFECT TO
A 2-FOR-1 SPLIT OF THE COMMON STOCK WHICH WILL BE EFFECTED PRIOR TO THE DATE OF
THIS PROSPECTUS AND (V) ASSUMES THE SALE OF 882,353, 536,193 AND 160,858 SHARES
OF COMMON STOCK TO NSP, UE AND BEN (EACH AS DEFINED HEREIN), RESPECTIVELY,
CONCURRENTLY WITH THE CLOSING OF THE OFFERING AT AN ASSUMED PRICE OF $17.00 PER
SHARE, $18.65 PER SHARE AND $18.65 PER SHARE, RESPECTIVELY. SEE "DIRECT
PLACEMENTS" AND "DESCRIPTION OF CAPITAL STOCK." REFERENCES HEREIN TO "CELLNET"
OR THE "COMPANY" REFER TO CELLNET DATA SYSTEMS, INC. AND ITS SUBSIDIARIES. THE
NOTE WARRANT SHARES OFFERED HEREBY ARE SUBJECT TO A HIGH DEGREE OF RISK. SEE
"RISK FACTORS." CERTAIN INFORMATION CONTAINED IN THIS SUMMARY AND ELSEWHERE IN
THIS PROSPECTUS, INCLUDING INFORMATION WITH REGARD TO THE COMPANY'S EXPECTED
WIRELESS DATA COMMUNICATIONS NETWORK DEPLOYMENTS AND OPERATIONS, ITS STRATEGY
FOR MARKETING AND DEPLOYING SUCH NETWORKS AND RELATED FINANCING ACTIVITIES,
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS."
THE COMPANY
The Company designs, builds, owns and operates innovative wireless networks
capable of providing low-cost real-time status and event monitoring of up to
several million fixed endpoints. The primary application of the Company's
network is to provide network meter reading ("NMR") services to electric, gas
and water utility companies pursuant to long-term contracts. The Company is
currently building wireless networks to provide NMR services to Kansas City
Power & Light Company ("KCPL") and Union Electric Company ("UE") in St. Louis
covering a total of approximately 1,220,000 meters, of which more than 105,000
meters were in revenue service as of June 30, 1996. In addition, the Company has
recently entered into separate services agreements with Northern States Power
Company ("NSP") in Minneapolis and Puget Sound Power & Light Company ("Puget")
in Washington State, pursuant to which it has contracted to build wireless
networks to provide NMR services covering an aggregate of approximately
1,015,000 additional meters, including 1,000,000 meters under the NSP Services
Agreement and an initial installation consisting of 15,000 meters under the
Puget Services Agreement. CellNet also currently provides certain network
distribution automation services to electric utility customers including
monitoring and control of power distribution equipment. CellNet's network uses
radio devices fitted to existing utility meters to read and report data from
each meter every few minutes. Through efficient use of radio frequency spectrum,
the Company's networks will have substantial additional capacity to service
non-utility applications that require low-cost monitoring of fixed endpoints,
such as home security and remote status monitoring of vending machines and
office equipment. The Company is working with industry leaders in those markets
to encourage further development of such applications.
CellNet believes it has a first-to-market opportunity to offer wireless data
communications services on a commercial scale for utility and selected
non-utility applications. CellNet's network is distinguished by the following
advantages:
- infrastructure and operating costs sufficiently low to permit cost
effective utility meter reading and other fixed point monitoring
applications;
- highly efficient use of spectrum -- the equivalent of approximately a
single voice channel is needed to operate a network;
- proprietary software specifically designed to manage real-time data
collection from up to several million endpoints; and
- open system architecture designed to allow new applications to be added to
the CellNet system.
4
<PAGE>
Utilities are under increasing regulatory and competitive pressures. CellNet
offers an outsourced solution which enables utilities to offer time-of-use
pricing plans, peak demand monitoring, real-time response to billing inquiries,
real-time power outage detection, on-demand meter reads, customized billing
functions and distribution automation. The Company believes its NMR services
provide utilities with an effective solution to many of the demands created by
increased regulatory and competitive pressures within the utility industry.
CellNet's system allows utilities to respond effectively to regulatory changes,
reduce costs, defer capital spending and enhance their operating efficiencies.
CellNet's strategy is to deploy and operate a series of wireless data
communications networks pursuant to long-term contracts with utility company
customers and to earn recurring revenues by providing NMR services to such
utilities and by using the network to support a variety of non-utility
applications. Principal elements of CellNet's strategy include (i) focus on
utility markets, (ii) promote development of non-utility applications, (iii)
form strategic alliances to enhance NMR services and offer additional services,
(iv) pursue international expansion and (v) outsource a substantial portion of
its manufacturing and installation activities.
The Company is actively targeting those utilities which operate in the 60
largest Metropolitan Statistical Areas ("MSAs"), which represent a majority of
the 225 million electric, gas and water meters in the United States. The Company
believes that utilities operating in these densely populated areas will be the
first to experience heightened competitive and regulatory pressures, and as
such, will be most likely to benefit from the Company's services. The Company
believes that these competitive and regulatory pressures have recently prompted
utilities in the United States to undertake increased measures to improve their
efficiency and service levels.
CellNet's proprietary technology enables the Company to make extremely
efficient use of spectrum. As a result, relative to other wireless services, the
Company has been able to acquire frequency at a very low cost. The Company had
capitalized $762,000 for license fees and related expenses as of June 30, 1996
and has acquired 50 spectrum licenses in 42 of the top 60 MSAs. The Company
believes that it will be able to obtain additional spectrum at reasonable cost
if required. The Company has focused its spectrum acquisition strategy on these
top 60 markets.
The Company believes its spectrum-efficient networks will have substantial
excess capacity to service non-utility applications which require low-cost
monitoring of fixed endpoints. Potential non-utility applications of the
Company's systems include home security, remote status monitoring of vending
machines, office equipment, parking meters and other equipment and remote
control of traffic lights. The Company is working with industry leaders such as
Ameritech, Hewlett-Packard, Honeywell, Inc., Real Time Data, Inc., and
Interactive Technologies, Inc. to develop such applications. The Company
believes that its utility networks will provide an excellent platform to
position the Company as a leading wholesale provider of wireless data
communications services for such non-utility applications.
The Company believes that a significant international market also exists for
its services with several hundred million electric, gas and water meters outside
of the United States. The Company's strategy is to pursue international markets
through a proposed joint venture with Bechtel Enterprises, Inc. ("BEn"). The
Company is currently exploring projects with electric utilities in the U.K.,
Singapore and Thailand.
5
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock Offered:
U.S. Offering (1)............................. 4,000,000 shares
International Offering........................ 1,000,000 shares
Total Common Stock Offered in the
Offering (1)............................. 5,000,000 shares
Note Warrant Offering......................... 2,600,000 shares
Common Stock to be outstanding after the
Offerings (1)(2)............................... 40,627,538 shares
Use of proceeds................................. For general corporate purposes, including
working capital, capital requirements
(capital expenditures and negative
operating cash flow) in connection with
the installation and operation of the
Company's networks and research and
development expenses. See "Use of
Proceeds."
Nasdaq National Market Symbol................... CNDS
</TABLE>
In addition, NSP, UE and BEn have agreed to acquire $15.0 million, $10.0
million and $3.0 million, respectively, of restricted Common Stock from the
Company (the "NSP Purchase," "UE Purchase" and "BEn Purchase", respectively, and
together, the "Direct Placements") concurrently with the closing of the
Offering. NSP will purchase 882,353 shares of Common Stock at a purchase price
of $17.00 per share (the initial public offering price, less a discount of up to
15%, which discount is dependent upon entering into a services agreement with
Wisconsin Electric Power Company for at least 750,000 meters (if such services
agreement is not entered into, the purchase price per share will be adjusted to
90% of the initial public offering price)). UE and BEn will purchase,
respectively, 536,193 shares and 160,858 shares of Common Stock at a purchase
price of $18.65 per share (the initial public offering price less the
underwriting discounts and commissions). Upon the closing of the Offering and
the Direct Placements, NSP, UE and BEn will own approximately 2.17%, 1.32% and
0.40%, respectively, of the outstanding Common Stock. The closing of the
Offering is not conditioned upon the closing of the Direct Placements. See
"Direct Placements."
- ---------
(1) Assumes the underwriters' over-allotment option in the Offering is not
exercised.
(2) Based on the number of shares outstanding as of June 30, 1996, after giving
effect to the automatic conversion of all outstanding shares of Preferred
Stock into Common Stock and the assumed exercise on a cash basis of warrants
to purchase 4,132,970 shares of Common Stock effective upon the closing of
the Offering which includes the assumed exercise of all Note Warrants on a
cash basis. Also includes the sale of 1,579,404 shares of Common Stock
pursuant to the Direct Placements concurrently with the closing of the
Offering. See "Direct Placements." Excludes 3,779,136 shares of Common
Stock issuable upon exercise of outstanding stock options as of June 30,
1996 granted under the Company's 1992 Stock Option Plan and 1994 Stock Plan
with a weighted average exercise price of $.625 per share. Also excludes
52,610 shares of Common Stock issuable upon exercise of warrants outstanding
as of June 30, 1996 with a weighted average exercise price of $7.59 per
share. See "Management -- Incentive Stock Plans," "Description of Capital
Stock -- Warrants" and Note 7 to Consolidated Financial Statements.
-------------------
CELLNET WAS INCORPORATED IN CALIFORNIA IN OCTOBER 1984 AND REINCORPORATED IN
DELAWARE IN AUGUST 1996. CELLNET'S SUBSIDIARIES INCLUDE CELLNET DATA SERVICES,
INC., CELLNET DATA SERVICES (IS), INC., CELLNET DATA SERVICES (KC), INC.,
CELLNET DATA SERVICES (MSP), INC., CELLNET DATA SERVICES (SL), INC., CN
FREQUENCY (KC), INC., CN FREQUENCY (MSP), INC., CELLNET DATA SERVICES (SF),
INC., CN FREQUENCY (SL), INC., CN WAN CORP. AND DAC (UK), LIMITED. THE COMPANY'S
PRINCIPAL EXECUTIVE OFFICES ARE LOCATED AT 125 SHOREWAY ROAD, SAN CARLOS,
CALIFORNIA 94070. THE TELEPHONE NUMBER AT SUCH ADDRESS IS (415) 508-6000.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth summary consolidated financial and other data
of the Company for each of the three years in the period ended December 31,
1995, for the six months ended June 30, 1995 and 1996 and at June 30, 1996. The
financial information data were derived from, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues............................................. $ 1,757 $ 1,651 $ 2,126 $ 1,291 $ 420
Costs and expenses:
Cost of revenues................................. 1,840 1,191 5,129 1,931 3,483
Research and development......................... 5,262 9,693 22,380 6,735 13,009
Marketing and sales.............................. 1,447 3,257 4,201 1,946 2,924
General and administrative....................... 1,450 2,583 6,805 2,874 5,412
--------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 9,999 16,724 38,515 13,486 24,828
--------- ---------- ---------- ---------- ----------
Loss from operations................................. (8,242) (15,073) (36,389) (12,195) (24,408)
Other income (expense)............................... (148) 441 (4,564) 75 (7,903)
--------- ---------- ---------- ---------- ----------
Loss before income taxes............................. (8,390) (14,632) (40,953) (12,120) (32,311)
Provision for income taxes........................... 1 2 3 1 2
--------- ---------- ---------- ---------- ----------
Net loss............................................. $ (8,391) $ (14,634) $ (40,956) $ (12,121) $ (32,313)
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Pro forma net loss per share (1)..................... $ (1.22) $ (0.94)
---------- ----------
---------- ----------
Shares used in computing pro forma net loss per share
(1)................................................. 33,497 34,483
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
SELECTED OTHER DATA:
Meters under contract (2)..................................................... 1,070,000 1,220,000
Meters in revenue service (2)................................................. 17,559 105,354
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------------
AS
ACTUAL PRO FORMA(3) ADJUSTED(3)(4)
---------- ------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.................. $ 102,967 $ 106,621 $ 226,431
Total assets....................................................... 162,653 166,307 286,117
Long-term obligations, including current portion................... 195,513 195,513 195,513
Series CC redeemable convertible preferred stock................... 29,486 -- --
Total stockholders' equity (deficit)............................... (70,400) (37,260) 82,550
</TABLE>
- ---------
(1) For an explanation of the determination of the number of shares used in
computing pro forma net loss per share, see Note 1 to Consolidated Financial
Statements.
(2) "Meters under contract" refers to the aggregate number of meters for which
the Company has agreed to provide NMR services under services agreements
with utilities and "Meters in revenue service" refers to the aggregate
number of meters under contract which have been installed on the Company's
networks and for which the Company is receiving NMR service revenues. As of
August 31, 1996, the Company had 2,235,000 meters under contract and as of
July 31, 1996, the Company had 143,415 meters in revenue service.
(3) Reflects the conversion of all outstanding shares of Preferred Stock into
Common Stock and the assumed exercise on a cash basis of warrants to
purchase 4,132,970 shares of Common Stock at an aggregate exercise price of
approximately $3.7 million upon the closing of the Offering.
(4) Adjusted to reflect the proceeds of the Offering at the initial public
offering price of $20.00 per share and after deducting estimated
underwriting discounts and commissions and offering expenses payable by the
Company. See "Use of Proceeds." Also reflects the sale of 1,579,404 shares
of Common Stock pursuant to the Direct Placements, less estimated issuance
costs of approximately $40,000 with respect to such purchases. See "Direct
Placements."
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK BEING OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY. CERTAIN INFORMATION CONTAINED
IN THIS SECTION AND ELSEWHERE IN THIS PROSPECTUS, INCLUDING INFORMATION WITH
REGARD TO THE COMPANY'S EXPECTED WIRELESS COMMUNICATIONS NETWORK DEPLOYMENTS AND
OPERATIONS, ITS STRATEGY FOR MARKETING AND DEPLOYING SUCH NETWORKS AND RELATED
FINANCING ACTIVITIES CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS."
HISTORY AND CONTINUATION OF OPERATING LOSSES
The Company has incurred substantial and increasing operating losses since
inception. As of June 30, 1996, the Company had an accumulated deficit of $127.3
million, primarily resulting from expenses incurred in the development of the
Company's wireless data communications system, marketing of the Company's NMR,
distribution automation and other services, the installation of its wireless
data communications networks and the payment of other normal operating costs.
The Company does not expect significant revenues during 1996 and expects to
incur substantial and increasing operating losses and negative net cash flow
after capital expenditures for the foreseeable future as it expands its research
and development and marketing efforts and installs additional networks. The
Company's network service revenues from a particular network are expected to lag
significantly behind network installation expenses until such network is
substantially complete. If the Company is able to deploy additional networks,
the losses created by this lag in revenues are expected to increase until the
revenues from the installed networks overtake the costs associated with the
deployment and operation of such additional networks. The Company does not
expect positive cash flow after capital expenditures from its NMR services
operations for several years. A large portion of the Company's limited revenues
to date has been attributable to miscellaneous equipment sales and development
and other contract revenues that are largely non-recurring and that the Company
expects to decrease and remain at relatively insignificant levels over the next
few years. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEPENDENCE ON AND UNCERTAINTY OF UTILITY MARKET ACCEPTANCE
The Company's success will be almost entirely dependent on whether a large
number of utility companies sign long-term services contracts with CellNet. Any
decision by a utility to utilize the Company's services will involve a
significant organizational, technological and financial commitment by such
utility. The utility industry is generally characterized by long purchasing
cycles and cautious decision making. Utilities typically go through numerous
steps before making a final purchase decision. These steps, which can take up to
several years to complete, may include the formation of a committee to evaluate
the purchase, the review of different technical options with vendors,
performance and cost justifications, regulatory review and the creation and
issuance of requests for quotes and proposals, as well as the utilities' normal
budget approval process. Purchases of the Company's services are, to a
substantial extent, deferrable in the event that utilities seek to reduce
capital expenditures. Outside of pilot trials, only four utilities (KCPL, UE,
and recently NSP and Puget) have made a commitment to purchase the Company's
services to date, and there can be no assurance as to when or if the Company
will enter into additional services contracts or that any such agreement would
be on favorable terms to the Company. See "Business."
Because automation of utility meter reading and distribution is a relatively
new and evolving market, it is difficult to predict the future growth rate and
size of this market. Utility companies are testing products from various
suppliers for various applications, and no industry standard has been broadly
adopted. The CellNet system is one possible solution for automated meter reading
and distribution automation. There can be no assurance that the Company will be
successful in achieving the large-scale adoption of its system. In the event
that the utility industry does not adopt the Company's technology, or does so
less rapidly than expected by the Company, the Company's future results,
including its ability to service its indebtedness and
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achieve profitability, will be materially and adversely affected. In recent
competitive bids, potential utility customers have from time to time selected
competing systems to perform services offered by the Company. See "Business --
Competition."
UNCERTAINTY OF FUTURE REVENUES; INCREASING INSTALLATION COSTS; NEED FOR
ADDITIONAL SERVICES CONTRACTS AND FLUCTUATING OPERATING RESULTS
The timing and amount of future revenues will depend almost entirely upon
the Company's ability to obtain new services agreements with utilities and other
parties and upon the successful deployment and operation of the Company's
wireless data communications networks. The signing of any new services contracts
is expected to occur on an irregular basis, if at all. The Company expects that
it will generally take two to four years to complete the installation of each
network after a services contract has been signed. Service revenues from such
networks are not expected to exceed the Company's capital investments and
expenses incurred to deploy and operate such network for several years. The
Company will not begin to receive recurring revenues under a services contract
until portions of the network become operational, which is expected to occur no
earlier than six months after installation begins. The Company's results of
operations may be adversely affected by delays or difficulties arising in the
network installation process. The cost of network deployments will be highly
variable and depend upon a wide variety of factors, including radio frequency
characteristics, the size of a service territory and density of endpoints within
such territory, the nature and sophistication of services being provided, local
labor rates and other economic factors.
CellNet currently derives almost all of its revenues from long-term services
contracts with KCPL and UE. The Company recently entered into services contracts
with NSP and Puget. The Company will not generate sufficient cash flow to
service its indebtedness or achieve profitability unless it enters into a
significant number of additional services contracts. There can be no assurance
that the Company will complete commercial deployments of the CellNet system
under the KCPL, UE, NSP and Puget contracts successfully or that it will obtain
enough additional contracts on satisfactory terms for network deployments in a
sufficient number of locations to allow the Company to achieve adequate cash
flow to service its indebtedness or achieve profitability. The Company's
operating results will fluctuate significantly in the future as a result of a
variety of factors, some of which are outside of the Company's control,
including the rate at which utilities and other customers enter into new
services contracts, general economic conditions, economic conditions in the
utility industry, the effects of governmental regulations and regulatory
changes, capital expenditures and other costs relating to the expansion of
operations, the introduction of new services by the Company or its competitors,
the mix of services sold, pricing changes and new service introductions by the
Company and its competitors and prices charged by suppliers. In response to a
changing competitive environment, the Company may elect from time to time to
make certain pricing, service or marketing decisions or enter into strategic
alliances or investments that could have a material adverse effect on the
Company's business, results of operations, financial condition and cash flow.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNCERTAINTY OF ACCEPTANCE OF AND DEPENDENCE ON OTHER APPLICATIONS
The Company's long-term business plan contemplates offering non-utility
application services. The Company believes its future ability to service its
indebtedness and to achieve profitability will be significantly dependent on its
success in generating substantial revenues from such additional services. The
Company currently has no services contracts which provide for the implementation
of such services, and the Company has not yet demonstrated an ability to deploy
such services on a commercial scale. In addition, unless utilities sign services
contracts that enable the Company to deploy its wireless networks in their
service areas, the Company may not be able to offer any such services in such
areas or may be able to offer these services only on a limited basis. See
"Business -- Business Strategy -- Promote Development of Non-Utility
Applications" and "Business -- Wireless Communications Industry Overview."
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT; SUBSTANTIAL FUTURE CAPITAL
NEEDS
The Company had outstanding indebtedness as of June 30, 1996 of
approximately $195.5 million, which included $194.7 million of the Company's 13%
Senior Discount Notes due 2005 (the "Senior Discount Notes"). The Senior
Discount Notes will accrete to $325.0 million by June 2000. The Company must
begin
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paying cash interest on the Senior Discount Notes in December 2000. The Company
and its subsidiaries intend to incur substantial additional indebtedness,
primarily in connection with installing future networks. As a result, the
Company and its subsidiaries will have substantial debt service obligations. The
Company's capital expenditures will increase significantly if new services
contracts are signed, and the Company expects that its cash flow taking into
account capital expenditures will be increasingly negative over the next several
years. The ability of the Company to meet its debt service requirements will
depend upon achieving significant and sustained growth in the Company's cash
flow, which will be affected by its success in implementing its business
strategy, prevailing economic conditions and financial, business and other
factors, certain of which are beyond the Company's control. The Company's
ability to generate such cash flow is subject to a number of risks and
contingencies. Included among these risks are: (i) the possibilities that the
Company may not obtain sufficient additional services agreements or complete
scheduled installations on a timely basis, (ii) revenues may not be generated
quickly enough to meet the Company's operating costs and debt service
obligations, (iii) the Company's wireless systems could experience performance
problems or (iv) adoption of the Company's system could be less widespread than
anticipated. Accordingly, there can be no assurance as to whether or when the
Company's operations will generate positive cash flow or become profitable or
whether the Company or its subsidiaries will at any time have sufficient
resources to meet their debt service obligations. If the Company is unable to
generate sufficient cash flow to service its indebtedness, it will have to
reduce or delay planned capital expenditures, sell assets, restructure or
refinance its indebtedness or seek additional equity capital. There can be no
assurance that any of these strategies could be effected on satisfactory terms,
if at all, particularly in light of the Company's high levels of indebtedness.
In addition, the degree to which the Company is leveraged could have significant
consequences, including, but not limited to, the following: (i) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, research and development, acquisitions, and other general
corporate purposes may be materially limited or impaired, (ii) a substantial
portion of the Company's cash flow from operations must be dedicated to the
payment of principal and interest on its indebtedness and therefore cannot be
used in the Company's business and (iii) the Company's high degree of leverage
may make it more vulnerable to economic downturns, may limit its ability to
withstand competitive pressures and may reduce its flexibility in responding to
changing business and economic conditions.
The Company will require substantial additional funds for the development,
commercial deployment and expansion of its networks, as well as to fund
operating losses. As of August 31, 1996, the Company had $88.5 million in cash,
cash equivalents and short-term investments. The Company believes that the net
proceeds of the Offering and from the sale of Common Stock pursuant to the
Direct Placements, together with its existing cash, cash equivalents and
short-term investments and anticipated interest income and other revenues, will
be sufficient to meet its cash requirements for at least the next 12 months.
Thereafter, the Company expects that it will require substantial additional
capital. Depending upon the number and timing of any new services agreements and
upon the associated network deployment costs and schedules, the Company may
require additional equity or debt financing earlier than estimated in order to
fund its working capital and other requirements. Future financings may be
dilutive to existing stockholders. There can be no assurance that additional
financing will be available when required or, if available, that it will be on
terms satisfactory to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Substantially all of the operations of the Company are and will be conducted
through subsidiaries. Nonetheless, the Company has incurred significant
indebtedness at the holding company level, and intends to incur substantial
additional holding company indebtedness. The ability of the Company to service
such indebtedness will depend on the availability of income and cash flow from
its subsidiaries for distribution to the holding company. Such availability will
depend on a number of factors, including the terms of financing agreements
entered into by the Company's subsidiaries and restrictions arising under the
laws of the jurisdictions wherein those subsidiaries conduct their businesses.
The Company's subsidiaries are separate and distinct legal entities and have no
obligation, contingent or otherwise, to pay any amounts due on the Company's
indebtedness or to make any funds available therefor, whether in the form of
loans, dividends or otherwise. Any default in the payment of its debt
obligations could seriously impair the value of the Common Stock.
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In the event that the Company is unable to generate sufficient cash flow and
is otherwise unable to obtain funds necessary to meet required payments on its
indebtedness, the Company could be in default under the terms of the agreements
governing such indebtedness. In the event of such default, the holders of such
indebtedness would have certain enforcement rights, including the right to
accelerate such debt and the right to commence an involuntary bankruptcy
proceeding against the Company. In any such proceeding, the holders of the
Company's debt would be entitled to receive payment of their claims prior to any
distributions to equity holders. In addition, any holders of secured
indebtedness of the Company and its subsidiaries would have certain rights to
repossess, foreclose upon and sell the assets securing such indebtedness. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SUBSTANTIAL AND INCREASING COMPETITION
The emerging market for utility NMR systems, and the potential market for
other applications once a common infrastructure is in place, have led
electronics, communications and utility product companies to begin developing
various systems, some of which currently compete, and others of which may in the
future compete, with the CellNet system. The Company believes that its only
significant direct competitor in the marketplace at present is Itron, Inc.
("Itron"), an established manufacturer and seller of hand-held and drive-by
automated meter reading equipment to utilities. Itron has announced the
development of its Genesis-TM- system, a radio network system similar to the
Company's, for meter reading purposes and is presently offering that system in
the marketplace. The Company believes that Itron has signed at least two
contracts with utilities for the commercial installation of its Genesis-TM-
system.
There may be many potential alternative solutions to the Company's NMR
services including traditional wireless solutions. Metricom, Inc., a provider
primarily of subscriber-based, wireless data communications for users of
portable and desktop computers; First Pacific Networks, a provider primarily of
bandwidth efficient wireline communications technology; and Lucent Technologies
are examples of companies whose technology might be adapted for NMR and who may
become direct competitors of the Company in the future. Schlumberger is
developing a fixed network system in cooperation with Motorola for meter reading
as well. Schlumberger, Lucent Technologies and First Pacific Networks either
have conducted, or are in the process of conducting, pilot trials of utility
network automation systems. Established suppliers of equipment, services and
technology to the utility industry such as Asea Brown Boveri and General
Electric could expand their current product and service offerings so as to
compete directly with the Company, although they have not yet done so. Many of
the Company's present and potential future competitors have substantially
greater financial, marketing, technical and manufacturing resources, name
recognition and experience than the Company. The Company's competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements or to devote greater resources to the development,
promotion and sale of their products and services than the Company. While
CellNet believes its technology is widely regarded as competitive at the present
time, there can be no assurance that the Company's competitors will not succeed
in developing products or technologies that are better or more cost effective.
In addition, current and potential competitors may make strategic acquisitions
or establish cooperative relationships among themselves or with third parties
that increase their ability to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances among
current and new competitors may emerge and rapidly gain significant market
share. In addition, if the Company achieves significant success it could draw
additional competitors into the market. Traditional providers of wireless
services may in the future choose to enter the Company's markets. Such existing
and future competition could materially adversely affect the pricing for the
Company's services and the Company's ability to sign long-term contracts and
maintain existing agreements with utilities. Competition for services relating
to non-utility applications may be more intense than competition for utility NMR
services. There can be no assurance that the Company will be able to compete
successfully against current and future competitors, and any failure to do so
would have a material adverse effect on the Company's business, operating
results, financial condition and cash flow. See "Business -- Competition."
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TECHNOLOGICAL PERFORMANCE AND BUILD-OUT OF THE SYSTEM; RAPID TECHNOLOGICAL
CHANGE AND UNCERTAINTY
The Company's initial target market is the monitoring, control and
automation of utility companies' electric, gas and water distribution networks.
Although the CellNet system (including both NMR services and distribution
automation) has been deployed commercially with more than 105,000 meters in
revenue service as of June 30, 1996, there can be no assurance that unforeseen
problems will not develop with respect to the Company's technology, products or
services, or that the Company will be successful in completing the development
and commercial implementation of its technology on a wider scale. The Company
must complete a number of technical development projects and continue to expand
and upgrade its capabilities in connection with such commercial implementation,
the success of which cannot be assured. While the Company believes that it has
developed the necessary hardware to install its endpoint devices on most of the
standard electromechanical electric meters manufactured by the four largest U.S.
electric meter manufacturers, there can be no assurance that the Company will be
able to develop successfully a full range of endpoint devices required by
utilities. The Company must also develop the hardware enhancements necessary to
utilize its system on a commercial basis with gas and water meters. The
Company's future success will be materially adversely affected if it is not
successful or is significantly delayed in the completion of its hardware
development programs.
The Company's future success will also depend, in part, on its ability to
enhance its existing hardware, software and wireless communications technology.
The telecommunications industry has been characterized by rapid, significant
technological advances. The advent of computer-linked electronic networks, fiber
optic transmission, advanced data digitization technology, cellular and
satellite communications capabilities and personal communications systems
("PCS") have radically expanded communications capabilities and market
opportunities. Future advances may render the Company's technology obsolete or
less cost effective than competitive systems or erode the Company's market
position. Many companies from diverse industries are seeking solutions for the
transmission of data over traditional communications media, including radio, as
well as more recently developed media such as cellular and PCS-based networks.
Competitors may be capable of offering significant cost savings or other
benefits to the Company's customers, and there can be no assurance that the
Company will maintain competitive services or obtain appropriate new
technologies on a timely basis or on satisfactory terms. See "Business --
Wireless Communications Industry Overview."
The necessary development effort will require the Company to make continued
substantial investments. The Company has encountered product development delays
in the past affecting both software and hardware components of its system. See
"Business -- Research and Development."
ACCESS TO RADIO FREQUENCY ("RF") SPECTRUM; REGULATION BY THE FEDERAL
COMMUNICATIONS COMMISSION ("FCC")
The Company will attempt to obtain exclusive usage of licensed bandwidth
and/or secure its own licenses. CellNet licenses radio spectrum for its wireless
networks in the top 60 MSAs in the U.S. sufficient to support its projected
utility and non-utility applications with a margin for future growth. Enough
frequency spectrum may not be available to fully enable the delivery of all or a
part of the Company's wireless data communications services or the Company may
be required to find alternative frequencies. The cost of obtaining such spectrum
is currently difficult to estimate and may involve time delays and/or increased
cost to the Company. The Company could also be unable to obtain frequency in
certain areas. Any of these circumstances could have a material adverse impact
on the Company's future ability to provide its network services and on the
Company's business, operating results, financial condition and cash flow. See
"Business -- Regulation."
The Company's network equipment uses radio spectrum and, as such, is subject
to regulation by the FCC. In addition, CellNet intends to provide services as a
private carrier. This status allows services to be provided pursuant to
individual contracts without becoming subject to many of the statutory
requirements and FCC and state regulations that govern the provision of common
carrier services. The Company's network equipment uses both licensed RF spectrum
allocated for multiple address system ("MAS") operations in the 928/952 MHz band
and unlicensed spectrum in the 902-928 MHz band. In order to obtain a license to
operate the Company's network equipment in the 928/952 MHz band, license
applicants may need
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to obtain a waiver of various sections of the FCC's rules. Although the Company
has obtained such waivers for its licensed systems routinely in the past, and
expects the required waivers to be granted on a routine basis in the future,
there can be no assurance that the Company will be able to obtain such waivers
on a timely basis or to obtain them at all. In addition, as the amount of
spectrum in the 928/952 MHz band is limited, issuance of these licenses is
contingent upon the availability of spectrum in the area(s) for which the
licenses are requested. The Company might not be able to obtain licenses to the
spectrum it needs in every area in which it has prospective customers. The FCC's
rules, subject to a number of limited exceptions, permit third parties such as
CellNet to operate on spectrum licensed to utilities to provide other services.
The Company plans to use these provisions of the FCC's rules to expand its
CellNet system.
The FCC requires that a minimum configuration of an MAS system be in
operation within eighteen months from the initial date of the grant of the
system authorization or risk forfeiture of the license for the MAS frequencies.
The eighteen-month deadline may be extended upon showing of good cause, but
there is no assurance that the FCC will grant any such extension. The Company is
responding to this requirement by selectively building out transmission capacity
in some areas where it does not yet have utility telecommunications services
contracts and may permit licenses to lapse in certain areas.
No license is needed to operate the Company's equipment utilizing the
902-928 MHz band, although the equipment must be certified by the Company and
the FCC as being compliant with certain FCC restrictions on radio frequency
emissions designed to protect licensed services from objectionable interference.
While the Company believes it has obtained all required certifications for its
products, the FCC could modify the limits imposed on such products or otherwise
impose new authorization requirements, and in either case, such changes could
have a material adverse impact on the Company's business. The FCC recently
completed a new rulemaking proceeding designed to better accommodate the
cohabitation in the 902-928 MHz band of existing licensed services with newly
authorized and expanded uses of licensed systems, and existing and newly
designed unlicensed devices like those used by the Company. In this proceeding,
the FCC expressly recognized the rights of such unlicensed services to operate
under certain delineated operating parameters even if the potential for
interference to the licensed operations exists. The Company's systems will
operate within those specified parameters. The FCC retains the right to modify
those rules or to allow for other uses of this spectrum that might create
interference to the Company's systems, which could, in either case, have a
material adverse impact on the Company's business, operating results, financial
condition and cash flow.
While the Company intends to offer non-utility services as a private carrier
and in accordance with FCC Rules, each such service offering would need to be
reviewed relative to these rules. The FCC's rules currently prohibit the use of
the MAS frequencies on which the Company is operating its systems for the
provision of common carrier service offerings. In the event that it is
determined that a particular service offering does not comply with the rules,
the Company may be required to restructure such offering or to utilize other
frequencies for the purpose of providing such service. There can be no assurance
that the Company will gain access to such other frequencies. Future
interpretation of regulations by the FCC or changes in the regulation of the
Company's industry by the FCC or other regulatory bodies or legislation by
Congress could have a material adverse effect on the Company's business,
operating results, financial condition and cash flow. See "Business --
Regulation."
MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL
The Company's recent growth has placed, and is expected to continue to
place, a significant strain on its managerial, operational and financial
resources. The Company's ability to manage growth effectively will require it to
continue to implement and improve its operational and financial systems and to
expand, train and manage its employee base. These demands are expected to
require the addition of new management personnel and the development of
additional expertise by existing management personnel. There can be no assurance
that the Company will be able to effectively manage the expansion of its
operations, that its systems, procedures or controls will be adequate to support
the Company's operations or that Company
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management will be able to exploit opportunities for the Company's services. An
inability to manage growth, if any, could have a material adverse effect on the
Company's business, results of operations, financial condition and cash flow.
See "Management."
The success of the Company is substantially dependent on its key management
and technical personnel, the loss of one or more of whom could adversely affect
the Company's business. All of the Company's employees and officers are employed
on an at-will basis. Presently, the Company does not maintain a "key man" life
insurance policy on any of its executives or employees. The Company's future
success also depends on its continuing ability to identify, hire, train and
retain other highly qualified technical and managerial personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to attract or retain highly qualified technical and managerial
personnel in the future. An inability to attract and retain the necessary
technical and managerial personnel could have a material adverse effect on the
Company's business, operating results, financial condition and cash flow. See
"Business -- Employees" and "Management."
UNCERTAINTY OF PROTECTION OF COPYRIGHTS, PATENTS AND PROPRIETARY RIGHTS
The Company relies on a combination of trade secret protection, copyright,
patent, trademark and confidentiality agreements and licensing arrangements to
establish and protect its proprietary rights. The Company's success will depend
in part on its ability to maintain copyright and patent protection for its
products, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. While the Company has obtained and applied
for patents, and intends to file applications as appropriate for patents
covering its products and processes, there can be no assurance that additional
patents will be issued or, if issued, that the scope of any patent protection
will be significant, or that any patents issued to the Company or licensed by
the Company will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide proprietary protection to the Company.
Since U.S. patent applications are maintained in secrecy until patents are
issued, and since publication of inventions in the technical or patent
literature tend to lag behind such inventions by several months, CellNet cannot
be certain that it was the first creator of inventions covered by its issued
patents or pending patent applications, that it was the first to file patent
applications for such inventions or that no patent conflict will exist with
other products or processes which could compete with the Company's products or
approach. Despite the Company's efforts to safeguard and maintain these
proprietary rights, there can be no assurance that the Company will be
successful or that the Company's competitors will not independently develop and
patent technologies that are substantially equivalent or superior to the
Company's technologies. Participants in the wireless industry, including
competitors of the Company, typically seek to obtain patents which will provide
as broad a protection possible for their products and processes. There is a
substantial backlog of patents at the United States Patent Office. It is
uncertain whether any such third-party patents will require the Company to alter
its products or processes, obtain licenses or cease certain activities. An
adverse outcome with regard to a third-party patent infringement claim could
subject the Company to significant liabilities, require disputed rights to be
licensed or restrict the Company's ability to use such technology. The Company
also relies to a substantial degree upon unpatented trade secrets, and no
assurance can be given that others, including the Company's competitors, will
not independently develop or otherwise acquire substantially equivalent trade
secrets. In addition, whether or not additional patents are issued to the
Company, others may receive patents which contain claims applicable to products
or processes developed by the Company. If any such claims were to be upheld, the
Company would require licenses, and no assurance can be given that licenses
would be available on acceptable terms, if at all. In addition, the Company
could incur substantial costs in defending against suits brought against it by
others for infringement of intellectual property rights or in prosecuting suits
which the Company might bring against other parties to protect its intellectual
property rights. From time to time the Company receives inquiries with respect
to the coverage of its intellectual property rights, and there can be no
assurance that such inquiries will not develop into litigation. See "Business --
Proprietary Rights."
Although the Company has been granted federal registration of its "CellNet"
trademark, another Company has filed a petition for cancellation in an attempt
to challenge such registration which, if successful, would mean the Company
could lose its registration and be required to adopt a new trademark
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and possibly a new or modified corporate name. CellNet could encounter similar
challenges to its trademark and corporate name in the future. While the
requirement to adopt a new trademark or new or modified corporate name could
involve a significant expense and could result in the loss of any goodwill and
name recognition associated with the Company's current trademark and corporate
name, the Company does not believe this would have a long-term material adverse
impact on its business, operating results, financial condition and cash flow.
See "Business -- Litigation."
DEPENDENCE ON THIRD-PARTY MANUFACTURERS; EXPOSURE TO COMPONENT SHORTAGES
The Company relies and will continue to rely on outside parties to
manufacture a majority of its network equipment such as radio devices and
printed circuit boards. As the Company signs additional services contracts,
there will be a significant ramp-up in the amount of manufacturing by third
parties in order to enable the Company to meet its contractual commitments. The
Company currently relies on single manufacturers for radio devices and for
printed circuit boards. There can be no assurance that these manufacturers will
be able to meet the Company's manufacturing needs in a satisfactory and timely
manner or that the Company can obtain additional manufacturers when and if
needed. Although the Company believes alternative manufacturers are available,
an inability of the Company to develop alternative suppliers quickly or
cost-effectively could materially impair its ability to manufacture and install
systems. The Company's reliance on third-party manufacturers involves a number
of additional risks, including the absence of guaranteed capacity and reduced
control over delivery schedules, quality assurance, production yields and costs.
Although the Company believes that these manufacturers would have an economic
incentive to perform such manufacturing for the Company, the quality, amount and
timing of resources to be devoted to these activities is not within the control
of the Company, and there can be no assurance that manufacturing problems will
not occur in the future. A significant price increase, a quality control
problem, an interruption in supply from one or more of such manufacturers or the
inability to obtain additional manufacturers when and if needed could have a
material adverse effect on the Company's business, operating results, financial
condition and cash flow. See "Business -- Manufacturing and Operations."
Certain of the Company's subassemblies, components and network equipment are
procured from single sources and others are procured only from a limited number
of sources. In addition, CellNet may be affected by general shortages of certain
components, such as surface mounted integrated circuits and memory chips. There
have been shortages of such materials generally in the marketplace from time to
time in the past. The Company's reliance on such components and on a limited
number of vendors and subcontractors involves certain risks, including the
possibility of shortages and reduced control over delivery schedules,
manufacturing capability, quality and cost. A significant price increase or
interruption in supply from one or more of such suppliers could have a material
adverse effect on the Company's business, operating results, financial condition
and cash flow. Although the Company believes alternative suppliers of
sub-assemblies, components and network equipment are available, the inability of
the Company to develop alternative sources quickly or cost-effectively could
materially impair its ability to manufacture and install systems. Lead times can
be as long as a year for certain components, which may require the Company to
use working capital to purchase inventory significantly in advance of receiving
any revenues. See "Business -- Manufacturing and Operations."
DEPENDENCE ON BUSINESS ALLIANCES
A key element of the Company's business strategy is the formation of
corporate alliances with leading companies. The Company is currently investing,
and plans to continue to invest, significant resources to develop these
relationships. The Company believes that its success in penetrating markets for
non-utility applications of its network will depend in large part on its ability
to maintain these relationships and to cultivate additional or alternative
relationships. There can be no assurance that the Company will be able to
develop additional corporate alliances with such companies, that existing
relationships will continue or be successful in achieving their purposes or that
such companies will not form competing arrangements. See "Business -- Business
Strategy -- Form Strategic Alliances."
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POSSIBLE TERMINATION OF LONG-TERM CONTRACTS
The Company expects that substantially all of its future revenues will be
provided pursuant to long-term services contracts with utility companies and
other parties. These contracts will generally be subject to cancellation or
termination in certain circumstances in the event of a material and continuing
failure on CellNet's part to meet agreed NMR performance standards on a
consistent basis over agreed time periods, subject to certain rights to cure any
such failure. Each of the Company's existing services contracts also provides
for termination of such contracts by the respective utility without cause in
less than ten years, subject to certain reimbursement provisions. Such contracts
also provide that CellNet will be required to compensate such utilities for the
use of its system for non-utility applications. In the event that a services
contract is terminated by a utility, the Company would incur substantial losses.
A network's service revenues are not expected to exceed the Company's capital
investments to deploy such network for several years. Termination or
cancellation of one or more utility services contracts would have a material
adverse effect on the Company's business, results of operations, financial
condition and cash flow. See "Business -- Current Utility Services Agreements."
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
The Company plans to expand into international markets and has begun initial
marketing efforts. The Company does not anticipate that it will have any
material international operations in the next 12 months. If revenues generated
by international activities are not adequate to offset the expense of
establishing and maintaining these activities, the Company's business, operating
results, financial condition and cash flow could be materially adversely
affected. International demand for the Company's services and systems is
expected to vary by country, based on such factors as the regulatory
environment, electric power generating capacity and demand, labor costs and
other political and economic conditions. To date, the Company has no experience
in developing a localized version of its wireless data communications system for
foreign markets. The Company believes its ability to establish business
alliances in each international market will be critical to its success. There
can be no assurance that the Company will be able to successfully develop,
market and implement its system in international markets or establish successful
business alliances for these markets. In addition, there are certain risks
inherent in doing business internationally, such as unexpected changes in
regulatory requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, longer payment cycles,
problems in collecting accounts receivable, political instability, fluctuations
in currency exchange rates and potentially adverse tax consequences, any of
which could adversely impact the Company's potential international operations.
There can be no assurance that one or more of such factors will not have a
material adverse effect on the Company's future international operations and,
consequently, on its business, operating results, financial condition and cash
flow. See "Business -- Business Strategy -- Pursue International Expansion."
The Company's strategy is to pursue international markets through a proposed
joint venture with BEn which could involve additional partners in a local
operating project entity in a particular country. The Company may not have a
majority interest or control of the board of directors of any such local
operating project entity. The risk is present in any such joint venture in which
the Company may determine to participate, that the other joint venture partner
may at any time have economic, business or legal interests or goals that are
inconsistent with those of the joint venture or the Company. The risk is also
present that a joint venture partner may be unable to meet its economic or other
obligations and that the Company may be required to fulfill those obligations.
In addition, in any joint venture in which the Company does not have a majority
interest, the Company may not have control over the operations or assets of such
joint venture. See "Business -- Business Strategy -- Pursue International
Expansion."
SHAREHOLDERS' AGREEMENT
Holders of 28,188,916 shares of Common Stock, or 69.4% of the outstanding
Common Stock after completion of the Offering and the Direct Placements, are
parties to a Shareholders' Agreement dated August 15, 1994, as amended (the
"Shareholders' Agreement"), pursuant to which the Company will be required to
cause all persons designated for election by certain stockholders to be
nominated at each meeting of the Company's stockholders at which a vote for
directors will be taken, so long as each such stockholder holds a minimum number
of shares of Common Stock. Under the Shareholders' Agreement, the
16
<PAGE>
Company agreed to set the authorized number of directors at ten directors. Of
these, after the closing of the Offering, nine directors will be persons
designated by certain holders in accordance with the Shareholders' Agreement. In
addition, under the Shareholders' Agreement the parties thereto have agreed
that, until August 15, 1997, the Certificate of Incorporation will not be
amended to eliminate cumulative voting and that the Board of Directors shall not
be comprised of less than eight directors. The effect of the Shareholders'
Agreement is to give certain stockholders greater influence over the management
of the Company than they would otherwise have and to provide certain
stockholders with, among other things, certain registration, first refusal,
co-sale and other rights. See "Management -- Board of Directors," "Certain
Transactions" and "Description of Capital Stock."
NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF
STOCK PRICE
Prior to the Offering there has been no public market for the Common Stock,
and there can be no assurance that an active public market for the Common Stock
will develop or be sustained after the Offering. The initial public offering
price in the Offering will be determined by negotiation between the Company and
the underwriters based upon several factors, and may not be indicative of the
market price of the Common Stock after the Offering. The trading price of the
Common Stock could be subject to wide fluctuations in response to quarterly
variations in the Company's results of operations, uncertain periodic events
such as the signing or termination of services contracts, changes in financial
estimates by analysts, variations between the Company's results and results
expected by financial analysts and investors, announcements of technological
innovations by the Company or its competitors, conditions in the wireless
communications industry, regulatory changes or general market or economic
conditions and other events or factors. In addition, in recent years the stock
market has experienced extreme price and volume fluctuations. These fluctuations
have had a substantial effect on the market prices for many emerging growth
companies, often unrelated to the operating performance of the specific
companies. Such market fluctuations could adversely affect the price of the
Common Stock.
RESALE RESTRICTIONS ON NOTE WARRANT SHARES; SHARES ELIGIBLE FOR FUTURE SALE;
REGISTRATION RIGHTS
The Note Warrant Shares are currently subject to lock-up agreements which
prohibit resale of (i) 866,667 of the Note Warrant Shares for 120 days from the
closing of the Offering and (ii) the remaining 1,733,333 Note Warrant Shares for
180 days from the closing of the Offering. Sales of a substantial number of
shares of Common Stock in the public market following the Offering could
adversely affect the market price for the Company's Common Stock. The number of
shares of Common Stock available for sale in the public market is limited by
restrictions under the Securities Act of 1933, as amended (the "Securities
Act"), and lock-up agreements pursuant to which holders have agreed not to sell
or otherwise dispose of 29,570,140 shares for 180 days after the date of the
closing of the Offering without the prior written consent of Morgan Stanley &
Co. Incorporated. However, Morgan Stanley & Co. Incorporated may, in its sole
discretion and at any time without notice, release all or any portion of such
shares. In addition, certain other holders have agreed not to sell or otherwise
dispose of 243,854 shares for 120 days after the closing of the Offering.
Concurrently with the closing of the Offering, the Company is registering the
offer and sale of the Note Warrant Shares which are being sold by the Company to
holders electing to exercise the Note Warrants issued pursuant to the Note
Warrant Agreement. Under the Note Warrant Agreement, the Company is required to
register the offer and sale of the Note Warrant Shares issuable upon exercise of
the Note Warrants to the extent legally permissible in connection with the
Company's initial public offering of its Common Stock. The Note Warrants are
exercisable at any time beginning on the closing of the Offering and ending on
the Expiration Date. If not exercised by the Expiration Date, the Note Warrants
terminate and may not be exercised.
On the date of the closing of the Offering, no shares other than 366 shares
of Common Stock previously issued and the Shares will be eligible for immediate
sale in the public market. Upon expiration of the various lock-up agreements,
approximately 1,110,521 shares of Common Stock will become eligible for
immediate public resale 120 days after the closing of the Offering (including
866,667 Note Warrant Shares issuable upon the assumed cash exercise of the Note
Warrants) and 31,303,473 shares of Common Stock will become eligible for
immediate public resale 180 days after the closing of the Offering, (including
1,733,333 Note Warrant Shares issuable upon the assumed cash exercise of the
Note Warrants), subject in the case of certain
17
<PAGE>
shares (including shares held by affiliates) to the limitations under Rule 144
under the Securities Act. The remaining approximately 1,680,208 shares held by
existing stockholders and issuable in the Direct Placements will become eligible
for public resale at various times beginning 180 days after the date of this
Prospectus and subject to the provisions of Rule 144. In addition, approximately
243,854 shares of Common Stock which are subject to the provisions of Rule 701,
and 1,872,244 shares which are subject to vested options, will be available for
sale in the public market, in each case, 120 days after the effective date of
the Offering and 267,592 shares which are subject to vested options will be
available for sale in the public market 180 days after the effective date of the
Offering.
The Company intends to register, following the Offering, a total of
4,878,810 shares of Common Stock subject to outstanding options or reserved for
issuance under the Company's 1992 Stock Option Plan and 1994 Stock Plan and
1,200,000 shares of Common Stock reserved for issuance under its 1996 Employee
Stock Purchase Plan. Furthermore, upon expiration of certain lock-up agreements
referred to above, the holders of 29,721,080 shares of Common Stock will be
entitled to certain registration rights with respect to such shares. Pursuant to
the agreements related to the Direct Placements, NSP, UE and BEn each agreed not
to sell or otherwise dispose of 50% of the shares of Common Stock acquired
thereby for a period of twelve months and the remaining 50% of the shares of
Common Stock acquired thereby for a period of 24 months from the date of the
Offering. The 1,579,404 shares sold in the Direct Placements will be eligible
for sale in the public market two years from the closing of the Offering
pursuant to Rule 144, however, the Company has agreed to register up to one half
of such shares upon request at any time after ten months from the closing of the
Offering. If such holders, by exercising their registration rights, cause a
large number of shares of Common Stock to be registered and sold in the public
market, such sales could have a material adverse effect on the market price for
the Common Stock. See "Description of Capital Stock -- Registration Rights of
Certain Holders" and "Shares Eligible for Future Sale."
SUBSTANTIAL DILUTION
Investors participating in the Offering will incur immediate, substantial
dilution. To the extent outstanding options and warrants to purchase the
Company's Common Stock are exercised, there will be further dilution. See
"Dilution."
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, INDENTURE, DELAWARE LAW AND CERTAIN AGREEMENTS
The Company's Board of Directors has the authority to issue up to 15,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of such shares of
Preferred Stock without any further vote or action by the stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. The Company
has no current plans to issue shares of Preferred Stock. Further, certain
provisions of the Company's Certificate of Incorporation and of Delaware law
could discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of the Board of
Directors and in the policies formulated by the Board of Directors and to
discourage certain types of transactions that may involve an actual or
threatened change in control of the Company. These provisions are designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal
and to discourage certain tactics that may be used in proxy fights. Certain of
the Company's executive officers are parties to an Employee Severance Agreement
pursuant to which, among other things, all of such officers' outstanding stock
options will vest upon the occurrence of certain events following a change of
control, including six months having elapsed following such change in control,
so long as such executives remain employed by the Company. In addition, the
Company's Indenture (the "Senior Discount Note Indenture") governing its Senior
Discount Notes provides in the event of certain changes in control of the
Company, each holder will have the right to require the Company to repurchase
such holder's Senior Discount Notes at a premium over the accreted value of such
debt. Certain provisions in the Certificate of Incorporation and Senior Discount
Note
18
<PAGE>
Indenture could have the effect of discouraging others from making tender offers
for the Company's shares and, as a consequence, they also may inhibit increases
in the market price of the Company's shares that could otherwise result from
actual or rumored takeover attempts. Such provisions also may have the effect of
limiting changes in the management of the Company. See "Management -- Employment
Contracts and Change of Control Arrangements" and "Description of Capital Stock
- -- Preferred Stock."
NO DIVIDENDS; DIVIDEND RESTRICTIONS.
The Company has not declared or paid any dividends on its capital stock
since its inception. The Company currently anticipates that it will retain all
of its future earnings, if any, for use in the operation and expansion of its
business and does not anticipate paying any cash dividends in the foreseeable
future. In addition, the Company's existing financing arrangements restrict the
payment of any dividends. See "Dividend Policy."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares in the Offering
are estimated to be approximately $91.9 million ($105.8 million if the U.S.
Underwriters' over-allotment option is exercised in full), after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company, and the estimated net proceeds to the Company from the
Direct Placements, which are expected to close concurrently with the closing of
the Offering, are estimated to be approximately $27.96 million after deducting
estimated issuance costs related thereto, in each case at the initial public
offering price of $20.00 per share. See "Direct Placements."
The Company anticipates that the net proceeds of the Offering and the Direct
Placements will be used for general corporate purposes, including working
capital, capital requirements (capital expenditures and negative operating cash
flow) expected to be incurred in connection with the installation and operation
of the Company's networks and continuing research and development activities. A
portion of the proceeds may also be used for the licensing of new products or
technologies, early retirement of corporate debt, which may include the purchase
or redemption of a portion of the 13% Senior Discount Notes due 2005, and for
investment purposes related to the expansion of its business, including
internationally, although the Company currently has no specific plans or
commitments in this regard. Pending application of the proceeds as described
above, the Company intends to invest the net proceeds of the Offering and the
Direct Placements in short-term, interest-bearing, investment-grade securities.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company believes that the
net proceeds of the Offering and the Direct Placements, together with its
existing cash, cash equivalents, short-term investments and anticipated interest
income and other revenues, will be sufficient to meet its cash requirements for
at least the next 12 months. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DIRECT PLACEMENTS
NSP has agreed to purchase from the Company, in a private placement that
will occur concurrently with the closing of the Offering, shares of Common Stock
at an aggregate purchase price of $15,000,000. In addition, UE, through its
affiliate and wholly-owned subsidiary Union Electric Development Corporation,
has agreed to purchase from the Company, in a private placement that will occur
concurrently with the closing of the Offering, shares of Common Stock at an
aggregate purchase price of $10,000,000. BEn has agreed to purchase from the
Company, in a private placement that will occur concurrently with the closing of
the Offering, shares of Common Stock at an aggregate purchase price of
$3,000,000. The purchase price per share to be paid by NSP will be an amount
equal to 85% of the initial public offering price, and the purchase price per
share to be paid by UE and BEn will be an amount equal to the initial public
offering price less the underwriting discounts and commissions. At the initial
public offering price of $20.00 per share, NSP, UE and BEn would purchase
882,353 shares, 536,193 shares and 160,858 shares, respectively. Of the 882,353
shares to be purchased by NSP, 49,020 of these shares will be placed in escrow
(the "Escrow Shares"), with their release to NSP being dependent upon NSP
causing Wisconsin Electric Power Company ("WEPC") to enter into a services
agreement for at least 750,000 meters with the Company by December 31, 1997. If
such services agreement is not entered into, all the Escrow Shares will revert
to the Company, which will effectively increase NSP's purchase price per share
to 90% of the initial public offering price. WEPC and NSP are parties to a
pending merger agreement, which is subject to regulatory approval. In the event
that any of the Escrow Shares are released to NSP, the fair value of such shares
will be expensed as a sales discount over the term of the NSP services
agreement. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."
DIVIDEND POLICY
The Company has not declared or paid any dividends on its capital stock
since its inception. The Company currently anticipates that it will retain all
of its future earnings, if any, for use in the operation and expansion of its
business and does not anticipate paying any cash dividends in the foreseeable
future, and any changes in the Company's dividend policies will be determined by
its Board of Directors. The Company's existing financing arrangements also
restrict the payment of any dividends. The Company anticipates that it and its
subsidiaries will incur substantial additional indebtedness, which is also
likely to restrict the payment of dividends.
20
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
June 30, 1996, (ii) the pro forma capitalization of the Company after giving
effect to the automatic conversion of all outstanding shares of Preferred Stock
into Common Stock, the issuance of 4,132,970 shares of Common Stock upon the
assumed exercise on a cash basis of certain outstanding warrants for aggregate
proceeds to the Company of $3.7 million and the reincorporation of the Company
in Delaware which occurred on August 30, 1996, and (iii) the as adjusted
capitalization of the Company to reflect the receipt of the estimated net
proceeds from the sale of Common Stock in the Offering at the initial offering
price of $20.00 per share and after deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by the Company and the
receipt of the estimated net proceeds of $27.96 million from the sale of Common
Stock to NSP, UE and BEn.
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations(1)................................................ $ 195,513 $ 195,513 $ 195,513
----------- ------------- -----------
Series CC redeemable convertible preferred stock, $.001 par value;
3,215,768 shares designated and outstanding actual; no shares
outstanding pro forma and as adjusted.................................. 29,486 -- --
----------- ------------- -----------
Stockholders' equity (deficit):
Convertible preferred stock, $.001 par value; 15,000,000 shares
authorized; 9,137,078 shares outstanding actual; no shares
outstanding pro forma and as adjusted................................ 27,196 -- --
Common Stock, $.001 par value; 50,000,000 shares authorized; 5,209,472
shares outstanding actual; 34,048,134 shares outstanding pro
forma(2); and 100,000,000 shares authorized and 40,627,538 shares
outstanding as adjusted(3)........................................... 27,636 90,947 210,757
Notes receivable from sale of Common Stock............................ (866) (866) (866)
Warrants.............................................................. 2,984 9 9
Accumulated deficit................................................... (127,334) (127,334) (127,334)
Net unrealized loss on short-term investments......................... (16) (16) (16)
----------- ------------- -----------
Total stockholders' equity (deficit)................................ (70,400) (37,260) 82,550
----------- ------------- -----------
Total capitalization.............................................. $ 154,599 $ 158,253 $ 278,063
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
- ---------
(1) Consists primarily of Senior Discount Notes. See Notes 5 and 9 to
Consolidated Financial Statements.
(2) Excludes 3,779,136 shares of Common Stock issuable upon the exercise of
outstanding options as of June 30, 1996, with a weighted average exercise
price of $.625 per share and 52,610 shares of Common Stock issuable upon
exercise of outstanding warrants to purchase Common Stock at a weighted
average exercise price of $7.59 per share. See "Management -- Incentive
Stock Plans," "Description of Capital Stock -- Warrants" and Note 7 to
Consolidated Financial Statements.
(3) Upon the closing of the Offering, 100,000,000 shares of Common Stock will be
authorized for issuance. Includes 49,020 shares of Common Stock that will be
issued and outstanding at the closing of the Offering and held in escrow in
connection with the NSP Purchase. If NSP causes WEPC to enter into a
services agreement with the Company, such Escrow Shares will be released to
NSP. If WEPC does not enter into such agreement, such Escrow Shares will
revert to the Company. See "Direct Placements."
21
<PAGE>
DILUTION
The pro forma deficit in net tangible book value of the Company as of June
30, 1996 was $43.4 million or $1.27 per share of outstanding Common Stock. The
pro forma deficit in net tangible book value per share represents the Company's
total assets less net intangibles of $6.1 million and less total liabilities,
divided by the number of shares of Common Stock outstanding (after giving effect
to the automatic conversion of the Preferred Stock and the exercise of certain
warrants upon the closing of the Offering). Dilution per share represents the
difference between the price per share paid by investors in the Offering and the
as adjusted pro forma net tangible book value per share immediately after the
Offering. After giving effect to the sale of the 5,000,000 shares of Common
Stock in the Offering at the initial public offering price of $20.00 per share
(after deducting the estimated underwriting discounts and commissions and
offering expenses) and the sale of 1,579,404 shares of Common Stock in the
Direct Placements for aggregate net proceeds of $27.96 million, the as adjusted
pro forma net tangible book value of the Company at June 30, 1996 would have
been $76.5 million, or approximately $1.88 per share. This represents an
immediate decrease in the pro forma deficit in net tangible book value of $3.15
per share to existing stockholders and an immediate dilution of $18.12 per share
to new investors purchasing shares in the Offering at the initial public
offering price. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share................................... $ 20.00
Pro forma net tangible book value (deficit) per share as of June 30,
1996................................................................... $ (1.27)
Increase attributable to the Direct Placements.......................... 0.84
Increase attributable to sale of Shares in the Offering................. 2.31
---------
As adjusted pro forma net tangible book value per share after the
Offering................................................................. 1.88
---------
Dilution per share to investors in the Offering........................... $ 18.12
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the number of shares of Common Stock purchased from the Company, the total cash
consideration paid and the average price per share paid by the existing
stockholders, by the new investors in the Offering (before deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company) at the initial public offering price of $20.00 per share, and by
NSP, UE and BEn in the Direct Placements:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CASH CONSIDERATION
------------------------- --------------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
------------ ----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......................... 34,048,134 83.8% $ 92,213,000 41.9% $ 2.71
Direct Placements.............................. 1,579,404 3.9 28,000,000 12.7 $ 17.73
Investors in the Offering...................... 5,000,000 12.3 100,000,000 45.4 $ 20.00
------------ --- -------------- ---
Total...................................... 40,627,538 100% $ 220,213,000 100%
------------ --- -------------- ---
------------ --- -------------- ---
</TABLE>
The foregoing table assumes the automatic conversion of all Preferred Stock,
the exercise on a cash basis of warrants to purchase 4,132,970 shares of Common
Stock, no exercise of the U.S. Underwriters' over-allotment option and no
exercise of stock options or other warrants outstanding at June 30, 1996. At
June 30, 1996, there were options outstanding to purchase 3,779,136 shares of
Common Stock at a weighted average exercise price of $.625 per share and other
warrants outstanding to purchase 52,610 shares of Common Stock at a weighted
average exercise price of $7.59 per share. To the extent outstanding options and
warrants are exercised, there will be further dilution to new investors. See
"Management -- Incentive Stock Plans," "Description of Capital Stock --
Warrants" and Note 7 to Consolidated Financial Statements.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and related
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus. The
consolidated statement of operations data for the years ended December 31, 1993,
1994 and 1995, and the consolidated balance sheet data at December 31, 1994 and
1995 are derived from, and are qualified by reference to, the audited
consolidated financial statements included elsewhere in this Prospectus. The
consolidated statement of operations data for the years ended December 31, 1991
and 1992 and the consolidated balance sheet data at December 31, 1991, 1992 and
1993 are derived from audited consolidated financial statements not included
herein. The consolidated statement of operations data for the six months ended
June 30, 1995 and 1996 and the consolidated balance sheet data at June 30, 1996
are derived from unaudited consolidated financial statements that include, in
the opinion of management, all adjustments, consisting of only normal, recurring
adjustments, necessary for a fair presentation of the information set forth
therein. The consolidated results of operations for the six months ended June
30, 1996 or any other period are not necessarily indicative of future results.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 7,408 $ 3,148 $ 1,757 $ 1,651 $ 2,126 $ 1,291 $ 420
Costs and expenses:
Cost of revenues........................ 6,943 2,509 1,840 1,191 5,129 1,931 3,483
Research and development................ 7,765 6,838 5,262 9,693 22,380 6,735 13,009
Marketing and sales..................... 3,037 1,523 1,447 3,257 4,201 1,946 2,924
General and administrative.............. 2,048 843 1,450 2,583 6,805 2,874 5,412
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses.................. 19,793 11,713 9,999 16,724 38,515 13,486 24,828
--------- --------- --------- --------- --------- --------- ---------
Loss from operations...................... (12,385) (8,565) (8,242) (15,073) (36,389) (12,195) (24,408)
Other income (expense).................... (178) (378) (148) 441 (4,564) 75 (7,903)
--------- --------- --------- --------- --------- --------- ---------
Loss before income taxes.................. (12,563) (8,943) (8,390) (14,632) (40,953) (12,120) (32,311)
Provision for income taxes................ -- -- 1 2 3 1 2
--------- --------- --------- --------- --------- --------- ---------
Net loss.................................. $ (12,563) $ (8,943) $ (8,391) $ (14,634) $ (40,956) $ (12,121) $ (32,313)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma net loss per share(1)........... $ (1.22) $ (0.94)
--------- ---------
--------- ---------
Shares used in computing pro forma net
loss per share(1)........................ 33,497 34,483
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996
----------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA(2)
--------- --------- --------- --------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................ $ 669 $ 2,236 $ 8,884 $ 24,508 $ 143,797 $ 102,967 $106,621
Total assets............................ 4,833 4,123 11,510 31,809 184,306 162,653 166,307
Long-term obligations, including current
portion................................ 1,598 1,734 825 546 183,348 195,513 195,513
Series CC redeemable convertible
preferred stock........................ -- -- -- 29,486 29,486 29,486 --
Total stockholders' equity (deficit).... (3,065) (235) 8,011 (1,564) (38,103) (70,400) (37,260)
</TABLE>
- ------------
(1) See Note 1 to Consolidated Financial Statements for an explanation of the
determination of the number of shares used in computing pro forma net loss
per share.
(2) Reflects the conversion of all outstanding shares of Preferred Stock into
Common Stock and the assumed exercise on a cash basis of warrants to
purchase 4,132,970 shares of Common Stock at an aggregate exercise price of
approximately $3.7 million upon the closing of the Offering which includes
the assumed exercise of all Note Warrants on a cash basis.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CELLNET DATA SYSTEMS, INC. SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE
IN THIS PROSPECTUS. CERTAIN OF THE INFORMATION CONTAINED IN THIS SECTION AND
ELSEWHERE IN THIS PROSPECTUS, INCLUDING INFORMATION WITH REGARD TO THE COMPANY'S
EXPECTED WIRELESS DATA COMMUNICATIONS NETWORK DEPLOYMENTS AND OPERATIONS, ITS
STRATEGY FOR MARKETING AND DEPLOYING SUCH NETWORKS AND RELATED FINANCING
ACTIVITIES, CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS."
OVERVIEW
The Company intends to deploy and operate a series of wireless data
communications networks pursuant to long-term contracts with utility company
customers and to earn recurring revenues by providing NMR services to the
utilities and using the network to support a variety of non-utility
applications. The Company's business strategy has affected and will continue to
affect its financial condition and results of operations as follows:
CHANGING COMPOSITION OF REVENUES. The Company's revenues in recent years
have been primarily attributable to sales of, and contract fees related to the
development of, miscellaneous utility communication equipment. The Company
believes that such revenues will be largely non-recurring and will diminish to
relatively insignificant levels over the next few years. The Company derives an
increasing proportion of its revenues from fees earned under services agreements
related to its wireless communications networks. Under the Company's existing
services agreements with KCPL, UE, NSP and Puget, the Company receives monthly
NMR service fees based on the number of endpoint devices that are in revenue
service during the applicable month to bill customers.
UNEVEN REVENUE GROWTH. The timing and amount of the Company's future
revenues will depend upon its ability to obtain additional services agreements
with utilities and other customers and upon the Company's ability to
successfully deploy and operate its wireless communications networks. New
services agreements are expected to be obtained on an irregular basis, and there
may be prolonged periods during which the Company does not enter into any
additional services agreements. As a result, the Company expects that its
revenues will not grow smoothly over time, but will increase unevenly as the
Company enters into new services agreements, and may decrease sharply in the
event that any of its existing services agreements are terminated or not
renewed. See "Risk Factors -- Uncertainty of Future Revenues; Increasing
Installation Costs; Need for Additional Services Contracts; and Fluctuating
Operating Results."
REVENUES LAG NETWORK DEPLOYMENT. The Company generally realizes network
service revenue under a services agreement with a utility only when a portion of
the network is installed and the utility has begun billing customers based upon
NMR data. The Company did not begin to receive revenue under its services
contracts with KCPL and UE until approximately one year after signing the
respective services agreements. The Company expects that its receipt of network
service revenue under future contracts will lag the signing of the related
services agreements by a minimum of six months and that it will generally take
two to four years to complete installation of a network after each services
agreement has been signed. A network's service revenues are not expected to
exceed the Company's capital investments and expenses incurred to deploy such
network for several years. The Company signed agreements with KCPL and UE in
August 1994 and August 1995, respectively, and did not receive its first revenue
under the KCPL and UE services agreements until September 1995 and May 1996,
respectively. The Company expects to complete the KCPL network in 1996 and the
UE network in 1998. The Company began the installation of both the NSP and Puget
networks in August 1996. As additional segments of the Company's networks are
installed and used by its utility clients for billing purposes, the Company
expects to realize a corresponding increase in its network service revenues.
However, if the Company is able to successfully deploy an increasing number of
networks over the next few years, the operating losses created by this lag in
revenues, and negative cash flow resulting
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from such operating losses and the capital expenditures expected to be required
in connection with the installation of such networks, are expected to widen for
a period of time and will continue until the operating cash flow from installed
networks exceeds the costs of deploying and operating additional networks.
IMPACT OF RAPID EXPANSION. CellNet will not typically invest the capital
necessary to deploy a wireless communications network prior to entering into a
long-term services agreement with a utility or other customer. However, during
its expansion phase, the Company will be required to invest significant amounts
of capital in its networks and to incur substantial and increasing sales and
marketing expenses before receiving any return on such expenditures through
network service revenues. The Company has incurred substantial operating losses
since inception and, as of June 30, 1996, had an accumulated deficit of $127.3
million. The Company does not expect significant revenues during 1996 and
expects to incur substantial and increasing operating losses and negative net
cash flow after capital expenditures for the foreseeable future as it expands
its research and development and marketing efforts and installs additional
networks. The Company does not expect positive cash flow after capital
expenditures from its NMR services operations for several years. The Company
will require substantial capital to fund cash flow deficits and capital
expenditures for the foreseeable future and expects to finance these
requirements through significant additional external financing. See "Risk
Factors -- History and Continuation of Operating Losses" and "-- Substantial
Leverage and Ability to Service Debt; Substantial Future Capital Needs."
INTEREST INCOME. The Company has earned substantial amounts of interest
income on short-term investments of the proceeds of its financing activities,
and expects to earn additional interest income through the investment of a
portion of the proceeds of this Offering. The Company expects to utilize
substantially all of its cash, cash equivalents and short-term investments in
deploying its wireless communications networks, in continuing research and
development activities related thereto and in related selling and marketing
activities. As such funds are expended, interest income is expected to decrease.
See "Use of Proceeds."
RESULTS OF OPERATIONS
REVENUES
Revenues for the three years ended December 31, 1993, 1994 and 1995 were
$1.8 million, $1.7 million and $2.1 million, respectively. Revenues for the six
months ended June 30, 1995 and 1996 were $1.3 million and $420,000,
respectively. Revenues prior to 1996 were attributable primarily to product
sales and development and other contract revenues unrelated to the Company's
current focus of providing NMR services that were largely non-recurring and that
are expected to decline and remain at relatively insignificant levels over the
next few years. During 1993, Pacific Gas & Electric Company ("PG&E"), Georgia
Power Company ("Georgia Power") and NSP accounted for 37%, 36% and 18% of the
the Company's revenues, respectively. During 1994, NSP, Georgia Power and PG&E
accounted for 58%, 14% and 10% of the Company's revenues, respectively. During
the first six months of 1996, KCPL and NSP accounted for 73% and 16% of the
Company's revenues, respectively. During 1995, NSP and KCPL accounted for 64%
and 29% of the Company's revenues, respectively. Revenues for the six months
ended June 30, 1996 declined $870,000 from the comparable period in 1995. The
decline resulted primarily from the transition from product sales to network
service revenues. The Company's NMR service revenues for the year ended December
31, 1995 and for the six months ended June 30, 1996 were $35,000 and $244,000,
respectively. In September 1995, the Company began to receive regular monthly
revenue under its services agreement with KCPL based upon the number of
automated meters installed on the network that were being used by KCPL to bill
its customers and the agreed monthly NMR charge per meter. In May 1996, the
Company began to realize regular monthly revenue from its services agreement
with UE on a similar basis. The Company will not recognize revenue earned under
its services agreements with NSP or Puget until the automated meters installed
on the respective networks are used by such utility clients for billing their
respective customers. In connection with the NSP Purchase, the Company has
agreed to issue Escrow Shares which will be released upon the entering into an
NMR services agreement with WEPC by December 1997. The fair value of these
Escrow Shares will be expensed as a sales discount over the term of the WEPC
services agreement if such event occurs. See "Direct Placements."
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The Company generally realizes service revenues under its services
agreements with utilities only when its networks or portions thereof are
successfully installed and operating and the utility commences billing its
customers based upon the NMR data obtained. Revenues are expected to increase as
the Company continues to install its networks, the networks or portions thereof
become operational, and utilities begin billing their customers based upon data
obtained over the CellNet system. Due primarily to the nature, amount and timing
of revenues received to date, no meaningful period-to-period comparisons can be
made. Revenues received during the years ended December 31, 1993, 1994 and 1995,
and for the six-month periods ended June 30, 1995 and 1996, respectively, are
not reliable indicators of revenues that might be expected in the future.
COST OF REVENUES
Cost of revenues historically have consisted of the cost of product sales.
For the year ended December 31, 1995 and for the six months ended June 30, 1996,
cost of revenues primarily consisted of network operations costs. Cost of
revenues were $1.8 million, $1.2 million and $5.1 million for the years ended
December 31, 1993, 1994 and 1995, respectively. Cost of revenues for the six
months ended June 30, 1995 and 1996 were $1.9 million and $3.5 million,
respectively. The increase in cost of revenues was driven by increasing costs of
providing network services, due primarily to growth in the number of employees
and associated costs necessary for network monitoring operations at customer
sites and at the Company's headquarters, network deployment management and
customer training. Costs of network services also include the increased
installation, applications and RF engineering staffing at the Company's
headquarters to support anticipated additional utility contracts. Network
services do not currently generate a profit as the Company has not yet achieved
a scale of services sufficient to cover network costs. The Company will incur
significant and increasing costs primarily attributed to network operation and
depreciation. Once a network has been fully installed, costs associated with
generating network revenues will consist primarily of maintaining a monitoring
center for such network, network depreciation and miscellaneous maintenance and
operating expenses.
OPERATING EXPENSES
Operating expenses, consisting of research and development, marketing and
sales, and general and administrative costs, were $8.2 million, $15.5 million
and $33.4 million for the years ended December 31, 1993, 1994 and 1995,
respectively. Operating expenses for the six months ended June 30, 1995 and 1996
were $11.6 million and $21.3 million, respectively. The increase in operating
expenses on a period to period basis is attributable to the Company's rapid
growth and to increasing research and development and marketing and sales
expenditures. The Company expects to continue to spend a significant portion of
its resources on research and development activities for the foreseeable future.
Marketing and sales and general and administrative costs are expected to
increase in the future as the Company seeks to sign new service agreements.
RESEARCH & DEVELOPMENT. Research and development expenses are attributable
largely to continuing system software, firmware and equipment development costs,
prototype manufacturing, testing, personnel costs, consulting fees, and
supplies. Research and development costs are expensed as incurred. The Company's
networks include certain software applications which are integral to their
operation. The costs to develop such software have not been capitalized as the
Company believes its software development is essentially completed when
technological feasibility of the software and/or development of the related
network hardware is established. Research and development expenses were $5.3
million, $9.7 million and $22.4 million for the years ended December 31, 1993,
1994 and 1995, respectively. Research and development expenses for the six
months ended June 30, 1995 and 1996 were $6.7 million and $13.0 million,
respectively. Research and development spending increases in 1995 and 1996
reflect primarily additions to the Company's engineering staff and costs
associated with development of processes to retrofit utility meters for use in
the CellNet network. Deployment of the Company's first network in 1995 resulted
in increased materials used for prototypes, nonrecurring engineering charges
associated with establishing relationships with third-party manufacturers and
rapid changes to the firmware and software utilized in the CellNet
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network. The Company expects that research and development expenses will
increase moderately in the near term. However, significant investments in
research and development may become necessary to remain competitive, to respond
to market changes or to establish international operations.
MARKETING & SALES. Marketing and sales expenses consist principally of
compensation, including commissions paid to sales and marketing personnel,
travel, advertising, trade show and other promotional costs. Marketing and sales
expenses were $1.4 million, $3.3 million and $4.2 million for the years ended
December 31, 1993, 1994 and 1995, respectively. Marketing and sales expenses for
the six months ended June 30, 1995 and 1996 were $1.9 million and $2.9 million,
respectively. The Company expects marketing and sales expenses to continue to
increase in absolute dollars as the Company seeks to enter into new services
agreements.
GENERAL & ADMINISTRATIVE. General and administrative expenses include
compensation paid to general management and administrative personnel, recruiting
costs, travel, and communications and other general administrative expenses,
including fees for professional services. General and administrative expenses
were $1.5 million, $2.6 million and $6.8 million for the years ended December
31, 1993, 1994 and 1995, respectively. General and administrative expenses for
the six months ended June 30, 1995 and 1996 were $2.9 million and $5.4 million,
respectively. The Company expects general and administrative expenses to
continue to increase in absolute dollars as the Company increases staffing and
continues developing information systems to support its planned growth. The
Company may need to increase administrative expenditures in the longer term to
expand domestic and establish international operations.
INTEREST INCOME AND EXPENSE
Prior to June 1995 the Company funded its liquidity needs primarily from the
issuance of equity securities. In June and November 1995, the Company issued and
sold a total of $325.0 million aggregate principal amount at maturity of Senior
Discount Notes and Note Warrants for proceeds, net of issuance costs, of $169.9
million. Accordingly, the Company has earned interest income on the invested
proceeds from the Senior Discount Notes and Note Warrants and has incurred
significant interest expense from the amortization of the original issue
discount on such debt.
Interest income has been and will continue to be received by the Company
from the short-term investment of proceeds from the issuance of equity and debt
securities pending the use of such proceeds by the Company for capital
expenditures and operating and other expenses. In June 1995, the Company began
to receive substantially increased amounts of interest income on the short-term
investment of the proceeds received from the issue and sale of its Senior
Discount Notes and Note Warrants. Interest income is expected to be highly
variable over time as proceeds from the issue and sale of additional equity and
debt securities are received and as funds are used by the Company in its
business. Interest income for the three years ended December 31, 1993, 1994 and
1995 was $66,000, $555,000 and $4.6 million, respectively. Interest income for
the six months ended June 30, 1995 and 1996 was $1.0 million and $3.5 million,
respectively.
No interest on the Senior Discount Notes is payable prior to December 15,
2000. Thereafter until maturity in June 2005, interest will be payable
semi-annually in arrears on each December 15 and June 15. The carrying amount of
the Senior Discount Notes accretes from the date of issue and the Company's
interest expense includes such accretion. Interest expense for periods prior to
June 1995 was attributable primarily to capital leases. Interest expense was
$198,000, $101,000 and $9.3 million for the years ended December 31, 1993, 1994
and 1995, respectively. Interest expense for the six months ended June 30, 1995
and 1996 was $754,000 and $11.3 million, respectively.
PROVISION FOR INCOME TAXES
The Company has not provided for or paid federal income taxes due to the
Company's net losses. A nominal provision has been recorded for various state
minimum income and franchise taxes.
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $82.5 million and $7.3 million available to offset future federal
and California taxable income, respectively. The extent to which the loss
carryforwards can be used to offset future taxable income will be limited
because of the ownership changes within any three-year period as provided in the
Tax Reform Act of 1986 and the
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California Conformity Act of 1987. The Offering will trigger such a limitation
as a result of which the annual usage will be limited by the market value of the
Company at the closing of the Offering multiplied by the then current long-term
tax exempt interest rate. Such federal carryforwards expire in 2001 through
2010. Such state carryforwards expire in 1996 through 2000. Based upon the
Company's history of operating losses and expiration dates of the loss
carryforwards, the Company has recorded a valuation allowance to the full extent
of its net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires significant amounts of capital for research and
development in connection with the development of its proprietary wireless
communications network and related products and services, for investments in the
installation and testing of such networks and for related sales and marketing
and general and administrative expenses. Historically, the Company has satisfied
its liquidity requirements primarily through external financings, including
private placements of equity and debt securities and interest income derived
from the investment of the proceeds of its financing activities. The discussion
in this section excludes the effect of warrants to purchase 4,132,970 shares of
Common Stock, which the Company assumes will be exercised on a cash basis
immediately prior to the closing of the Offering for expected proceeds of $3.7
million.
In 1993, 1994, 1995 and the first six months of 1996, net cash used in the
Company's operating activities totaled $9.1 million, $14.6 million, $24.6
million and $18.9 million, respectively. Net cash used in operating activities
resulted primarily from cash used to fund net operating losses.
In 1993, 1994 and 1995 and the first six months of 1996, net cash provided
by (used for) the Company's financing activities totaled $16.2 million, $34.0
million, $170.9 million and $(131,000), respectively, including cash provided by
the private sale of the Company's equity securities of $13.4 million, $34.1
million and $1.4 million in 1993, 1994 and 1995, respectively. In June and
November 1995, the Company received an aggregate of $175.8 million of gross
proceeds ($169.9 million in net proceeds) from the private sale of the Senior
Discount Notes and Note Warrants. During the first six months of 1996, the
Company financed its operations primarily from the proceeds of the offering of
the Senior Discount Notes and Note Warrants, together with interest income of
$3.5 million. In September 1996, NSP, UE and BEn signed agreements to purchase
shares of Common Stock concurrent with the closing of the Offering at an
estimated aggregate purchase price of $28,000,000. See "Direct Placements." As
of June 30, 1996, the Company had cash, cash equivalents and short-term
investments totalling $103.0 million. The Company continues to utilize cash in
its operating and investing activities and had cash, cash equivalents and
short-term investments of $88.5 million at August 31, 1996.
The Senior Discount Notes were issued at a substantial discount from their
aggregate principal amount at maturity of $325.0 million. Although interest is
not payable on the Senior Discount Notes prior to December 15, 2000, the
carrying amount of such indebtedness will increase as the original issue
discount is amortized through maturity in June 2005. Beginning June 15, 2000,
the Senior Discount Notes will bear interest, payable semi-annually, at a rate
of 13% per annum, with payments commencing December 15, 2000. No principal
payments on the Senior Discount Notes are due prior to maturity in 2005.
In 1993, 1994 and 1995, net cash used for investing activities totaled $3.4
million, $12.8 million and $110.8 million, respectively and in the first six
months of 1995, net cash used in investing activities was $36.6 million and in
the first six months of 1996, net cash provided from investing activities was
$41.7 million. The Company's investing activities consisted primarily of
purchases of network components and inventory, the construction and installation
of networks, purchases of property and equipment, and purchases, sales and
maturities of short-term investments. The $41.7 million of net cash provided by
investing activities in the first six months of 1996 was largely attributable to
proceeds of short-term investments. These proceeds exceed investments in
short-term instruments as the Company used the proceeds of short-term
investments to fund its operating activities. The Company shortened the maturity
of its portfolio of short-term investments to less than 90 days, which are
classified, accordingly, as cash equivalents.
Deployments of the Company's wireless communications networks will require
substantial additional capital. In addition, funds will be required for further
enhancements to the system software, firmware,
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hardware and other equipment to increase the speed, capacity and functionality
of the system, to enhance system productivity over time and to expand the scope
of utility and other network information services that may be offered on the
CellNet system. The Company currently estimates that funds required for capital
expenditures relating to the buildout of its KCPL and UE networks will be
approximately $22.5 million from June 30, 1996 through year end. Although the
Company is currently unable to predict the amount of expenditures that may be
incurred in connection with the establishment of other networks or the amount of
expenditures to be made after 1996 with respect to KCPL and UE, the Company
expects that cash used for the construction and installation of networks and for
the purchase of property and equipment will increase substantially as and when
the Company obtains new services agreements, and that the Company will require
significant amounts of additional capital from external sources. Sources of
additional capital may include project or conventional bank financing, public
and private offerings of debt and equity securities and cash generated from
operating activities. To provide financing for installation of the Company's
network under its UE services agreement, the Company has received a commitment
from Toronto Dominion Bank for $25.0 million for a nine-year and three-month
secured revolving credit facility on conventional bank financing terms. This
commitment is subject to standard conditions including satisfactory
documentation. The Company will pay Toronto Dominion Bank fees of up to $500,000
in connection with this facility. This facility is expected to require the
Company's St. Louis operations to meet certain revenue requirements and to limit
the capital expenditures and indebtedness of such operations. The Company
expects that a substantial portion of its future financing will be at the
subsidiary level on a project basis. The Company expects to obtain third party
financing for the construction of wireless networks, based on the projected cash
flow expected to be generated from such projects, after it has entered into a
long-term contract with a utility. The Company expects that the recurring
revenue stream from the long-term services contract will support the
amortization of debt raised for the project involved. The Company does not
anticipate deriving any significant cash from such operations for several years.
The Company believes that the net proceeds of the Offering and from the sale
of Common Stock pursuant to the Direct Placements, together with existing cash,
cash equivalents and anticipated interest income and other revenues, will be
sufficient to meet its cash requirements for at least the next 12 months.
Thereafter, the Company expects that it will require substantial additional
capital. The extent of additional financing will depend on the success of the
Company's business. The Company expects to incur significant operating losses
and to generate increasingly negative net cash flow during the next several
years while it develops and installs its network communications systems. There
can be no assurance that additional financing will be available to the Company
or, if available, that it can be obtained on terms acceptable to the Company and
within the limitations contained in the Senior Discount Note Indenture or that
may be contained in any additional financing arrangements. The Senior Discount
Note Indenture contains certain covenants that limit the Company's ability to
incur additional indebtedness. Future financings may be dilutive to existing
stockholders. Failure to obtain such financing could result in the delay or
abandonment of some or all of the Company's development and expansion plans and
expenditures, which could limit the ability of the Company to meet its debt
service requirements and could have a material adverse effect on its business
and on the value of the Common Stock. See "Risk Factors -- Substantial Leverage
and Ability to Service Debt; Substantial Future Capital Needs."
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BUSINESS
OVERVIEW
The Company designs, builds, owns and operates innovative wireless networks
capable of providing low-cost real-time status and event monitoring of up to
several million fixed endpoints. The primary application of the Company's
network is to provide NMR services to electric, gas and water utility companies
pursuant to long-term contracts. The Company is currently building wireless
networks to provide NMR services to KCPL and UE in St. Louis covering a total of
approximately 1,220,000 meters, of which more than 105,000 meters were in
revenue service as of June 30, 1996. In addition, the Company has recently
entered into separate services agreements with NSP in Minneapolis and Puget in
Washington State, pursuant to which it has contracted to build wireless networks
to provide NMR services covering an aggregate of approximately 1,015,000
additional meters, including 1,000,000 meters under the NSP Services Agreement
and an initial installation consisting of 15,000 meters under the Puget Services
Agreement. CellNet also currently provides certain network distribution
automation services to electric utility customers including monitoring and
control of power distribution equipment. CellNet's network uses radio devices
fitted to existing utility meters to read and report data from each meter every
few minutes. Through efficient use of radio frequency spectrum, the Company's
networks will have substantial additional capacity to service non-utility
applications that require low-cost monitoring of fixed endpoints, such as home
security and remote status monitoring of vending machines and office equipment.
The Company is working with industry leaders in those markets to encourage
further development of such applications.
CellNet was established in 1984 and prior to 1991 it developed and sold
non-communicating electronic meter registers with embedded memory capabilities.
In 1991, the Company decided to phase out such activities and focus on the
development of NMR services and related networks.
CellNet believes it has a first-to-market opportunity to offer wireless data
communications services on a commercial scale for utility and selected
non-utility applications. CellNet's network is distinguished by the following
advantages:
- infrastructure and operating costs sufficiently low to permit cost
effective utility meter reading and other fixed point monitoring
applications;
- highly efficient use of spectrum -- the equivalent of approximately a
single voice channel is needed to operate a network;
- proprietary software specifically designed to manage real-time data
collection from up to several million endpoints; and
- open systems architecture designed to allow new applications to be added
to the CellNet system.
Utilities are under increasing regulatory and competitive pressures. CellNet
offers an outsourced solution which enables utilities to offer time-of-use
pricing plans, peak demand monitoring, real-time response to billing inquiries,
real-time power outage detection, on-demand meter reads, customized billing
functions and distribution automation. The Company believes its NMR services
provide utilities with an effective solution to many of the demands created by
the increased regulatory and competitive pressures within the utility industry.
CellNet's system allows utilities to respond effectively to regulatory changes,
reduce costs, defer capital spending and enhance their operating efficiencies.
The Company is actively targeting those utilities which operate in the 60
largest MSAs, which represent a majority of the 225 million electric, gas and
water meters in the United States. The Company believes that utilities operating
in these densely populated areas will be the first to experience heightened
competitive and regulatory pressures, and as such, will be most likely to
benefit from the Company's services. The Company believes that these competitive
and regulatory pressures have prompted utilities in the United States to
undertake increased measures to improve their efficiency and service levels.
CellNet's proprietary technology enables the Company to make extremely
efficient use of spectrum. As a result, relative to other wireless services, the
Company has been able to acquire frequency at a very low
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cost. The Company had capitalized $762,000 for license fees and related
acquisition expenses attributable to spectrum acquisition costs as of June 30,
1996 and has acquired 50 spectrum licenses in 42 of the top 60 MSAs. The Company
believes that it will be able to obtain additional spectrum at reasonable cost
if required. The Company has focused its spectrum acquisition strategy on these
top 60 markets. See "Risk Factors -- Access to Radio Frequency Spectrum;
Regulation by the Federal Communications Commission."
The Company believes its spectrum-efficient networks will have substantial
excess capacity to service non-utility applications requiring low-cost
monitoring of fixed endpoints. Potential non-utility applications of the
Company's systems include home security, remote status monitoring of vending
machines, office equipment, parking meters and other equipment, and remote
control of traffic lights. The Company is working with industry leaders such as
Ameritech, Hewlett Packard, Honeywell, Inc., Real Time Data, Inc., and
Interactive Technologies, Inc. to develop such applications. The Company
believes that its utility networks will provide an excellent platform to
position the Company as a leading wholesale provider of wireless data
communications services for such non-utility applications.
The Company believes that a significant international market also exists for
its services with several hundred million electric, gas and water meters outside
of the United States. The Company's strategy is to pursue international markets
through a proposed joint venture with BEn. The Company is currently exploring
projects with electric utilities in the U.K., Singapore and Thailand.
CHANGES IN THE ELECTRIC UTILITY INDUSTRY
The utility industry is in transition. The traditional utility structure,
consisting of a vertically integrated system operating as a natural monopoly
with rates set in relation to cost, has presented utilities with little
incentive to improve service quality or operating efficiency. Similar to the
regulatory evolution that has already taken place in the transportation and
telecommunications industries, customer demands and regulatory mandates by
Federal, state and local governments are forcing utilities to transform
themselves from regulated monopolies into competitive enterprises. While
regulatory initiatives vary from state to state, many involve a shift from
rate-of-return ratemaking, in which a utility's rates are determined by its
return on assets, to performance-based ratemaking, in which a utility's rates
and profitability are based upon its cost, efficiency and service quality. The
gas utility industry has already been transformed. Today, commercial and
industrial customers can negotiate to purchase gas directly from producers or
brokers, while utilities are required to provide transportation of such gas to
customers' facilities.
The restructuring of the electric utility industry is underway. This
restructuring is focused on opening the electric power production industry, in
certain markets, to full competition in the next few years, and ultimately
providing customers access to multiple suppliers. Federal legislation, such as
the National Energy Policy Act of 1992 (the "EP Act"), has eased restrictions on
independent power producers in an effort to increase competition in the
wholesale electric power generation market. As a result, the construction of
cogeneration facilities and independent power production facilities has been
increasing, creating lower cost alternatives for large commercial and industrial
customers. Further, the EP Act authorized the Federal Energy Regulatory
Commission ("FERC") to mandate utilities to transport and deliver, or "wheel"
energy for the supply of bulk power to wholesale, but not retail, customers. In
order to facilitate the transition to increased competition in the wholesale
power markets made possible by the EP Act, in March 1995 FERC issued a Notice of
Proposed Rulemaking that would require utilities to (i) establish open access to
all wholesale sellers and buyers, (ii) offer power transmission service
comparable to what they provide themselves and (iii) take power transmission
service under the same tariffs offered to other buyers and sellers.
The EP Act granted individual states the sole authority to mandate the
wheeling of electric power to retail customers. Regulatory and legislative
activity at the state level regarding retail wheeling has recently increased
dramatically. California is the furthest along in implementing retail wheeling,
and pursuant to the California Public Utility Commission's plan (which is still
subject to legislative approval), utilities will be required to offer an initial
group of customers the ability to choose their electricity supplier in 1998,
with all customers having this ability by 2003. Regulators in New York,
Massachusetts, Michigan, New Hampshire and Vermont have all ordered utilities to
file restructuring plans which would address, among other
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competitive issues, a schedule for implementing retail wheeling over the next
several years. Other states are in various stages of considering the
implementation of retail wheeling, both at legislative and regulatory levels.
The trend from rate-of-return towards performance-based ratemaking, the
movement towards retail wheeling and heightened competition are leading many
utilities to implement initiatives in the following areas:
INCREASE OPERATING EFFICIENCIES. Utilities are seeking to reduce operating
costs through increased automation and improved information processing. In
particular, many utilities have focused on the inefficiencies of the traditional
once-a-month drive-by or walk-by meter reading process. In addition to the
direct expense of monthly meter reading, manual processes create significant
indirect expenses. These include responding to customer billing service
inquiries and complaints, meter reading errors, missed meter reads, special
appointment meter reads to determine and correct errors, and service calls to
discontinue and to initiate service. Utilities are also seeking to improve
detection of energy theft, which is estimated to cost many millions of dollars
per year.
DEFER CAPITAL EXPENDITURES. Utilities must build plant capacity to meet the
anticipated peak demand for energy on a daily and seasonal basis with an excess
capacity margin to respond to extraordinary demand peaks caused by extreme
weather conditions. However, power plant expansions are costly and, under
performance-based ratemaking, investments in such capacity might not be fully
compensated by ratemaking authorities. Reducing peak demand allows utilities to
defer or avoid additional plant construction or costly peak power generation
with standby power generating facilities. Unlike phone companies, which offer
time-of-use rates to discourage consumption during peak periods, utilities are
currently unable to implement time-of-use plans for any but their largest
customers due to inadequate real-time information about customer power usage.
IMPROVE SERVICE QUALITY. In response to the emerging competitive
environment, utilities are seeking to improve and differentiate their services
by offering their customers different billing plans, remote move in/ move out
meter reading, multi-location bill aggregation and other innovations. In
addition, utilities are seeking to respond to regulatory and public pressure to
improve their ability to detect and respond to power outages.
To implement time-of-use pricing and other sophisticated pricing plans,
retail wheeling, real-time power outage detection and the other services
described above, electric utilities will require extremely accurate and timely
data regarding energy consumption by customers. However, adequate automated
systems have not been available. Some utilities have simplified and automated
the manual meter reading process to a limited degree through the use of
hand-held and drive-by meter reading equipment, commonly referred to as
automated meter reading ("AMR"). An AMR device polls meters on a meter reading
route, usually on a monthly basis, and the consumption data is then transmitted
to the utility's information system. Periodic meter readings, even when
"automated" by such equipment, do not provide the necessary data to implement
these regulatory and competitive initiatives.
THE CELLNET SOLUTION
CellNet has designed, developed and is now commercially deploying in scale
the first wireless data communications network designed to provide high-volume
real-time status and event monitoring of up to several million endpoints. Since
the primary application of the network is to provide NMR services to utilities,
the network has been designed to meet the utility industry's cost requirements,
information needs and rigorous design specifications. CellNet's network uses
radio transmitters fitted to existing meters to read and report data from each
meter every few minutes. CellNet uses inexpensive radio devices and proprietary
software in its networks, deploys certain network components primarily on
utility power poles, and requires minimal frequency spectrum to operate its
system. As a result, the Company believes that for large scale installations it
will be able to provide basic NMR services at a cost to the utility of less than
$1 per month per meter.
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CellNet's system enables utilities to better serve their customers by
offering enhanced services such as:
- time-of-use and demand energy rates;
- real-time response to billing inquiries;
- real-time power outage detection, location and notification;
- remote verification of "power on" and outage restoration;
- on-demand meter reads;
- customer-selected billing dates and consolidated, multi-location billing;
- automatic move in/move out meter reading;
- distribution automation; and
- access for utility customers to consumption, rate and billing information
via the Internet.
In addition, CellNet's system allows utilities to respond effectively to
regulatory changes, reduce costs, defer capital spending and enhance their
operating efficiencies, thereby deriving benefits in the following areas:
RESPOND EFFECTIVELY TO REGULATORY INITIATIVES. If retail wheeling is
adopted, consumers will contract to buy electricity from specific power
providers, but all such power providers will supply electricity to the local
electrical network, which will then distribute power to all consumers. Monthly
meter reading allows power providers to determine aggregate usage, but not to
determine time of use, a critical requirement to implement retail wheeling. By
providing real-time data on each consumer's power usage, CellNet enables
utilities to effectively implement retail wheeling and avoid the installation
across their territories of individual time-of-use meters, which could cost more
than $150-$200 at each service endpoint.
REDUCE CAPITAL INVESTMENTS. CellNet's NMR services will enable utilities to
adopt time-of-use billing plans, which can be used to motivate consumers to
shift discretionary consumption to off-peak periods. Reducing peak demand may
enable utilities to defer or avoid costly plant construction. In addition, by
contracting with CellNet to build and maintain the wireless network, the
utilities avoid both the technological risk and capital outlay of developing and
deploying NMR systems.
REDUCE OPERATING COSTS AND ENHANCE OPERATING EFFICIENCIES. Through
automation, CellNet's wireless data network helps utilities to reduce the direct
and indirect operating costs associated with manual meter reading. In addition,
CellNet's network enables distribution automation capabilities which include
monitoring and control of power distribution equipment as well as meters. Using
the CellNet network, utilities can manage many aspects of the delivery of
electricity, including the ability to detect power outages, monitor and control
circuit breakers, monitor the load on transformers, control circuits to isolate
faults on feeder power lines, and switch automatically among capacitor banks to
produce constant voltage levels. As a result, problems may be detected earlier
and solved more quickly, operations may become more reliable and service fleets
may be more efficiently deployed and dispatched as outages can be more readily
pinpointed within the utility's service territory. Such capabilities also enable
a utility to reduce energy theft through quick detection of meter tampering.
RESPOND TO COMPETITIVE PRESSURES. CellNet's networks enable utilities to
profile their customers' power usage and to enhance and differentiate service
offerings through innovative billing plans and other programs. In addition,
utilities may elect to provide non-utility services connected with the CellNet
network, as such services are developed. These services could enable utilities
to obtain new revenue sources and, through bundling of such applications,
further differentiate their services.
BUSINESS STRATEGY
The Company intends to deploy and operate a series of wireless data
communications networks pursuant to long-term contracts with utility company
customers and to earn recurring revenues by providing NMR services to the
utilities and by using the network to support a variety of non-utility
applications.
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Principal elements of CellNet's strategy are to (i) focus on utility markets,
(ii) promote development of non-utility applications, (iii) form strategic
alliances, (iv) pursue international expansion and (v) outsource a substantial
portion of its manufacturing and installation activities.
FOCUS ON UTILITY MARKETS
The Company is initially targeting those utilities which operate in the 60
largest MSAs, which represent a majority of the 225 million electric, gas and
water meters in the United States. The Company believes that utilities operating
in these densely populated areas will be the first to experience heightened
competitive and regulatory pressures, and as such, will have the greatest need
to adopt NMR. These MSAs also offer the greatest potential markets for
non-utility applications. The Company is also pursuing selected utilities
outside of the top 60 MSAs.
PROMOTE DEVELOPMENT OF NON-UTILITY APPLICATIONS
Through the efficient use of spectrum, each CellNet network will have excess
capacity after serving all of a utility's NMR and distribution automation
requirements. The Company will seek to use its networks' excess capacity to
support non-utility services that would benefit from the availability of a
low-cost wireless network and that would be offered by CellNet's corporate
clients, including a utility or its affiliates. The Company is working with
leading manufacturers and application developers in order to promote the
development of products and services capable of using the CellNet networks.
Potential applications include the following:
- security services for home security, fire alarm and personal safety
devices;
- remote status monitoring for vending, postage, change and commercial
washing machines, office and factory equipment, and intelligent home
devices, such as remote control thermostats; and
- intelligent transportation systems for traffic lights, parking meters and
toll booths.
The Company believes that its low monthly network service prices will
substantially increase the likelihood of market acceptance of existing
applications and enable potential new applications. Wireless home security
systems are an example of an existing application that might achieve greater
market penetration if equipment and service costs were reduced by using a
CellNet network. CellNet is working with Interactive Technologies, Inc., a
leading provider of wireless home security systems, to develop an affordable
security system that would communicate over a CellNet network. Additionally,
remote monitoring of vending machines would substantially reduce the cost of
servicing those machines. Real Time Data, Inc. ("RTD") has developed a vending
machine monitoring device which tracks product sales and inventory. RTD and the
Company have been working together to integrate RTD's devices with the Company's
networks and expect to begin commercial trials within twelve months.
FORM STRATEGIC ALLIANCES
The Company is forming strategic alliances with leading companies and
certain utilities to promote the development and joint marketing of
complementary products or services for utility applications and the development
of non-utility applications whose traffic would be carried on CellNet networks.
CellNet is currently working with the following leading companies.
AMERITECH AND WISCONSIN ELECTRIC POWER COMPANY. The Company is working with
Ameritech and its partner, Wisconsin Electric Power Company, on the development
and joint marketing of a high-end, two-way, in-home terminal for remote control
of home security, lighting, environmental and other home systems.
GENERAL ELECTRIC COMPANY ("GE"). GE and the Company have entered into a
non-binding memorandum of understanding ("MOU") to jointly market to utilities,
on a non-exclusive basis, automated NMR solutions that incorporate both parties'
products. GE has installed CellNet radio devices on new GE meters on a trial
basis.
HEWLETT-PACKARD ("HP"). The Company and HP are working on a number of
projects for cooperative marketing of utility applications such as systems
integration, data storage, transformer load analysis, energy
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theft analysis, power quality measurement, and equipment and status monitoring.
This non-exclusive relationship, pursuant to a non-binding MOU, provides for
joint marketing, technology exchange and joint proposals to utilities.
HONEYWELL, INC. Honeywell has entered into a non-binding MOU with the
Company relating to the creation of "smart communicating thermostats" that would
serve as the key elements in a home-based energy management system. The parties
also plan to collaborate on identifying other in-home automation products that
could leverage Honeywell's extensive line of environmental control products with
CellNet's wireless technology.
INTERACTIVE TECHNOLOGIES, INC. ("ITI"). The Company has entered into an
agreement with ITI, a leading provider of wireless, in-home security systems, to
develop moderately-priced security systems based on ITI's existing security
devices and CellNet's wireless technology.
RTD. As described above, RTD, a developer of remote vending machine
monitoring systems, has entered into an agreement with the Company to integrate
its vending machine monitoring system with the Company's wireless network
technology.
CONNEXT, INC. ("CONNEXT"). The Company has entered into a joint marketing
agreement with ConnexT, a subsidiary of Puget which provides network-based
application services to utility companies, whereby the parties agree to assist
each other in marketing their respective products and services to both
companies' existing and prospective utility customers.
PURSUE INTERNATIONAL EXPANSION
With several hundred million utility meters located outside of the United
States and with comparable opportunities to use the CellNet system for utility
and non-utility applications, the international market offers significant
additional opportunities for the Company. Although it has concentrated almost
all of its efforts to date on the domestic market, the Company has begun
exploring international market opportunities. The Company has undertaken limited
market investigations in a number of countries including the U.K., Singapore and
Thailand, and continues to receive numerous inquiries from utilities and others
expressing interest in the deployment of the CellNet system outside of the
United States. The Company's strategy is to pursue these markets through a
proposed joint venture with BEn.
In September 1996, the Company entered into a letter of intent ("Letter of
Intent") with BEn to form an international joint venture (the "Joint Venture")
that would have the exclusive right to deploy and operate the Company's wireless
data communications system in countries outside of the United States. The Joint
Venture would be 50% owned by each party and would be operated independently.
The Company would license its technology to the Joint Venture and the Joint
Venture would sublicense that technology to individual local operating project
entities in which the Joint Venture would invest and generally maintain
operating control. The managing board of the Joint Venture would be composed of
an equal number of representatives from each party and would review and approve
all major business decisions. Formation of the Joint Venture is subject to the
negotiation and execution of definitive agreements between the parties upon
mutually acceptable terms. While both parties have agreed to work diligently, on
an exclusive basis, to conclude such arrangements within a three-month period
following execution of the Letter of Intent, no assurance can be given that the
parties will be able to do so within that period, or at all.
In considering international expansion opportunities for the CellNet system,
the Joint Venture intends to target markets characterized by (i) a
well-developed utility infrastructure, (ii) demand for low-cost monitoring,
(iii) a progressive regulatory climate favoring increased efficiency, customer
service and competitive access and (iv) well-capitalized, established and
reliable local partners.
The Company's principal international activity to date has been in the
United Kingdom, where deregulation and privatization initiatives have resulted
in open market competition in a pattern which may be duplicated elsewhere. The
Company believes that the CellNet system can be adapted for use in the United
Kingdom with appropriate modifications to the system's radio devices and other
system equipment.
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The Company is seeking to obtain spectrum licenses with the assistance of local
regional electric companies ("RECs") and others, and has initiated discussions
with a number of RECs for the deployment of pilot and full-scale NMR systems.
Singapore and Thailand are estimated to have approximately 3.0 million and
8.0 million existing utility meters (of which 2.0 million are in metropolitan
Bangkok), respectively. The Company has had preliminary discussions with
utilities and potential local partners to enter into NMR services agreements in
these markets.
OUTSOURCE SUBSTANTIAL MANUFACTURING AND INSTALLATION ACTIVITIES
The Company outsources a substantial portion of its manufacturing and
installation activities. As a result, CellNet leverages the size and
capabilities of key suppliers to take advantage of manufacturing economies of
scale, reduce component pricing through bulk purchasing, and have access to
manufacturing capacity and resources to meet highly variable production
requirements. The Company will retain overall network construction
responsibility, but intends to rely on local subcontractors for installation,
primarily those who have long working relationships with CellNet's utility
customers. The Company believes that outsourcing installation activities will
reduce the start-up time and the Company's investment risk for each project.
WIRELESS COMMUNICATIONS INDUSTRY OVERVIEW
CellNet operates within the wireless communications industry, which includes
personal communications services ("PCS"), specialized mobile radio ("SMR"),
microwave, cellular (including cellular digital packet data ("CDPD") ), paging
and multiple address radio system ("MAS") segments, among others. The two
principal categories of commercial wireless applications are voice and data
transmission. Within those broad categories, service requirements for specific
applications vary substantially in terms of quality, speed, capacity, mobility,
two-way capability, geographical coverage and cost. In general, products which
provide for greater mobility and capacity are more expensive. As a consequence,
the market for wireless services is segmented, matching specific service
requirements with the most suitable wireless technology. The following chart
illustrates the relative positioning of these applications.
[CHART]
[Graphical representation of the relative positions of segments within the
wireless communications industry based upon two parameters: (i) relative network
capacity to handle data, voice and video applications and (ii) relative user
device mobility ranging from fixed to mobile. The chart suggests that monthly
endpoint cost increases with increasing network capacity and user/device
mobility.]
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CellNet's system is designed to utilize small amounts of spectrum and to
provide low-cost, high-volume, real-time monitoring of fixed endpoints. The
Company believes other telecommunications applications or market segments are
not as well suited for use in NMR and similar applications except in limited
cases such as high-use industrial metering, where the increased equipment and
service costs might be justified by high rates of power consumption, or in
certain rural applications, where the cost of installing and operating a fixed
network on a per meter basis might be higher. Competing service applications are
therefore expected to develop largely within the segment of the wireless
communications market in which CellNet now operates.
CellNet's network architecture and the nature of the markets that it serves
differ significantly from traditional cellular companies, thereby resulting in
potential advantages for CellNet in providing NMR services which include:
LOWER MARKET ADOPTION RISK. CellNet will only construct a network after
entering into a long-term relationship with a utility or other client. It
therefore does not need to finance construction of networks in anticipation of
obtaining customers.
LOWER CHURN/PENETRATION RATE. Unlike the customer bases for other wireless,
voice and data service providers where customers can easily switch to a
competitive provider, CellNet's subscriber endpoints do not experience frequent
change or "churn" and the Company gains 100% penetration within each contracted
market. The marketing and administrative costs typically associated with churn,
and the capital risk associated with variable penetration rates, are thus
eliminated. Further, due to inflation escalation clauses in the Company's
services agreements, the Company believes that the value of its revenue per
endpoint in real terms will likely be maintained over time.
HIGHER CUSTOMER CREDIT QUALITY. CellNet receives its contract service
revenue directly from utilities rather than from individual subscribers. As a
result, the Company experiences less credit risk and generally lower billing
expenses than other wireless communication providers.
MORE EFFICIENT DEPLOYMENT. Cellular and PCS cell sites are frequently
costly and can be difficult to obtain. The modularity of the CellNet system and
the efficient size of its components facilitate inexpensive deployment of
scalable networks. The Company's system components have been designed to fit on
utility power poles or, where necessary, on buildings or other structures. As
the electric utility is its primary customer, CellNet has access to utility
poles, transmission towers, and various properties for deployment. Radio
devices, which represent the bulk of network components, are simply "plugged in"
as newly retrofitted meters to replace an existing meter. The Company's MCCs and
CellMasters (as defined below) typically take two to five hours to install,
providing a network which can be deployed swiftly and efficiently. The system is
also scalable, thereby allowing coverage regardless of the size of the utility
service area.
MORE EFFICIENT SYSTEM DESIGN. Cellular telephone networks are designed for
peak usage, with a large percentage of the network underutilized for much of the
day. The CellNet network gathers information from its endpoints consistently
around the clock and therefore does not encounter the peak usage problems
typically experienced by cellular phone service providers.
LOWER FREQUENCY COSTS. Cellular, PCS and other two-way wireless systems
typically require a large amount of spectrum which can be very costly to obtain.
Because the Company is able to utilize a small amount of frequency for a wide
metropolitan area (the equivalent of approximately a single cellular voice
channel), it is not subject to the substantial frequency costs associated with
wireless communications companies.
TECHNOLOGY
CellNet's NMR system has been developed specifically to offer real-time,
low-cost, high volume wireless data communications services. Such services
require (i) inexpensive endpoint devices, (ii) the ability to support a wide
range of applications, (iii) reliable, consistent service over a wide area, (iv)
the capacity to
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handle simultaneous transmission and processing of a large volume of data, (v)
integrated communications and applications support software, and (vi) efficient
use of bandwidth to minimize spectrum acquisition costs.
To meet these cost and data handling requirements, CellNet has designed a
system which uses a two-tiered wireless network hierarchy managed by a central
system control center which collects, concentrates, forwards and manages data
from many fixed endpoints. The elements of this communications hierarchy
include:
- endpoint devices which transmit data relating to the equipment they are
monitoring or controlling such as utility meters;
- MicroCell Controllers ("MCCs") which manage the endpoint devices in their
local coverage area (as part of a local area network or "LAN") and which
collect and process data transmissions from such endpoint devices;
- CellMasters which gather data from MCCs located in a wide coverage area
(as part of a wide area network or "WAN") and which communicate that data
to a central System Controller; and
- a System Controller which manages the entire network and operates the
application gateways for integration with the client's own data systems.
[CHART]
[Schematic diagram of CellNet's wireless data communications system,
illustrating the heirarchy from endpoint radio devices to System Controllers.]
ENDPOINT DEVICES. The subscriber unit of the CellNet system is a relatively
inexpensive low-power radio device which is attached to a stationary data
source, such as a utility meter, to collect and transmit information to an MCC
and typically includes a transceiver or transmitter. The Company has developed
endpoint devices for electric utility applications which may be retrofitted to
each of the four major types of utility meters presently being used by electric
utilities in the United States. These endpoint devices currently collect time of
use, customer demand and load profile data from an electric meter and transmit
such information to the local area MCC once every few minutes. Electric meter
endpoints are also able to transmit "distress signals" indicating meter
tampering or power outages. The Company is also developing
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endpoint devices for gas and water meters, which it expects to introduce by the
end of 1996 and 1997, respectively, and two-way radio devices for advanced NMR
applications. The Company is also working with industry leaders to develop
endpoint devices for non-utility applications. See "-- Business Strategy -- Form
Strategic Alliances."
MICROCELL CONTROLLERS. An MCC is a device which is mounted on a utility
pole or other fixed location in the center of a microcell and which routes data
from all of the endpoints in the microcell to the CellMaster via the WAN. The
number of endpoint devices in each microcell depends on a number of factors,
including topography and population density. In addition to functioning as a
router, the MCC is an intelligent node in the distributed control system and has
a powerful microprocessor which enables it to perform data storage, packet
routing and voltage and power outage monitoring for endpoint devices in its
microcell area. Each MCC also has extensive network management capabilities
which permit new endpoint devices to be added automatically without interfering
with the handling of data from existing endpoints. This architecture allows
CellNet to significantly reduce the cost of the endpoint device itself and
increases the potential data throughput of an entire network, as most of the
intelligence is provided at the MCC level. The MCC communicates with the
endpoint devices in its microcell in the 902-928 mHz band, which is an
unlicensed portion of spectrum.
CELLMASTERS. A CellMaster generally communicates with anywhere from 50 to
200 MCCs over an area typically covering 20-75 square miles (2.5-5-mile radius).
Each CellMaster incorporates network management software which manages traffic
scheduling, radio frequency power controls and signal monitoring. CellMasters
are built with fully redundant hardware, are ruggedly constructed for extreme
weather, and can perform automatic switchovers between system components in case
of failure. The WANs covering specific utility customer service areas are
composed of a number of CellMaster units. A CellMaster communicates with the
MCCs using a radio link in the 928/952 mHz band, which is a licensed portion of
spectrum.
RTUS. Remote Terminal Units ("RTUs") monitor and operate equipment at
specific points in a utility's distribution system. CellNet integrates a two-way
radio device into RTU equipment manufactured for a utility by other parties,
which enables remote operation of these RTUs. By providing a means of remote
monitoring and controlling of power distribution equipment, CellNet's system
enables utilities to monitor and control circuit breakers, monitor the load on
transformers, control circuits to isolate faults on feeder power lines, and
switch automatically among capacitor banks to provide constant voltage levels.
SYSTEM CONTROLLERS. The System Controller provides the link from the
CellMasters to the client's corporate data network and serves as the network
management platform. The System Controller consists of a cluster of UNIX-based
workstations operating over a network using standard TCP/IP protocols. Such a
configuration is extremely scaleable as it can be expanded to meet system
requirements simply by adding additional workstations. The System Controller
supports a variety of radio-based and leased line data links to each CellMaster
in the network. These links are redundant for added reliability. At the local
systems operations center, the System Controller provides customized gateways to
existing client data systems. The System Controller enables CellNet's on-site
system operator, who manages the network for CellNet's utility clients, to
manage traffic, monitor performance and configure network devices. As
non-utility applications are deployed, the Company may integrate additional
server devices to manage such non-utility applications at the System Controller
level.
CellNet's MCC and CellMasters are equipped with back-up batteries and power
supply. CellNet's System Controllers also have available back-up power
capability.
The Company also operates the CellNet Central Operations Room ("CCOR") at
its San Carlos, California facilities which monitors performance of all regional
System Controllers and is able to assume operations of the regional networks if
the local System Controller experiences a failure. The Company operates a
private national data network to link these regional sites using third-party
carrier services.
SYSTEM SOFTWARE. CellNet believes that one of its key enabling technologies
is the software which facilitates operation of a large-scale NMR system. While
certain "off-the-shelf" networking approaches
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work well in a wireline environment with expensive computers and workstations,
the ability to operate in a wireless environment under extreme conditions at low
cost has required the development of a sophisticated network architecture.
CellNet's network solution is based on distributed computing and messaging
technologies which enable intelligence to be decentralized and ensure efficient
use of spectrum. The CellNet Network Operating System ("NOS") is a proprietary
system that provides sophisticated network communication services between the
System Controller and the CellMaster units, RTUs, MCCs and endpoint devices. It
is a scaleable system that has been specifically designed to ultimately handle
millions of endpoints in a single regional network. Extensive real-time
diagnostic and network management features manage traffic, monitor system
performance and enable network configuration as data is collected and delivered
to users. The CellNet NOS is able to maintain fast response times and system
capacity by distributing a significant portion of the network's computing power
at the MCC level.
The NOS offers the benefits of incrementally adding processing power as well
as supporting remote operations required for redundancy and backup operations.
As such, an entire regional system can be switched quickly from one System
Controller to another in the event of failure. The CellNet NOS is also able to
segregate network data from multiple non-utility applications and provide such
data to non-utility clients over additional database interfaces. Each CellNet
system is customized with application-specific gateways which enable the
interface between the System Controller and the client's existing corporate data
systems. CellNet has delivered gateways to support the data requirements for
billing automation, electric distribution automation, customer service call
center automation and load management programs. The flexibility provided by this
NOS architecture will enable the system to offer services for many new
applications unrelated to NMR services such as distribution automation and
non-utility applications. By building on a general network capability the
Company can extend its services to many other utility and non-utility services
without incurring significant costs of re-designing the underlying
communications architecture. Each new application is expected to be added with
only incremental development, which will be focused primarily on
application-specific endpoint devices and system gateways. Furthermore, since
its design is independent of the specific endpoint radio devices, the Company
believes that this architecture can evolve to incorporate future advances in
wireline and wireless communications. The Company has made a substantial
commitment to establishing a strong competitive position, having invested over
240 staff-years in the design, development and testing of its system.
EFFICIENT SPECTRUM UTILIZATION. CellNet's network components utilize both
licensed and unlicensed radio frequency bands. The CellNet WAN operates in the
928/952 mHz frequencies which are licensed by the FCC in 25 or 12.5 kHz channel
bandwidths for full duplex operation and point-multipoint data services. CellNet
has developed a proprietary technology, subject to issued and pending patents,
which permits a narrowband radio system to derive 10 subchannels from a single
25 kHz channel. By reusing subchannels in a manner similar to that used by
cellular phone systems, CellNet believes it can grow a system to cover a large
region and expand capacity incrementally as needed. As a result, CellNet is able
to operate its wide area networks in the spectral equivalent of approximately a
single voice channel. CellNet has obtained 50 spectrum licenses in 42 of the top
60 MSAs and believes that it will be able to obtain additional spectrum as
required.
MANUFACTURING AND OPERATIONS
The Company currently outsources the manufacture and assembly of its high
volume, low cost equipment such as endpoint radio devices. For instance, Jabil
Circuit Inc. ("Jabil"), one of the largest electronic equipment subcontractors
in the United States, is assembling endpoint radio devices for electric meters
for the Company. CellNet's supply strategy is to leverage the size and
production capabilities of Jabil and other key suppliers to take advantage of
manufacturing economies of scale, reduce component pricing through bulk
purchasing and obtain access to manufacturing capacity and resources to meet
highly variable production requirements.
CellNet presently focuses its limited internal manufacturing resources on
final assembly and testing of its lower volume, more complex equipment,
including System Controllers, CellMasters and MCCs. CellNet assembles these
network components, then custom configures and tests such components to meet
stringent
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utility industry field equipment standards. Samples of all products, whether
internally or externally built, are thermally and electrically stress-tested to
measure product quality and reliability. Test results are used both to monitor
production quality and to provide information to CellNet's development
organization for further design enhancements.
CellNet has developed and is continuing to improve a high-volume, low-cost
process to retrofit electric utility meters with endpoint radio devices without
causing a meaningful disruption of service to a utility's customers. The
Company's proprietary system for retrofit information management analyzes
operating data, generates reports, and provides this information to utilities
for inclusion in their databases. The Company installs its endpoint radios on
both new and previously installed electric meters at its retrofit facilities in
Kansas City, Missouri. The Company expects that similar regional retrofit
centers will be established as needed to meet the network installation
requirements under new services agreements with utilities, although a retrofit
center can support more than one network deployment.
The Company's reliance on third-party manufacturers, including currently
single manufacturers for radio devices and for printed circuit boards, involves
a number of additional risks, including the absence of guaranteed capacity and
reduced control over delivery schedules, quality assurance, production yields
and costs. The Company relies on sole and limited source vendors and
subcontractors for certain subassemblies and components which involves certain
risks, including the possibility of shortages and reduced control over delivery
schedules, manufacturing capability, quality and cost. See "Risk Factors --
Dependence on Third-Party Manufacturers; Exposure to Component Shortages."
SYSTEM DEPLOYMENT AND OPERATION
For each of its network deployments, the Company provides full
implementation services to its clients, including system design, site selection,
frequency licensing, equipment installation, software modification, systems
integration and project management.
The modular design of the CellNet system and the efficient size of its
components facilitate inexpensive deployment of scalable networks. Most of the
system components have been designed to fit on utility power poles or, where
necessary, on buildings or other structures. The majority of the network is
simply "plugged in" as the newly retrofitted meters replace existing meters. The
MCCs and CellMasters take typically two to five hours each to install, providing
a network which can be deployed swiftly and efficiently. The system is also
scalable, thereby allowing adequate coverage regardless of the size of the
utility service area.
Field engineering teams are responsible for the installation and deployment
of all of the Company's networks. Once a services contract has been signed,
CellNet places a local project manager in charge of the installation. The
project manager hires local personnel, coordinates activities with various
departments within the utility, and draws on CellNet's corporate staff to
perform specialized services. CellNet's corporate staff is responsible for RF
network design, system software installation and integration, training of local
systems administration personnel, FCC licensing requirements, and remote systems
monitoring. CellNet's local personnel are responsible for RF engineering and
site testing, site selection, routine software administration and maintenance,
selection and training of subcontractors, coordination of meter retrofitting,
materials handling, and office administration. During the two to four-year
installation phase of each project, local personnel for the project employed by
CellNet numbers from five to nine people, depending on the size and anticipated
speed of each deployment. Meter changeout and system equipment installations are
generally carried out by subcontractors.
Following system deployment, a system management team of typically eight to
ten CellNet personnel (for deployments the size of KCPL and UE) will remain on
site for the duration of the contract to handle day-to-day operations and
routine utility requests. This group will be supported by CellNet's headquarters
or regional offices, if any, that will provide 24 hour troubleshooting support
as well as additional technical expertise that can be quickly dispatched if
needed.
The Company also intends to provide substantial customer support, including
on-going field support and critical centralized network support functions
through regional network control centers. Currently, the Company is providing
sophisticated network monitoring from its headquarters in San Carlos,
California.
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CURRENT UTILITY SERVICES AGREEMENTS
KANSAS CITY POWER & LIGHT COMPANY. In August 1994, CellNet entered into a
Utility Services Agreement with KCPL (the "KCPL Services Agreement") for the
provision of NMR and other data communications services over a network to be
built, installed and operated by CellNet. KCPL is paying CellNet for certain
installation costs based upon the number of meters in revenue service and
monthly service fees based on the number of meters in service being used to bill
customers. The KCPL Services Agreement covers approximately 420,000 meters
within KCPL's service territory. CellNet is obligated to provide certain NMR
services, including basic meter reading, time-of-use, demand, connect/disconnect
(move in/move out), load profile and real-time reading, as well as outage and
tampering notification and certain other distribution automation services.
CellNet retains ownership of its network system and all related equipment. KCPL
retains ownership of its meters, RTUs and all metering and other data collected
from KCPL's equipment. Upon the third anniversary following complete deployment
of the system, KCPL will have the option to purchase from CellNet the radio
transmitters and transceivers attached to KCPL's meters and RTUs at prices
intended to allow CellNet to fully recover its then unamortized endpoint costs
(meter and RTU radio device), based upon agreed prices for such equipment.
The term of the KCPL Services Agreement is 20 years. KCPL has the right to
terminate the KCPL Services Agreement on its eighth, eleventh, fourteenth and
seventeenth anniversary, subject to six-months prior written notice and to the
making of specified termination payments intended to allow CellNet to recover
its then unamortized endpoint costs (meter and radio RTU device), based upon
agreed prices for such equipment. KCPL can also terminate the KCPL Services
Agreement for cause in the event of a material and continuing failure on
CellNet's part to meet agreed NMR performance standards on a consistent basis
over agreed time periods, subject to certain rights to cure any such failure.
CellNet is entitled to install and operate its network equipment on KCPL's
property under joint use arrangements. The cost of obtaining any necessary third
party installation sites will be shared equally by the parties. CellNet may use
the network to provide services to third parties both during and after the term
of the KCPL Services Agreement.
UNION ELECTRIC COMPANY. In August 1995, CellNet entered into a Utility
Services Agreement with UE (the "UE Services Agreement") for the provision of
data communications services over the Company's network for all electric meters
within defined limits of UE's service area in the city of St. Louis and certain
surrounding counties. UE is paying CellNet for certain installation costs and
monthly service fees based on the number of installed meters and RTUs. The UE
Services Agreement now covers approximately 800,000 electric meters within such
territory. CellNet is obligated to provide certain NMR services, including basic
meter reading, demand, load profile, connect/disconnect, time-of-use and
real-time reading, as well as outage and other notification services. During the
term of the UE Services Agreement, UE has the option to acquire certain gas NMR
services from CellNet and receive an expanded scope of electric NMR services.
CellNet retains ownership of its network system and all related equipment. UE
retains ownership of its meters, RTUs and all metering and other data collected
from UE's equipment.
CellNet is entitled to install its network equipment on UE's property
without cost provided the use of such sites is exclusively for the provision of
services to UE. The cost of obtaining any necessary third party sites will be
shared equally by the parties. CellNet may use the network to provide services
to third parties for a period of 30 years subject to the payment to UE of
reasonable rental rates. The term of the UE Services Agreement is 20 years with
an option on UE's part to extend it for two additional periods of five years
each on substantially similar terms. UE has the right to terminate the UE
Services Agreement on its seventh, twelfth and seventeenth anniversary subject
to six-months prior written notice and to the making of specified termination
payments intended to allow CellNet to recover its then unamortized endpoint
costs (meter and radio RTU devices) based upon agreed prices for such equipment.
UE can also terminate the UE Services Agreement for cause in the event of a
material and continuing failure on CellNet's part to meet agreed NMR performance
standards on a consistent basis over agreed time periods, subject to certain
rights to cure any such failure.
NORTHERN STATES POWER COMPANY. In August 1996, CellNet entered into a
Utility Services Agreement (the "NSP Services Agreement") with NSP for the
provision of data communications services over a network
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to be built, installed and operated by CellNet. NSP will pay CellNet a monthly
service fee based on the number of meters in service then being used to bill
customers. The NSP Services Agreement covers approximately 1.0 million gas and
electric meters within NSP's service territory located in the Minneapolis - St.
Paul metropolitan area. CellNet is obligated to provide certain automated meter
reading services, including basic meter reading, time-of-use, demand,
connect/disconnect (move in/move out), load profile and real-time reading, as
well as outage and tampering notification and certain other distribution
automation services. CellNet retains ownership of its network system and all
related equipment. NSP retains ownership of its RTUs, meters and all metering
and other data collected from NSP's equipment.
The term of the NSP Services Agreement is 15 years, with a five year option
to extend, exercisable by NSP. The NSP Services Agreement provides NSP with
certain rights to terminate the NSP Services Agreement prior to commercial
operation of the network and system (I.E., full deployment) if certain specific
conditions are not met, such as approval of the NSP Services Agreement by
governmental authorities to the extent such approval is required. In addition,
either party has the right to terminate the NSP Services Agreement upon the
occurrence of continuing events of default or if a governmental authority causes
the NSP Services Agreement to be rescinded. In addition, upon the failure of
either party to meet certain obligations, such as delays in installation or
integration schedules thereunder, such party must pay penalty fees to the other
party.
CellNet is entitled to install and operate its network equipment on NSP's
property, so long as it pays to NSP market-based rates for such rights. CellNet
bears the cost of obtaining any necessary third party installation sites.
PUGET SOUND POWER & LIGHT COMPANY. In August 1996, CellNet entered into a
letter of intent (the "Puget Letter of Intent") and an Initial Services
Agreement (the "Puget Initial Services Agreement") with ConnexT, a subsidiary of
Puget for the provision of NMR and other data communications services over a
network to be operated by CellNet. The Puget Letter of Intent provides that the
parties will enter into good faith negotiations with respect to a Services
Agreement which would succeed the Puget Initial Services Agreement.
The Puget Initial Services Agreement covers approximately 15,000 meters
within Puget Power's service territory. There are approximately 838,000 meters
within Puget's service territory. The Company seeks a long term services
agreement covering approximately 556,000 meters. The term of the Puget Initial
Services Agreement continues until 60 days after an evaluation period following
installation and testing of the network. CellNet is obligated to provide certain
NMR services and to retrofit certain quantities of electric and gas meters
supplied by ConnexT. ConnexT has agreed to arrange for Puget to undertake
installation of retrofitted meters, MCCs, CellMasters and other network related
components in the agreed service territory. CellNet will establish communication
links and perform certain other work necessary to complete installation. ConnexT
is paying CellNet monthly services fees based on the number of meters in service
then being used to bill customers. CellNet retains ownership of its network
system, all related equipment and radio meter modules. ConnexT retains ownership
of its meters and certain other equipment. If CellNet has met certain
performance standards under the Initial Services Agreement and, within one year,
a Services Agreement has not been entered into with Puget covering at least
175,000 meters, ConnexT may elect to continue receiving NMR services from
CellNet for a period of not less than five years, or may discontinue the
arrangement upon making a specified termination payment intended to allow
CellNet to recover certain of its invested costs.
SALES AND MARKETING
The Company has organized its sales and marketing efforts based on utility
and non-utility network applications. For its utility segment, the Company's
initial target market includes utilities in the 60 largest MSAs in the U.S.
which represent a large majority of the meters in the United States. The Company
is also pursuing selected utilities outside the top 60 MSAs. Given the strategic
nature of the Company's utility products, sales cycles typically extend up to 18
months and involve the solicitation, consultation and approval of decision
makers across key divisions within each potential utility customer. The Company
has a sales and marketing organization of 24 persons, including six dedicated
sales representatives with a mix of utility and
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information technology sales backgrounds, several of whom have extensive
experience in the electric utility industry. Regional sales professionals are
supported by corporate specialists in the areas of metering, systems
integration, and deployment.
The Company has established a team of market managers for the development of
new business opportunities. This team develops business concepts that are
enabled by CellNet's services, pursues market research to validate these
concepts and identifies potential alliances that will be required to create the
products and services. This team is composed of individuals with backgrounds in
cellular and wireless marketing, product management and consumer products. The
Company intends to seek joint venture partners to pursue international markets.
CellNet's sales approach addresses a utility's need to prepare for the
future competitive environment by reducing costs, meeting present and future
regulatory requirements and enhancing customer service. CellNet intends to show
sustained commitment to the utility by entering into long-term performance-based
contracts, typically exceeding ten years. While the sales cycle for utilities is
lengthy, it results in the signing of long-term service contracts covering
thousands and potentially several million endpoints, providing both significant
recurring revenue and the opportunity to offer additional non-utility services.
The Company intends to concentrate its marketing efforts for non-utility
applications on industry-leading providers of products and services that would
benefit from the Company's low-cost wireless network. The Company is working
with leading manufacturers and applications developers to promote and develop
products and services that utilize the Company's networks. See "-- Business
Strategy -- Promote Development of Non-Utility Applications." The Company
expects that the manufacturers and developers of such products and services
would market such products and services to end users.
PROPRIETARY RIGHTS
CellNet relies on a combination of trade secret protection, copyrights,
patents, trademarks and confidentiality and licensing agreements to establish
and protect its proprietary rights.
CellNet's WAN radio system has been developed using advanced digital signal
processing techniques and an RF system architecture that enables CellNet to
create a complete digital cellular system in approximately a single 25 kHz voice
channel. This technology is based on narrowband modulation and compression of
many subchannels into a single channel. Extremely stable frequency control is
required to preserve system performance. CellNet's system of frequency control
is the subject of several issued and pending patents claims. In addition, the
efficiency of the frequency protocol utilized by the CellMaster is determined in
part by its ability to recover short burst transmissions from an RTU or MCC. The
CellMaster's burst data recovery process is also the subject of several issued
and pending patents claims.
The spread spectrum radio technology utilized in the CellNet LAN has been
licensed to CellNet by Axonn Corporation and an affiliate of Axonn (together,
"Axonn"). The Axonn spread spectrum technology is a patented, low-cost radio
system which offers the price / performance relationships that the Company
believes are required for a commercially-feasible telemetry network. Under its
licenses from Axonn, CellNet has acquired an exclusive right to use Axonn spread
spectrum technology in the utility distribution and service market and an
exclusive right to provide services for other applications outside the utility
market through the CellNet system architecture. CellNet's right to provide fire
and security applications based upon Axonn's technology is not exclusive under
these licenses. The Axonn licenses do not expire by their terms until the last
to expire of any of the patent rights underlying such licenses which will occur
not earlier than March 21, 2014. Up to that time, as each patent licensed under
the Axonn licenses expires, the technology underlying such patent will become
freely available in the public domain.
CellNet has developed a proprietary, patent-pending approach to transmitting
metering information which allows the LAN to accumulate time of use, demand and
load profile data. CellNet's protocols and data transmission methods are
incorporated in its proprietary firmware. During the development and test
deployments of the CellNet WAN and LAN radio systems, the Company has
accumulated substantial information regarding cellular and microcellular radio
systems. This information is being used to develop
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modeling and planning tools which assist CellNet in the deployment and operation
of complex RF systems. The Company has written over 4.5 million lines of
software code to implement its system, a process which required over 150
staff-years of design, coding and testing and remains a proprietary asset.
The Company's success will depend in part on its ability to maintain
copyright and patent protection for its products, to preserve its trade secrets
and to operate without infringing the proprietary rights of third parties. See
"Risk Factors -- Uncertainty of Protection of Copyrights, Patents and
Proprietary Rights."
RESEARCH AND DEVELOPMENT
The Company has steadily increased its research and development efforts over
the past several years and expects to continue to spend a significant portion of
its resources on these activities for the foreseeable future. The Company spent
$5.3 million, $9.7 million, $22.4 million and $13.0 million for research and
development in 1993, 1994, 1995 and the six months ended June 1996,
respectively. The Company presently employs more than 85 software and hardware
engineers and other professional staff in these efforts and contracts with a
number of highly-specialized outside consultants for additional services as
required. The focus of the Company's research and development efforts in the
past has been on the development of the radio hardware, spread spectrum radio
protocols, System Controllers, intelligent base stations (CellMasters and MCCs),
extensive software code, database capacity and other elements required for a
flexible, high-capacity wireless data communications network capable of
processing data from several million endpoints on a real-time basis at a low
cost. The Company expects that the focus of future research and development will
be to make further enhancements to the system software, firmware, hardware and
other equipment to increase the speed, capacity and functionality of the system,
to lower the cost of system equipment over time and, working with other
companies, to expand the scope of utility and non-utility services that may be
offered on the system. The Company's future success will depend, in part, on the
Company's success in these development projects which will require continued
substantial investments. See "Risk Factors -- Technological Performance and
Buildout of the System; Rapid Technological Change and Uncertainty."
As part of the Company's research and development efforts, the Company has
worked closely with current and potential customers in conducting pilot trials
and jointly developing system specifications and requirements.
COMPETITION
The emerging market for utility network automation systems, and the
potential market for other applications accessible once a common infrastructure
is in place, have led electronics, communications and utility product companies
to begin development of various systems, some of which currently compete, and
others of which may in the future compete, with the CellNet system. The Company
believes its only significant direct competitor in the marketplace at the
present time is Itron, an established manufacturer and seller of hand-held and
drive-by automated meter reading equipment ("AMR") to utilities. Itron has
announced the development of its Genesis-TM- system, a radio network similar to
the Company's for meter reading purposes and is presently offering that system
in the marketplace. The Company believes Itron has signed at least two contracts
with utilities for the commercial installation of its Genesis-TM- system.
Metricom, Inc. a provider primarily of subscriber-based, wireless data
communications for users of portable and desktop computers, First Pacific
Networks, a provider primarily of bandwidth efficient wireline communications
technology, and Lucent Technologies are examples of companies whose technology
might be adapted for NMR and who may become direct competitors of the Company in
the future. Schlumberger is developing a fixed network system or application in
cooperation with Motorola for meter reading as well. Schlumberger, Lucent
Technologies and First Pacific Networks either have conducted or are in the
process of conducting pilot trials of utility network automation systems.
Established suppliers of equipment, services and technology to the utility
industry such as Asea Brown Boveri and General Electric could expand their
current product and service offerings in the marketplace so as to compete
directly with the Company, although they have not yet done so. Many of the
Company's present and potential future competitors have significantly greater
financial, marketing, technical and manufacturing resources, name recognition
and experience than the Company. There may be many potential alternative
solutions to the Company's NMR services. The Company's competitors may be able
to respond more quickly to new or emerging technologies
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and changes in customer requirements, or devote greater resources to the
development, promotion and sale of their products and services than the Company.
While CellNet believes its technology is widely regarded as competitive at the
present time, there can be no assurance that the Company's competitors will not
succeed in developing products or technologies that are better or more cost
effective. In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing their ability to address the needs of the
Company's prospective customers. Accordingly, it is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. In addition, if the Company achieves
significant success it could draw additional competitors into the market.
Traditional providers of wireless services may in the future choose to enter the
Company's markets. However, such telecommunications applications are not well
suited for use in NMR or similar applications given certain technical challenges
and economic costs such as high embedded spectrum costs. Such existing and
future competition could materially adversely affect the pricing for the
Company's services and the Company's ability to sign long-term contracts and
maintain existing agreements with utilities. Competition for services relating
to non-utility applications may be more intense than competition for utility NMR
services. There can be no assurance that the Company will be able to compete
successfully against current and future competitors, and any failure to do so
would have a material adverse effect on the Company's business, operating
results, financial condition and cash flow.
The Company believes the principal competitive factors for NMR services
include price, quality of service, system functionality, reliability, and ease
of installation. The Company believes it competes favorably in these areas. In
particular, the Company believes that it has developed the first commercially
deployed, large-scale network-based NMR system capable of simultaneously
collecting, processing, transporting and sharing data from millions of endpoints
on an efficient and timely basis.
REGULATION
The Company's network equipment uses radio spectrum, and as such, is subject
to regulation by the FCC. In addition, CellNet intends to provide services as a
private carrier. This status allows services to be provided pursuant to
individual contracts without being subject to many of the statutory requirements
and FCC and state regulations that govern the provision of common carrier
services. The Company's network equipment uses both licensed radio spectrum
allocated for MAS operations in the 928/952 MHz band, and unlicensed spectrum in
the 902-928 MHz band. In order to obtain a license to operate the Company's
network equipment in the 928/952 MHz band, license applicants may need to obtain
a waiver of various sections of the FCC's rules. Although the Company has
obtained such waivers for its licensed systems routinely in the past, and
expects the required waivers to be granted on a routine basis in the future,
there can be no assurance that the Company will be able to obtain such waivers
on a timely basis or to obtain them at all. In addition, as the amount of
spectrum in the 928/952 MHz band is limited, issuance of these licenses is
contingent upon the availability of spectrum in the area(s) for which the
licenses are requested. The Company might not be able to obtain licenses to the
spectrum it needs in every area in which it has prospective customers. The FCC's
rules, subject to a number of limited exceptions, permit third parties such as
CellNet to operate on spectrum licensed to utilities to provide other services.
The Company plans to use these provisions of the FCC's rules to expand its
CellNet system. The FCC has the authority to amend its rules at any time and
such changes could have a material adverse effect on the Company's spectrum
utilization strategy. The FCC requires that a minimum configuration of an MAS
system be in operation within eighteen months from the initial date of the grant
of the system authorization or risk forfeiture of the license for the MAS
frequencies. The eighteen month deadline may be extended upon a showing of good
cause, but there is no assurance that the FCC will grant any such extension. The
Company is responding by selectively building out transmission capacity in some
areas where it does not yet have utility telecommunications service contracts
and may permit licenses to lapse in certain areas.
No license is needed to operate the Company's equipment utilizing the
902-928 MHz band, although the equipment must be certified by the Company and
the FCC as being compliant with certain FCC restrictions on radio frequency
emissions designed to protect licensed services from objectionable interference.
While the Company believes it has obtained all required certifications for its
products, the FCC
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could modify the limits imposed on such products or otherwise impose new
authorization requirements, and in either case, such changes could have a
material adverse impact on the Company's business. The FCC recently completed a
new rulemaking proceeding designed to better accommodate the cohabitation in the
902-928 MHz band of existing licensed services with newly authorized and
expanded uses of licensed systems, and existing and newly designed unlicensed
devices like those used by the Company. In this proceeding, the FCC expressly
recognized the rights of such unlicensed services to operate under certain
delineated operating parameters even if the potential for interference to the
licensed operations exists. The Company's systems will operate within those
specified parameters. The FCC retains the right to modify those rules or to
allow for other uses of this spectrum that might create interference to the
Company's systems, in either case with a material adverse impact on the
Company's business or operations in these frequency bands.
While the Company intends to offer non-utility services as a private carrier
and in accordance with FCC Rules, each such service offering would need to be
reviewed relative to these rules. The FCC's rules currently prohibit the use of
the MAS frequencies on which the Company is operating its systems for the
provision of common carrier service offerings. In the event that it is
determined that a particular service offering does not comply with the rules,
the Company may be required to restructure such offering or to access other
frequencies for the purpose of providing such service. There can be no
assurances that the Company will gain access to such other frequencies. Future
interpretation of regulations by the FCC or changes in the regulation of the
Company's industry by the FCC or other regulatory bodies or legislation by
Congress could have a material adverse effect on the Company's operations.
EMPLOYEES
As of June 30, 1996, CellNet had 443 employees, including 88 in product
development, 226 in materials and manufacturing, 33 in sales and marketing, 65
in field service and support, and 31 in administration. None of the Company's
employees is currently represented by a labor union. The Company believes that
its relationship with its employees is good.
PROPERTIES
The Company's administrative, sales and marketing, product development and
production facilities are located in San Carlos, California, where the Company
leases approximately 66,000 square feet under an agreement which expires on
December 31, 2000. The Company will require additional space to meet its
currently anticipated requirements for expansion and is presently negotiating
for additional space near its present office complex. A subsidiary of the
Company leases approximately 30,000 square feet of factory and warehouse space
in Kansas City, Missouri where meter retrofit operations are carried out. The
Company anticipates that it will be able to acquire additional space as required
for its operations on acceptable terms.
LITIGATION
Although the Company has been granted federal registration of its "CellNet"
trademark, in January 1995 Century Telephone Enterprises, Inc. ("Century
Telephone") filed a petition for cancellation in an attempt to challenge such
registration. The matter is currently pending before the Trademark Trial and
Appeal Board of the U.S. Patent and Trademark Office. CellNet and Century
Telephone are the sole parties in the action. If such challenge were successful,
the Company could lose its registration and could be required to adopt a new
trademark and possibly a new or modified corporate name. CellNet could encounter
similar challenges in the future. See "Risk Factors -- Uncertainty of Protection
of Copyrights, Patents and Proprietary Rights."
The Company has no other pending litigation.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the executive
officers and directors of the Company as of June 30, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --------- -----------------------------------------------------------------------
<S> <C> <C>
John M. Seidl............... 57 President, Chief Executive Officer and Director
Cree A. Edwards............. 39 Vice President, Business Development
Robert A. Hayes............. 44 Vice President, Development
James J. Jennings........... 49 Vice President, Sales and Marketing
Larsh M. Johnson............ 38 Vice President and Chief Technology Officer
Paul G. Manca............... 37 Vice President and Chief Financial Officer
Philip H. Mallory........... 56 Vice President and General Manager, Services and Operations
David L. Perry.............. 55 Vice President, General Counsel, Secretary and Chief Administrative
Officer
Paul M. Cook................ 72 Chairman of the Board
Neal M. Douglas(2).......... 37 Director
William C. Edwards(2)....... 67 Director
William Hart(2)............. 56 Director
Brian Kwait................. 35 Director
Nancy E. Pfund(1)........... 40 Director
Paul J. Salem(1)............ 32 Director
Henry B. Sargent(1)......... 62 Director
</TABLE>
- ---------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
JOHN M. SEIDL became President, Chief Executive Officer and a director of
the Company in September 1994. From December 1992 to September 1994, Mr. Seidl
served as a director of St. Mary's Land & Exploration Company, CRSS, Inc., J.B.
Poindexter, Inc. and a privately-held company. From January 1989 through
December 1992, Mr. Seidl served as a director of MAXXAM, Inc., an aluminum,
forest products and real estate concern, and Chairman and Chief Executive
Officer of Kaiser Aluminum Corporation. From September 1990 through December
1992 Mr. Seidl also served as President of MAXXAM, Inc. Previously, Mr. Seidl
was Executive Vice President, from July 1985 to May 1986, and President and
Chief Operating Officer, from May 1986 to January 1989, of Enron Corp., an
energy company. Mr. Seidl currently is a director of St. Mary's Land &
Exploration Company and several privately-held companies and non-profit
organizations. He received a B.S. degree in Engineering from the United States
Military Academy, and M.P.A. and Ph.D. degrees in Political Economy from Harvard
University.
CREE A. EDWARDS is a co-founder of the Company and has served as Vice
President, Business Development since January 1994. Mr. Edwards was President of
the Company from October 1984 to February 1990 and Executive Vice President of
the Company from February 1990 to January 1994. Prior to founding CellNet in
1984, Mr. Edwards was an Area Sales Manager for Octel Communications
Corporation, a voice processing manufacturer, from September 1984 to September
1985, and a Major Accounts Manager for the General Electric Information Services
Company from March 1983 to September 1984. He received a B.A. degree in
Economics from the University of California at Davis.
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ROBERT A. HAYES joined the Company in January 1993 as Vice President,
Special Assistant to the President. He became Vice President, Software
Development in March 1994 and was named Vice President, Development in January
1995. From February 1991 to December 1992, Mr. Hayes held a number of positions
with Everex Systems, Inc. ("Everex"), a computer hardware manufacturer,
including Vice President of Manufacturing, Vice President of Quality and
Service, Manager of the Network Division and Group Manager of Service. Everex
filed for Chapter 11 bankruptcy protection in January 1993. Mr. Hayes received
B.S. and M.C.E. degrees in Civil Engineering from Rice University.
JAMES J. JENNINGS joined the Company in August 1994 and has served as Vice
President, Sales and Marketing since that time. From April 1988 until July 1994,
Mr. Jennings was a Vice President of Octel Communications Corporation, a voice
processing manufacturer, where he served in a variety of domestic and
international sales, marketing and business development capacities. Mr. Jennings
served as an officer in the United States Army from 1968 to 1975. Mr. Jennings
holds a B.S. degree in Engineering from the United States Military Academy and
an M.B.A. degree from the University of San Francisco.
LARSH M. JOHNSON is a co-founder of the Company and has served in several
vice presidential positions from October 1984 to December 1994 and, since
January 1995, as Vice President and Chief Technology Officer. While at CellNet
and prior to co-founding the Company in 1984, he was a self-employed product
design consultant from May 1983 to June 1985 and Director of Product Development
at Interactive Communications Corporation, a video systems company, from
February 1984 to June 1985. Mr. Johnson was an Engineering Manager at Digital
Optics Corporation, a company specializing in electro-optical systems, from
March 1981 to April 1983 and an electrical engineer at Systems Control
Corporation, a computer hardware company, from June 1980 to April 1981. He
received B.S. and M.S. degrees in Mechanical Engineering from Stanford
University.
PAUL G. MANCA joined the Company in May 1995 as Vice President and Chief
Financial Officer. From March 1993 to May 1995, he was the Managing Director and
Group Head of the Communications Group at BZW/Barclays Bank. Mr. Manca joined
BZW/Barclays Bank as Vice President, Merchant Banking Division in February 1987.
From June 1980 to February 1987, Mr. Manca was employed in the corporate finance
group of the Canadian Imperial Bank of Commerce. He received a B.A. degree in
Economics from the University of California, Berkeley and an M.B.A. degree in
Finance from Golden Gate University.
PHILIP H. MALLORY joined the Company in January 1995 as Vice President and
General Manager, Services. In June 1996, he assumed the additional duties of
Vice President, Operations. From June 1992 to January 1995, Mr. Mallory held
various positions at CAE-Link Corporation, a defense contractor, including
Director of Strategic Planning, Director - Product Management and Director -
Department of Defense Marketing. Mr. Mallory served as a career officer in the
United States Army from June 1961 to August 1991, attaining the rank of Major
General prior to his retirement. During his army career he held a number of
posts, including Commanding General of the 2nd Armored Division, NATO Advisor to
the Secretary of Defense, and the Commanding General of the 7th Army Training
Command. Mr. Mallory received a B.S. degree in Engineering from the United
States Military Academy and an M.S. degree in Engineering - Applied Science from
the University of California, Davis. Mr. Mallory also attended the Industrial
College of the Armed Forces in Washington, D.C., where he attained the
equivalent of a master's degree in Resource Management.
DAVID L. PERRY joined the Company in November 1994 as Vice President,
General Counsel and Secretary, and was appointed Chief Administrative Officer in
February 1996. From January 1992 through November 1994, Mr. Perry was engaged as
an attorney in private practice. From January 1984 through December 1991, Mr.
Perry was Vice President and General Counsel of Kaiser Aluminum Corporation.
From August 1969 through December 1983, Mr. Perry served in a variety of
capacities in Kaiser Aluminum's Law Department. Mr. Perry received a B.A. degree
from Amherst College and a J.D. degree from the Boalt Hall School of Law,
University of California, Berkeley.
PAUL M. COOK has been a director of the Company continuously since August
1990. Mr. Cook became Chief Executive Officer of the Company in August 1990, and
assumed the additional title of President in 1992. He relinquished the positions
of President and Chief Executive Officer in September 1994. Since June
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<PAGE>
1995, Mr. Cook has been the Chief Executive Officer and Chairman of the Board of
DIVA Systems Corp., a company developing video-on-demand products. Until his
retirement in April 1990, Mr. Cook was Chief Executive Officer of Raychem
Corporation, a plastics and insulation manufacturer, which he founded in 1957.
Since September 1994, Mr. Cook has served as Chairman of the Board of SRI
International, Inc., and as a director of Raychem Corporation. Currently, Mr.
Cook is also a director of Chemfab Corporation. He received a B.S. degree from
the Massachusetts Institute of Technology.
NEAL M. DOUGLAS has been a director of the Company since October 1993. Since
January 1993 he has been a general partner of AT&T Ventures Company, L.P. ("AT&T
Ventures"), a venture capital firm. From May 1989 to January 1993, he was a
partner of New Enterprise Associates, another venture capital firm. Mr. Douglas
also serves as a director of two privately held companies.
WILLIAM C. EDWARDS has been a director of the Company from October 1985 to
April 1986 and has been a director continuously since March 1991. Since October
1968 he has been a general partner of Bryan & Edwards, an investment
partnership. Mr. Edwards also serves as a director of Western Atlas, Inc. and
two privately held companies.
WILLIAM HART has been a director of the Company since October 1992. He has
been a general partner of Technology Partners, a venture capital firm, since its
founding in 1979. Mr. Hart also serves as a director of Trimble Navigation,
Ltd., Silicon Gaming, Inc. and several privately held corporations.
BRIAN KWAIT has been a director of the Company since October 1995. Mr. Kwait
has been a principal at Odyssey Partners, L.P. ("Odyssey"), a private investment
firm, since August 1989. Mr. Kwait also serves as a director of The Scotsman
Group, Inc. and one privately held company.
NANCY E. PFUND has been a director of the Company since January 1991. Since
December 1989, she has been an employee of Hambrecht & Quist Group ("H&Q"), an
investment banking firm. Ms. Pfund is also a principal of Hambrecht & Quist
Venture Partners and a general partner of H&Q Environmental Principals. She
serves as a director of Gensym Corp.
PAUL J. SALEM has been a director of the Company since January 1996. Mr.
Salem has been a vice president of Providence Ventures Inc., an investment
management firm, since June 1992. From August 1991 to June 1992, Mr. Salem was
an associate at Morgan Stanley & Co. Incorporated, an investment banking firm.
Mr. Salem also serves as a director of several privately held companies.
HENRY B. SARGENT has been a director of the Company since January 1996. Mr.
Sargent has been President, Chief Executive Officer and a director of El Dorado
Investment Company ("El Dorado"), a venture capital firm, for more than the past
five years. From May 1987 to June 1995, he was also Executive Vice President,
Chief Financial Officer and a director of Pinnacle West Capital Corp., an
electric utility holding company. Mr. Sargent also serves as a director of
Pinnacle West Capital Corp., Arizona Public Service Co., Megafood Stores, Inc.
and several privately held companies.
William C. Edwards is the father of Cree A. Edwards. There are no other
family relationships among the directors or executive officers of the Company.
BOARD OF DIRECTORS
The Company's Bylaws authorize a Board of Directors that can range in size
from six to 11 directors, with the number of directors presently set at ten. The
Company currently has nine directors and one vacancy. All directors hold office
until the next annual meeting of stockholders or until their successors have
been elected. Officers of the Company serve at the discretion of the Board of
Directors. Under the terms of the Shareholders' Agreement among the Company and
the holders of 69.4% of the issued and outstanding shares of capital stock of
the Company (after giving effect to the issuance of the Shares offered hereby
and in the Direct Placements), the Company agreed to set the authorized number
of directors on the Board of Directors at ten, and the stockholders party
thereto have agreed to elect the following persons to the Board of Directors:
(i) one candidate selected by H&Q, currently Nancy E. Pfund; (ii) one candidate
selected by El Dorado, currently Henry B. Sargent; (iii) Paul M. Cook; (iv) one
candidate selected by Banner Partners, currently William C. Edwards; (v) one
candidate selected by AT&T Ventures, currently Neal M. Douglas; (vi) one
candidate selected by Odyssey, currently Brian Kwait; (vii) one candidate
selected by Providence Media Partners L.P., currently Paul J. Salem; (viii) one
candidate selected by Kleiner, Perkins, Caufield &
50
<PAGE>
Byers, which position is currently vacant; and (ix) the Chief Executive Officer
of the Company, currently John M. Seidl. The foregoing voting obligations
terminate upon the closing of this Offering. Following this Offering, the
Company will continue to be obligated to nominate for election as directors the
persons designated by the parties to the Shareholders' Agreement for as long as
such parties continue to hold not less than 700,000 shares of Common Stock (as
such number may be adjusted from time to time for stock splits, consolidations
or other similar events). The parties to the Shareholders' Agreement have also
agreed to take such action as is necessary to retain the right of cumulative
voting in the election of directors and to maintain a Board of Directors of not
less than eight directors until August 15, 1997. See "Risk Factors --
Shareholders' Agreement" and "Description of Capital Stock -- Common Stock."
DIRECTORS' COMPENSATION
The Company does not pay any compensation to directors for serving in that
capacity, nor does it reimburse directors for expenses incurred in attending
board meetings. Under the terms of the Shareholders' Agreement, the Company has
agreed to reimburse the directors elected pursuant to the Shareholders'
Agreement for such expenses following the closing of this Offering for so long
as such persons continue to serve as directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of three
non-employee directors, Mr. Edwards, Chairman, and Messrs. Douglas and Hart. The
Compensation Committee makes recommendations to the Board of Directors
concerning salaries and incentive compensation for employees of and consultants
to the Company. Mr. Edwards is the father of Cree A. Edwards, an executive
officer of the Company. No interlocking relationship exists between the
Company's Board of Directors or Compensation Committee and the board of
directors or compensation committee of any other party, nor has any such
relationship existed in the past. Entities affiliated with Messrs. Edwards,
Douglas and Hart are stockholders of the Company and have entered into financing
arrangements with the Company from time to time. See "Certain Transactions."
AUDIT COMMITTEE
The Audit Committee of the Board of Directors consists of three non-employee
directors, Ms. Pfund, Chair, and Messrs. Salem and Sargent. The Audit Committee
reviews the nature, scope and results of the independent audit of the Company,
the Company's accounting principles and internal accounting controls and other
matters relating to the relationship of the independent auditors with the
Company.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information for the year ended
December 31, 1995 regarding the compensation of the Company's Chief Executive
Officer and each of the other four most highly compensated executive officers
whose annual compensation (salary and bonus) for services rendered in all
capacities to the Company during the year ended December 31, 1995 exceeded
$100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION(1)
- -------------------------------------------------------- ---------- ---------- ------------- -----------------
<S> <C> <C> <C> <C>
John M. Seidl .......................................... $ 300,000 $ 135,000 -- $ 1,237
President and Chief Executive Officer
James J. Jennings ...................................... 175,060 -- -- 902
Vice President, Sales and Marketing
Robert A. Hayes ........................................ 165,000 10,000 -- 872
Vice President, Development
Larsh M. Johnson ....................................... 165,000 -- -- 872
Vice President and Chief Technology Officer
Philip H. Mallory ...................................... 138,654 -- $ 50,000(2) 762
Vice President and General Manager, Services and
Operations
</TABLE>
- ---------
(1) Represents premium payments made by the Company for life insurance,
accidental death and dismemberment, and long-term disability policies.
(2) Represents a relocation allowance.
OPTION GRANTS IN LAST YEAR. The Company made no stock option grants or
restricted stock awards during the year ended December 31, 1995 to the Named
Executive Officers. However, during 1995 the Company did permit the Named
Executive Officers to exercise unvested, previously-granted stock options to
purchase shares of restricted stock with vesting terms comparable to the vesting
terms of the options exercised.
AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES The
following table sets forth, for each of the Named Executive Officers, the shares
acquired and the value realized on each exercise of stock options during the
year ended December 31, 1995 and the year-end number and value of exercisable
and unexercisable options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE MONEY OPTIONS
SHARES OPTIONS AT 12/31/95(#)(2) AT 12/31/95($)(1)(2)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE(#)(2) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John M. Seidl.................. 800,000 $ 1,000,000 0 0 $ 0 $ 0
James J. Jennings.............. 180,000 225,000 0 0 0 0
Robert A. Hayes................ 0 0 109,000 121,000 143,150 147,350
Philip H. Mallory.............. 170,000 170,000 0 0 0 0
Larsh M. Johnson............... 220,658 248,158 106,190 173,952 148,576 190,427
</TABLE>
- ---------
(1) Calculated by determining the difference between the fair value of the
securities underlying the option on December 31, 1995 (which, for purposes
of this table, is assumed to equal the fair value of the Company's Common
Stock as last determined during fiscal 1995 on October 11, 1995 by the
Company's Board of Directors, or $1.50 per share), and the exercise price
(ranging from $.05 to $.50 per share).
(2) From December 1994 through August 1995 the Company issued and sold pursuant
to the early exercise of previously-granted options, an aggregate of
1,770,658 shares of restricted Common Stock to Messrs. Seidl, Jennings,
Mallory and Johnson at prices ranging from $.05 to $.50 per share, with the
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<PAGE>
purchase prices of such shares equal to the original exercise prices of such
options. Such shares of restricted stock were purchased with cash or by
delivery of promissory notes by such Named Executive Officers to the
Company. See "Certain Transactions." The loans represented by such
promissory notes are full recourse, bear interest at rates ranging from
6.04% to 7.92% per annum and mature on the fifth anniversary of such note.
Each such promissory note is secured by the shares of Common Stock purchased
with the proceeds of the loans. These shares are subject to repurchase by
the Company at the original price paid per share upon the purchaser's
cessation of service prior to the vesting of such shares. This repurchase
right lapsed and the purchaser vested as to a certain percentage of the
shares on the date of purchase and the repurchase right will lapse and the
purchaser will vest in the balance of the shares in a series of equal
quarterly or annual installments in accordance with the vesting schedule of
the exercised options. Information with respect to the shares of restricted
stock purchased by such Named Executive Officers is set forth below:
<TABLE>
<CAPTION>
NUMBER OF
RESTRICTED NUMBER OF VALUE OF
SHARES UNVESTED SHARES UNVESTED SHARES
NAME PURCHASED(#) AT 12/31/95(#) AT 12/31/95($)
- ----------------------------------------- ---------------- --------------- ---------------
<S> <C> <C> <C>
John M. Seidl............................ 1,200,000 750,000 $ 1,125,000
James J. Jennings........................ 180,000 117,000 175,500
Philip H. Mallory........................ 170,000 127,500 191,250
Larsh M. Johnson......................... 220,658 117,158 175,737
</TABLE>
INCENTIVE STOCK PLANS
1992 STOCK OPTION PLAN. The Company's 1992 Stock Option Plan (the "1992
Plan") was adopted by the Board of Directors and approved by the Company's
stockholders in September 1992. A total of 6,000,000 shares of Common Stock are
reserved for issuance under the 1992 Plan. As of June 30, 1996, 3,375,748 shares
of Common Stock had been issued upon exercise of stock options, and options to
purchase an aggregate of 2,416,642 shares were outstanding at a weighted average
exercise price of $.21615 per share, of which 1,357,726 shares were vested. In
connection with the adoption of the 1994 Plan described below, the 1992 Plan was
terminated and no additional options may be granted thereunder. Options
previously granted under the 1992 Plan will continue to be governed by the
provisions of such plan.
1994 STOCK PLAN. The Company's 1994 Stock Plan (the "1994 Plan") was
adopted by the Board of Directors in December 1994 and approved by the
stockholders in June 1995. Options granted under the 1994 Plan may be incentive
stock options, nonstatutory stock options or stock purchase rights. Employees
(including employee directors) and consultants (including nonemployee directors)
are eligible for nonstatutory stock options and stock purchase rights, and only
employees are eligible for incentive stock options under the 1994 Plan. The 1994
Plan is administered by the Board of Directors or a committee thereof. The plan
administrator has the authority to determine the fair market value of the
shares, select the employees and consultants to whom options and stock purchase
rights may be granted, determine the number of shares covered by each option and
stock purchase right granted, and determine the term, exercise price and vesting
schedule of options granted under the 1994 Plan.
A total of 3,000,000 shares of Common Stock are reserved for issuance under
the 1994 Plan. As of June 30, 1996, 537,832 shares of Common Stock had been
issued upon exercise of stock options, options to purchase an aggregate of
1,362,494 shares were outstanding at a weighted average exercise price of
$1.3489 per share, of which 158,212 shares were vested, and 1,099,674 shares
remained available for future issuance under the 1994 Plan.
In the event of a merger of the Company with or into another corporation or
a sale of substantially all of the Company's assets, the 1992 Plan and the 1994
Plan each provides that options issued under such plans will be assumed, or an
equivalent option substituted, by the successor corporation. If the successor
corporation does not agree to such assumption or substitution, the option will
vest in full and become exercisable.
1996 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
July 1996 and was approved by the stockholders in September 1996. A total of
1,200,000 shares of Common Stock are reserved for issuance under the
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<PAGE>
Purchase Plan. Under the Purchase Plan, the Company will withhold a specified
percentage of each salary payment to participating employees over certain
offering periods. Any employee who is then employed for at least 20 hours per
week by the Company (or any majority-owned subsidiary designated by the Board of
Directors from time to time), and who does not own 5% or more of the total
combined voting power or value of all classes of the capital stock of the
Company or of any such subsidiary, is eligible to participate in the Purchase
Plan. Unless the Board of Directors shall determine otherwise, each offering
period will run for six months, from November 1 to April 30 and from May 1 to
October 31, except that the first offering period will commence on the date of
this Prospectus and end on April 30, 1997. The price at which Common Stock may
be purchased under the Purchase Plan is equal to 85% of the fair market value of
the Common Stock on the first or last day of the applicable offering period,
whichever is lower.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company entered into an employment agreement with Mr. Jennings in July
1994. The agreement provides for an annual base salary of $175,060 and certain
performance-based bonuses to be determined by the Company's President. As part
of the agreement, the Company granted to Mr. Jennings an option to purchase
180,000 shares of Common Stock at $.25 per share, with 10% vesting six months
from the date of hire and the remainder vesting at a rate of 5% per quarter. If
Mr. Jennings is terminated by the Company without cause at any time, he will
receive his annual base salary and benefits for an additional twelve months, and
40% of any unvested shares of restricted stock held by Mr. Jennings will become
vested as of the date of termination.
Each of the Named Executive Officers are parties to an Employee Severance
Agreement with the Company which provides for accelerated vesting of their
respective stock options and for the lapse of the Company's rights to repurchase
unvested stock under all restricted stock purchase agreements upon the
occurrence of certain events following a change of control of the Company. These
events will occur if: (i) the Named Executive Officer's stock option agreement
or restricted stock purchase agreement is terminated without such officer's
consent, or if the terms of such agreements are not assumed by any successor to
the Company; (ii) the Named Executive Officer does not receive identical
securities or consideration, upon such officer's exercise of options or
restricted stock purchases, as other shareholders are receiving as part of such
change of control; (iii) six months have elapsed following the change of
control, so long as the Named Executive Officer remains employed by the Company;
or (iv) the Named Executive Officer is terminated or constructively terminated
following the change of control.
LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
The Company has adopted provisions in its Restated Certificate of
Incorporation that eliminate the personal liability of its directors for
monetary damages arising from breach of their fiduciary duties in certain
circumstances and authorize the Company to indemnify its directors and officers,
in each case to the fullest extent permitted by Delaware law. Such limitations
of liability do not apply to liabilities arising under the Federal securities
laws and do not affect the availability of equitable remedies such as injunctive
relief or rescission.
The Company's Bylaws provide that the Company will indemnify its directors
and officers to the fullest extent permitted by Delaware law, including under
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has entered into indemnification agreements providing for the
foregoing with its directors and executive officers. These indemnification
agreements may require the Company, among other things, to indemnify such
officers and directors against certain liabilities that may arise by reason of
their status or service as officers or directors and to advance their expenses
(including expenses of counsel) incurred as a result of any proceeding against
them as to which they could be indemnified.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company where indemnification is required or
permitted, nor is the Company aware of any threatened litigation or proceeding
that may result in a claim for such indemnification.
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<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1993, the Company has sold shares of Preferred Stock
convertible into an aggregate of 16,215,170 shares of Common Stock in a series
of private financings. In January 1993, shares of Series AA Preferred Stock
convertible into 1,510,284 shares of Common Stock were sold at an as-converted
price of $.50 per share. In October 1993 and December 1993, shares of Series BB
Preferred Stock convertible into 6,979,690 shares of Common Stock were sold at
an as-converted price of $2.375 per share. In connection with such sales, the
Company also issued warrants to acquire 766,888 shares of Series BB Preferred
Stock at an exercise price of $4.75 per share. In August 1994, shares of Series
CC Preferred Stock convertible into 6,431,536 shares of Common Stock were sold
at an as-converted price of $4.82 per share. In December 1994 and February 1995,
shares of Series DD Preferred Stock convertible into 1,293,660 shares of Common
Stock were sold at an as-converted price of $4.82 per share. The purchasers of
the Series BB Preferred Stock, Series CC Preferred Stock and Series DD Preferred
Stock included the following 5% or more stockholders, directors and entities
affiliated with directors.
<TABLE>
<CAPTION>
SHARES OF
SERIES BB
SHARES OF PREFERRED STOCK (1) PREFERRED
------------------------------------------------ STOCK UNDERLYING
NAME SERIES AA SERIES BB SERIES CC SERIES DD WARRANTS (2)
- ----------------------------------------------- ----------- ---------- ---------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND ENTITIES AFFILIATED WITH
DIRECTORS
Paul and Marcia Cook Living Trust
(Paul M. Cook)................................ -- 63,340 10,373 -- 19,002
AT&T Ventures (Neal M. Douglas)................ -- 631,580 48,842 -- 126,316
Entities affiliated with William C. Edwards.... 755,142 191,840 31,122 1,321 56,002
Technology Partners West Fund IV, L.P.
(William Hart)................................ -- 44,730 10,373 417 13,419
Odyssey Partners, L.P. (Brian Kwait)........... -- 1,450,660 112,184 -- 290,132
Entities affiliated with Hambrecht & Quist
(Nancy E. Pfund).............................. -- 213,585 35,794 1,520 48,343
Pfund Polakoff Family Trust (Nancy E. Pfund)... -- 2,025 -- -- 426
Providence Media Partners L.P. (Paul J.
Salem)........................................ -- -- 1,037,344 44,044 --
Entities affiliated with Henry B. Sargent...... -- 161,245 -- -- 41,623
OTHER 5% OR MORE STOCKHOLDERS
Entities affiliated with Acorn Ventures,
Inc........................................... -- 289,570 231,463 9,827 68,468
</TABLE>
- ---------
(1) Each share of Preferred Stock will automatically convert into two shares of
Common Stock upon the closing of this Offering.
(2) Each warrant to purchase Series BB Preferred Stock is exercisable at a price
of $4.75 per share and will expire immediately prior to the closing of this
Offering. This Prospectus assumes that all of such warrants will be
exercised and that the shares of Series BB Preferred Stock issuable upon
such exercise will automatically convert into shares of Common Stock upon
the closing of this Offering.
Between April 28, 1993 and September 13, 1993, Acorn Ventures, Inc.
("Acorn") (a principal stockholder of the Company), Cree A. Edwards (an
executive officer of the Company), entities affiliated with William C. Edwards
("Edwards Entities") (a director of the Company; the Edwards Entities are
principal stockholders of the Company), the Paul and Marcia Cook Living Trust
("Cook Trust") (a principal stockholder of the Company and an affiliate of Paul
M. Cook, Chairman of the Board of Directors of the Company), entities affiliated
with H&Q (affiliates of Nancy E. Pfund, a director of the Company), and
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<PAGE>
entities affiliated with Henry B. Sargent ("Sargent Entities") (a director of
the Company; the Sargent Entities are principal stockholders of the Company)
loaned the Company $500,000, $133,230, $711,100, $297,355, $265,300 and
$579,490, respectively, pursuant to promissory notes due on demand after October
1, 1993 and bearing interest at the rate of 4% per annum. In connection with the
sale of the Series BB Preferred Stock, the outstanding balance of principal and
accrued interest under such promissory notes was converted into shares of Series
BB Preferred Stock at a conversion price of $4.75 per share and warrants to
purchase .3 shares of Series BB Preferred Stock for each share of Series BB
Preferred Stock issued upon conversion of the promissory notes and accrued
interest, such that the Company issued and sold to Acorn, Cree A. Edwards, the
Edwards Entities, the Cook Trust, H&Q and the Sargent Entities 105,540, 28,380,
151,480, 63,340, 56,470 and 123,600 shares, respectively, of Series BB Preferred
Stock and warrants to purchase 31,662, 8,514, 45,444, 19,002, 16,941 and 37,080
shares, respectively, of Series BB Preferred Stock. The Company believes the
terms of these loans were no less favorable to the Company than loans negotiated
by such persons with unaffiliated third parties.
On September 29, 1993, the Company issued and sold 400,000 shares of Common
Stock to Acorn, a stockholder of the Company, at a price per share of $.05.
These shares were granted as part of a transaction in which Acorn was required
to perform consulting services for the Company. These shares were subject to
repurchase by the Company until such rights lapsed in September 1995.
On June 14, 1995, the Company issued and sold 200,000 shares of Common Stock
to Acorn at a price per share of $.50. Acorn paid cash for the shares. These
shares are subject to repurchase by the Company which right lapses over a
five-year period commencing in December 1994. On August 25, 1995, the terms of
the Company's agreement with Acorn were amended to provide for accelerated
release of such shares from the Company's repurchase option upon termination of
such agreement other than for cause. The transactions with Acorn were
unanimously approved by the Board of Directors of the Company and were on terms
the Company believes were no less favorable than would have been received from
unaffiliated third parties.
On December 27, 1994 and January 27, 1995, the Company issued and sold
400,000 shares and 800,000 shares, respectively, of Common Stock to Mr. Seidl,
its President and Chief Executive Officer, at a price of $.25 per share based on
the early exercise of previously-granted options with an equivalent exercise
price. In connection with the sale of such shares, the Company loaned Mr. Seidl
$300,000. The loans are full recourse, bear interest at the rate of 7.74% per
annum in the case of $100,000 of principal and at the rate of 7.92% per annum in
the case of $200,000 of principal, are due on the earlier of termination of Mr.
Seidl's employment or December 26, 1999 and January 25, 2000, respectively, and
are secured by the shares of Common Stock purchased with the proceeds of such
loans.
On July 21, 1995, the Company issued and sold 170,000 shares of Common Stock
to Mr. Mallory, an executive officer of the Company, at a price of $.50 per
share, based on the early exercise of a previously-granted option with an
equivalent exercise price. In connection with the sale of such shares, the
Company loaned Mr. Mallory $85,000. The loan is full recourse, bears interest at
the rate of 6.28% per annum, is due on the earlier of termination of Mr.
Mallory's employment or July 21, 2000 and is secured by the shares of Common
Stock purchased with the proceeds of such loan.
On July 31, 1995, the Company issued and sold 180,000 shares of Common Stock
to Mr. Manca, an executive officer of the Company at a price of $.50 per share
based on the early exercise of a previously-granted option with an equivalent
exercise price. In connection with the sale of such shares, the Company loaned
Mr. Manca $90,000. The loan is full recourse, bears interest at the rate of
6.28% per annum, is due on the earlier of termination of Mr. Manca's employment
or July 31, 2000 and is secured by the shares of Common Stock purchased with the
proceeds of such loan.
On August 1, 1995, the Company issued and sold 45,110 shares of Common Stock
to Ronald W. Goodall, a former executive officer of the Company who resigned in
1996, at a price of $.05 per share, based on the early exercise of a
previously-granted option with an equivalent exercise price. On August 1, 1995,
the Company also issued and sold 144,000, 110,000 and 40,000 shares of Common
Stock to Messrs. Jennings, Johnson and Goodall, respectively, each an executive
officer of the Company, at a price of $.25 per share
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<PAGE>
based on the early exercise of previously-granted options with equivalent
exercise prices. On August 1, 1995, the Company also issued and sold 155,408,
50,000 and 110,658 shares of Common Stock to Messrs. Edwards, Goodall and
Johnson, respectively, each an executive officer of the Company, at a price of
$.50 per share, based on the early exercise of previously-granted options with
an equivalent exercise price. In connection with the sale of shares, the Company
loaned Messrs. Goodall, Jennings, Johnson and Edwards $37,255, $36,000, $82,829
and $77,704, respectively. The loans are full recourse, bear interest at the
rate of 6.04% per annum, are due on the earlier of termination of employment or
August 1, 2000 and are secured by the shares of Common Stock purchased with the
proceeds of such loans. Notwithstanding the foregoing, the Company agreed to
extend the maturity date of the restricted stock purchase loan of Mr. Goodall
until December 31, 1996, at which time a balance of $40,455 in principal and
accrued interest will be due. The Company will exercise its option to repurchase
the unvested portion of Mr. Goodall's restricted stock at the original purchase
price, and such amount will be credited against the amount of principal and
interest due.
The amounts of outstanding indebtedness, including interest, on the loans to
executive officers described above as of June 30, 1996, which were the largest
aggregate amount of indebtedness owed by each of the officers at any time, were
as follows: Mr. Seidl, $334,315.40, Mr. Mallory, $90,060.13, Mr. Manca,
$95,202.94, Mr. Jennings, $37,995.68, Mr. Johnson, $87,420.68, Mr. Edwards,
$82,011.57 and Mr. Goodall, $39,135.83. The terms (including the terms of the
promissory notes) of the sale of shares of Common Stock by the Company to
Messrs. Seidl, Mallory, Manca, Jennings, Johnson, Edwards and Goodall were
unanimously approved by the Board of Directors of the Company. The shares were
issued upon the early exercise of unvested options and are subject to repurchase
by the Company at the original price paid per share upon such executive
officer's termination of employment prior to vesting in such shares. The
repurchase rights lapse and the shares vest at the same rate as the prior
vesting schedule of the exercised options. See "Management -- Executive
Compensation." The sales price of each sale was the fair market value of the
Company's Common Stock on the original date of grant of each option to purchase
Common Stock, as determined by the Board of Directors of the Company.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 30, 1996, and as adjusted to
reflect the sale of shares offered hereby by (i) each person who is known by the
Company to own beneficially more than five percent of the Common Stock, (ii)
each of the Named Executive Officers, (iii) each of the Company's directors and
(iv) all current directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES PERCENT BENEFICIALLY
BENEFICIALLY OWNED (1)(2)
OWNED (1) ------------------------
------------- BEFORE AFTER
BENEFICIAL OWNER NUMBER OFFERING OFFERING
- ------------------------------------------------------------------------------ ------------- ----------- -----------
<S> <C> <C> <C>
Odyssey Partners, L.P. (3) ................................................... 3,705,952 12.2% 9.1%
31 West 52nd Street
New York, NY 10019
Providence Media Partners L.P ................................................ 2,162,776 7.2 5.3
50 Kennedy Plaza
Providence, RI 02903
Paul M. Cook (4) ............................................................. 2,132,088 7.0 5.2
PM Cook Associates
Bldg. IR-242
333 Ravenswood Avenue
Menlo Park, CA 94025
Banner Partners (5) .......................................................... 2,037,912 6.8 5.0
3000 Sand Hill Road
Bldg. 1, Suite 190
Menlo Park, CA 94025
William C. Edwards (6) ....................................................... 1,894,228 6.3 4.7
3000 Sand Hill Road
Bldg. 1, Suite 190
Menlo Park, CA 94025
Acorn Ventures, Inc. (7) ..................................................... 1,755,400 5.8 4.3
11400 S.E. Sixth Street, Suite 120
Bellevue, WA 98004
AT&T Ventures Company, L.P. (8) .............................................. 1,613,476 5.4 4.0
3000 Sand Hill Road
Bldg. 4, Suite 235
Menlo Park, CA 94025
El Dorado Investment Company (9) ............................................. 1,603,152 5.4 3.9
400 E. Van Buren, Suite 750
Phoenix, AZ 85004
John M. Seidl................................................................. 1,200,000 4.0 3.0
Robert A. Hayes (10).......................................................... 136,000 * *
James J. Jennings............................................................. 180,000 * *
Larsh M. Johnson (11)......................................................... 416,268 1.4 1.0
Philip H. Mallory............................................................. 170,000 * *
Neal M. Douglas (12).......................................................... 1,613,476 5.4 4.0
William Hart (13)............................................................. 998,914 3.3 2.5
Brian Kwait (3)(14)........................................................... 3,705,952 12.2 9.1
Nancy E. Pfund (15)........................................................... 1,367,316 4.6 3.4
Paul J. Salem (16)............................................................ 2,162,776 7.2 5.3
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENT BENEFICIALLY
BENEFICIALLY OWNED (1)(2)
OWNED (1) ------------------------
------------- BEFORE AFTER
BENEFICIAL OWNER NUMBER OFFERING OFFERING
- ------------------------------------------------------------------------------ ------------- ----------- -----------
<S> <C> <C> <C>
Henry B. Sargent (17)......................................................... 1,778,306 5.9% 4.4%
All directors and executive officers as a group (16 persons) (18)............. 19,575,226 61.6 48.2
</TABLE>
- ---------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. In computing the
number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of Common Stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days of June 30, 1996 are deemed outstanding. Such shares,
however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person. The persons named in this table
have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them, subject to community property
laws where applicable and except as indicated in the other footnotes to this
table.
(2) Percentage of beneficial ownership before the Offering is based on
29,915,164 shares of Common Stock outstanding as of June 30, 1996 and gives
effect to the automatic conversion of all outstanding shares of Preferred
Stock into Common Stock. Percentage of beneficial ownership after the
Offering is based on 40,627,538 shares of Common Stock then outstanding and
assumes the exercise of warrants on a cash basis to purchase 4,132,970
shares of Common Stock effective upon the closing of this Offering.
(3) Includes 580,264 shares issuable upon the exercise of warrants held by
Odyssey, all of which are assumed to be exercised upon the closing of this
Offering.
(4) Consists of 1,645,630 shares beneficially owned by the Paul and Marcia Cook
Living Trust, dated April 21, 1992, 120,000 shares beneficially owned by two
trusts of which Mr. Cook is trustee, 328,140 shares issuable upon the
exercise of options exercisable within 60 days of June 30, 1996, 38,004
shares issuable upon the exercise of warrants held by the Paul and Maria
Cook Living Trust, dated April 21, 1992, all of which are assumed to be
exercised upon the closing of this Offering, and 314 shares issuable upon
the exercise of warrants held by Mr. Cook.
(5) Includes 59,658 shares issuable upon the exercise of warrants held by
Banner Partners, of which 59,238 are assumed to be exercised upon the
closing of this Offering.
(6) Includes 989,128 shares, 269,192 shares, and 577,540 shares beneficially
owned by Banner Partners, Banner Partners/Minaret, Carson, a partnership,
and certain members of Mr. Edwards's family and certain foundations and
trusts of which Mr. Edwards is a trustee, respectively. Also includes 29,830
shares, 7,458 shares, and 21,080 shares issuable upon the exercise of
warrants held by Banner Partners, Banner Partners/Minaret, Carson, and such
family members, foundations and trusts, respectively, of which an aggregate
of 58,158 are assumed to be exercised upon the closing of this Offering. Mr.
Edwards, a director of the Company, may be deemed to be a beneficial owner
of shares held by such family members, foundations and trusts. Mr. Edwards
and Alan R. Brudos are the general partners of Banner Partners and exercise
voting and dispositive power over the shares held by Banner Partners.
(7) Includes 136,936 shares issuable upon the exercise of warrants held by
Acorn, all of which are assumed to be exercised upon the closing of this
Offering. Rufus W. Lumry is the principal stockholder, sole director and
President of Acorn, and in such capacities exercises voting and dispositive
power over the shares held by Acorn.
(8) Includes 252,632 shares issuable upon the exercise of warrants held by AT&T
Ventures, all of which are assumed to be exercised upon the closing of this
Offering.
(9) Includes 50,936 shares issuable upon the exercise of warrants held by El
Dorado, of which 50,682 are assumed to be exercised upon the closing of this
Offering.
59
<PAGE>
(10) Consists of 136,000 shares issuable upon the exercise of options
exercisable within 60 days of June 30, 1996 held by Mr. Hayes.
(11) Includes 122,650 shares issuable upon the exercise of options exercisable
within 60 days of June 30, 1996 held by Mr. Johnson.
(12) Consists of 1,613,476 shares beneficially owned by AT&T Ventures. Mr.
Douglas, a director of the Company, is a general partner of AT&T Ventures
and may be deemed to be the beneficial owner of such shares. Mr. Douglas
disclaims beneficial ownership of the shares except to the extent of his
proportionate partnership interest therein.
(13) Consists of 971,936 shares beneficially owned by Technology Partners West
Fund IV, L.P. and 26,978 shares issuable upon the exercise of warrants held
by Technology Partners West Fund IV, L.P., of which 26,838 are assumed to be
exercised upon the closing of this Offering. Mr. Hart, a director of the
Company, is a general partner of Technology Partners and may be deemed to be
the beneficial owner of such shares. Mr. Hart disclaims beneficial ownership
of the shares except to the extent of his proportionate partnership interest
therein.
(14) Consists of 3,705,952 shares beneficially owned by Odyssey. Mr. Kwait, a
director of the Company, is a principal of Odyssey and may be deemed to be
the beneficial owner of such shares. Mr. Kwait disclaims beneficial
ownership of the shares except to the extent of his proportionate
partnership interest therein.
(15) Consists of 11,250 shares beneficially owned by the Pfund Polakoff Family
Trust Dated February 18, 1993, 177,890 shares beneficially owned by H&Q
Group, 1,035,888 shares beneficially owned by H&Q Environmental Technology
Fund and 44,460 shares beneficially owned by the Hambrecht 1980 Revocable
Trust. Also consists of 852 shares issuable upon the exercise of warrants
held by the Pfund Polakoff Family Trust Dated February 18, 1993, 13,918
shares issuable upon the exercise of warrants held by H&Q Group, 79,472
shares issuable upon the exercise of warrants held by H&Q Environmental
Technology Fund and 3,586 shares issuable upon the exercise of warrants held
by the Hambrecht 1980 Revocable Trust, of which 97,538 shares are assumed to
be exercised upon the closing of this Offering. Ms. Pfund, a director of the
Company, is a general partner of the H&Q Environmental Technology Fund and
an employee of H&Q Group and may be deemed to be the beneficial owner of
such shares. Ms. Pfund disclaims beneficial ownership of the shares held by
H&Q Group, H&Q Environmental Technology Fund and the Hambrecht 1980
Revocable Trust except to the extent of her proportionate interest therein.
(16) Consists of 2,162,776 shares beneficially owned by Providence Media
Partners L.P. ("PMP"). Mr. Salem, a director of the Company, is a limited
partner of Providence Ventures L.P., the general partner of the general
partner of PMP, and is a vice president of Providence Ventures Inc., which
provides investment management services to PMP, and may be deemed to be
beneficial owner of such shares. Mr. Salem disclaims beneficial ownership of
the shares except to the extent of his proportionate partnership interest
therein.
(17) Consists of 4,210 shares beneficially owned by Mr. Sargent, 1,552,216
shares beneficially owned by El Dorado and 132,940 shares beneficially owned
by Sundance Capital Corporation. Also consists of 842 shares issuable upon
the exercise of warrants held by Mr. Sargent, 50,936 shares issuable upon
the exercise of warrants held by El Dorado and 37,162 shares issuable upon
the exercise of warrants held by Sundance Capital Corporation, of which
88,686 are assumed to be exercised upon the closing of this Offering. Mr.
Sargent, a director of the Company, is President of El Dorado and a
principal of Anderson & Wells Investment Companies, which manage Sundance
Capital Corporation, and may be deemed to be the beneficial owners of such
shares. Mr. Sargent disclaims beneficial ownership of the shares held by El
Dorado and Sundance Capital Corporation.
(18) Includes 1,882,674 shares issuable upon the exercise of options and
warrants exercisable within 60 days of June 30, 1996.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the Offering, the authorized capital stock of the
Company will consist of 100,000,000 shares of Common Stock and 15,000,000 shares
of Preferred Stock after giving effect to the automatic conversion of all
outstanding shares of Preferred Stock into Common Stock and the amendment and
restatement of the Company's Certificate of Incorporation. Prior to the
Offering, there has been no public market for the Company's Common Stock. The
following summary of certain provisions of the Common Stock and Preferred Stock
does not purport to be complete and is subject to, and qualified by, the
provisions of the Company's Restated Certificate of Incorporation which is
included as an exhibit to the Registration Statement of which this Prospectus is
a part, and by the provisions of applicable law.
COMMON STOCK
As of June 30, 1996, there were 34,048,134 shares of Common Stock
outstanding which were held of record by 285 stockholders, as adjusted to
reflect the automatic conversion of all outstanding shares of Preferred Stock
into 24,705,692 shares of Common Stock and the issuance of 4,132,970 shares of
Common Stock upon the assumed exercise of certain outstanding warrants.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders, except that, in the election of
directors, the holders are entitled to cumulative voting. Under terms of the
Shareholders' Agreement, the Company is obligated to nominate for election those
persons designated by the parties to the Shareholders' Agreement for as long as
the entities having the right to select such persons continue to hold not less
than 700,000 shares of Common Stock, as appropriately adjusted for stock splits,
consolidations or similar events. The parties to the Shareholders' Agreement
have also agreed to take such action as is necessary to retain the right of
cumulative voting in the election of directors and to maintain a Board of
Directors of not less than eight directors until August 15, 1997. See "Risk
Factors -- Shareholders' Agreement" and "Management -- Board of Directors."
Subject to preferences that may be applicable to any outstanding series of
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the board of
directors out of funds legally available for that purpose. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. However, certain stockholders
have certain contractual pre-emptive and subscription rights. See "--Rights of
First Refusal" and "--Other Rights." There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are fully paid and non-assessable, and the shares of Common Stock offered
hereby will, upon the closing of the Offering, be fully paid and non-assessable.
PREFERRED STOCK
Effective upon the closing of the Offering, the Company will be authorized
to issue 15,000,000 shares of undesignated Preferred Stock, none of which will
be outstanding. The Board of Directors will have the authority, without further
action by the stockholders, to issue the undesignated Preferred Stock in one or
more series, to fix the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued shares of undesignated Preferred Stock
and to fix the number of shares constituting any series and the designation of
such series. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders, may discourage bids for the Company's Common Stock
at a premium over the market price of the Common Stock and may adversely affect
the market price of and the voting and other rights of the holders of Common
Stock. At present, the Company has no plans to issue any Preferred Stock.
WARRANTS
Upon the closing of the Offering, the Company will have outstanding warrants
to purchase an aggregate of 50,150 shares of Common Stock, after giving effect
to an assumed exercise of warrants to purchase 4,132,970 shares of Common Stock.
Such outstanding warrants consist of warrants to purchase 50,000 shares
61
<PAGE>
of Common Stock at an exercise price of $2.00 per share (the "$2.00 Warrants")
and warrants to purchase an aggregate of 150 shares of Common Stock at an
exercise price of $20.00 per share (the "$20.00 Warrants"). 40,000 of the $2.00
Warrants are currently exercisable, and the remaining 10,000 $2.00 Warrants will
become exercisable on August 21, 1997. The $2.00 Warrants will expire on
February 24, 1999. The $20.00 Warrants are currently exercisable and will expire
on February 6, 1997.
In addition, the Company has outstanding Note Warrants to purchase an
aggregate of 2,600,000 shares of Common Stock at an exercise price of $.005 per
share, which Note Warrants were issued in connection with the issuance of the
Senior Discount Notes, and warrants to purchase an aggregate of 766,485 shares
of Series BB Preferred Stock at an exercise price of $4.75 per share (the
"Preferred Warrants"), which Preferred Warrants were issued in connection with
the issuance of the Series BB Preferred Stock. The Note Warrants will expire 270
days after the closing date of this Offering and the Preferred Warrants will
expire immediately prior to the closing of this Offering. This Prospectus
assumes that each of the Note Warrants and Preferred Warrants will be exercised
upon the closing of the Offering.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After the Offering, the holders of 28,188,916 shares of Common Stock and
1,532,970 shares issuable upon the assumed exercise of warrants to purchase
Common Stock (assuming no cashless exercise of such warrants) and their
transferees will be entitled to certain rights with respect to the registration
of such shares under the Securities Act pursuant to the Shareholders' Agreement.
Under the Shareholders' Agreement, if the Company proposes to register any of
its securities under the Securities Act, the holders are entitled to notice of
such proposed registration and the opportunity to include their shares therein,
subject to certain conditions and limitations including the right of the
underwriters of an offering to limit the number of shares included in such
registration to 25% of the total number of shares to be registered in certain
circumstances. The holders may also require that the Company file up to two
registration statements under the Securities Act with respect to underwritten
public offerings of their shares at any time beginning 180 days after the
effective date of the Offering. Furthermore, the holders may require the Company
to register their shares on Form S-3 when such form becomes available to the
Company. In addition, holders who purchased Series CC Preferred Stock are
entitled to initiate two separate demand registrations with respect to an
underwritten public offering of the shares of Common Stock issuable upon
conversion of the Series CC Preferred Stock at any time beginning 180 days after
the effective date of the Offering, subject to certain other conditions and
limitations. Other holders may participate in such registration, provided that
in the event of an underwriter's cutback, the number of shares that may be
included in such registration would be subject to certain allocations. The
Company will pay certain expenses in connection with the exercise of the
foregoing rights. All registration rights will terminate as to any holder upon
the later to occur of (i) one year after the Offering or (ii) such time as such
holder may sell all his or her shares under Rule 144 in any three month period.
Pursuant to its obligation under the Warrant Agreement, concurrently with
the closing of the Offering the Company is registering the offer and sale of
2,600,000 Note Warrant Shares which are being offered for sale by the Company to
holders electing to exercise the Note Warrants. The Note Warrants are
exercisable at any time beginning on the closing of the Offering and ending on
the Expiration Date. If not exercised by the Expiration Date, the Note Warrants
terminate and may not be exercised. The Note Warrant Shares are currently
subject to lock-up agreements which prohibit resale of (i) 866,667 of the Note
Warrant Shares for 120 days from the closing of the Offering and (ii) the
remaining 1,733,333 Note Warrant Shares for 180 days from the closing of the
Offering. Under a Warrant Registration Rights Agreement dated June 15, 1995, as
supplemented on November 21, 1995 (the "Warrant Registration Rights Agreement"),
after the Offering the holders of Note Warrants may require, subject to the
provisions of certain lockup agreements, that the Company file up to three
registration statements under the Securities Act with respect to the Note
Warrant Shares. Furthermore, the holders may require the Company to register the
Note Warrant Shares on a Form S-3 when such form becomes available to the
Company, subject to certain conditions and limitations. If the Company proposes
to register any of its securities under the Securities Act, either for its own
account or for the account of other security holders, the holders of the Note
Warrant Shares are entitled to notice of such registration and are entitled to
include their shares therein, subject to certain conditions and limitations
including the right of underwriters of an offering to limit the number of shares
included in such registration
62
<PAGE>
in certain circumstances. The Company will pay certain expenses in connection
with the exercise of the foregoing rights. The registration rights of the
holders of the Note Warrant Shares under the Warrant Registration Rights
Agreement terminate when such shares may be sold without limitation pursuant to
Rule 144 under the Securities Act.
The Company has also agreed to register up to one half of the 1,579,404
shares of Common Stock purchased by NSP, UE and BEn in the Direct Placements
upon request at any time after ten months from the closing of the Offering.
RIGHTS OF FIRST REFUSAL
Under the Shareholders' Agreement, holders who purchased Series CC Preferred
Stock have a right of first refusal to purchase, at the same price and on the
same general terms, a pro rata portion of equity securities that the Company
proposes to issue in certain transactions, including equity securities proposed
to be issued to any public or private utility or an affiliate of such utility,
and have a right of first refusal to purchase a pro rata portion of any equity
securities that any subsidiary of the Company proposes to issue to any public or
private utility or an affiliate of such utility if the subsidiary's business is
unrelated to the market area of such utility or if such securities are
convertible into equity securities of the Company. Such pro rata portion is
based on the ratio of the number of shares of Common Stock held by such holder
to the total number of shares of Common Stock then outstanding, including shares
of Common Stock issuable upon the exercise of "in the money" options and
warrants, at the time of issuance of such equity securities. This right of first
refusal terminates three years after the closing date of this Offering. The
holders of such rights have agreed to waive such rights in connection with the
Direct Placements.
OTHER RIGHTS
Under the Shareholders' Agreement, the investors in Series CC Preferred
Stock have the right to co-invest on similar terms and conditions in any foreign
investments, partnerships, or joint ventures involving the Company which include
financing from purely financial (as compared to strategic) investors. The co-
investment rights terminate three years after the closing date of this Offering.
Under the Shareholders' Agreement, in the event that any holder of shares of
the Company's equity securities who is a party to such agreement intends to
transfer (other than to an affiliate) any such shares to a buyer who owns or
will acquire as a result of the sale voting stock equal to 20% or more of the
Company's outstanding equity securities, the parties to the Shareholders'
Agreement will have the right to sell a pro rata portion of their shares to the
buyer in such transaction. In the event that any holder of shares of the
Company's equity securities who is a party to the Shareholders' Agreement
intends to acquire (other than from an affiliate) additional voting stock, and
such holder owns or will acquire as a result of such purchase 20% or more of the
Company's voting stock, the parties to the Shareholders' Agreement also have the
right to sell to such purchasing holder a pro rata portion of the voting stock
proposed to be acquired in such transaction. This co-sale right terminates three
years after the closing date of this Offering.
In addition, NSP has a right to participate in future public offerings of
newly issued shares of Common Stock by the Company. NSP will be entitled to
purchase a pro rata portion of the shares that the Company proposes to offer to
the public based on the ratio of the number of shares purchased by NSP in the
Direct Placements and owned on the date of such public offering to the total
number of shares of Common Stock then outstanding before giving effect to such
public offering. However, NSP may not exercise such participation right to the
extent that NSP's percentage ownership of the Common Stock after such new
offering would exceed the percentage ownership of NSP upon the closing of this
Offering (after giving effect to the release of any Escrow Shares to NSP). NSP's
participation shall be on the same terms and conditions as the public investors
in such public offering. NSP's participation right terminates two years after
the effective date of this Offering.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of
63
<PAGE>
three years following the date the person became an interested stockholder,
unless (with certain exceptions) the "business combination" or the transaction
in which the person became an interested stockholder is approved in a prescribed
manner. Generally, a "business combination" includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the stockholder.
Generally, an "interested stockholder" is a person who, together with affiliates
and associates, owns (or within three years prior, did own) 15% or more of a
corporation's voting stock. The existence of this provision would be expected to
have an anti-takeover effect with respect to transactions not approved in
advance by the Board of Directors, including discouraging attempts that might
result in a premium over the market price for the shares of Common Stock held by
stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The Bank of New
York.
64
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering and the Direct Placements, the Company
will have 40,627,538 shares of Common Stock outstanding, after giving effect to
the assumed exercise on a cash basis of warrants to purchase 4,132,970 shares of
Common Stock. Of these shares, the 5,000,000 Shares sold in the Offering will be
freely tradable without restriction under the Securities Act, unless held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. Pursuant to its obligation under the Warrant Agreement,
concurrently with the closing of the Offering the Company is registering the
offer and sale of 2,600,000 Note Warrant Shares which are being offered for sale
by the Company to holders electing to exercise the Note Warrants. The Note
Warrants are exercisable at any time beginning on the closing of the Offering
and ending on the Expiration Date. If not exercised by the Expiration Date, the
Note Warrants terminate and may not be exercised. The Note Warrant Shares are
currently subject to lock-up agreements which prohibit resale of (i) 866,667 of
the Note Warrant Shares for 120 days from the closing of the Offering and (ii)
the remaining 1,733,333 Note Warrant Shares for 180 days from the closing of the
Offering. The remaining 33,027,538 shares of Common Stock held by existing
stockholders and by NSP, UE and BEn were issued and sold by the Company in
reliance on exemptions from the registration requirements of the Securities Act
and are "restricted" securities within the meaning of Rule 144 under the
Securities Act ("Restricted Shares"). Restricted Shares may be sold in the
public market only if registered, or pursuant to an exemption from registration
such as Rules 144, 144(k) or 701 under the Securities Act. Sales of the
Restricted Shares in the public market, or the availability of such shares for
sale, could adversely affect the market price of the Common Stock.
All of the Company's directors, officers and holders of five percent or more
of the Common Stock, and certain other stockholders, have entered into lockup
agreements under which they have agreed not to offer, sell, or otherwise dispose
of any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exercisable or exchangeable for or convertible into Common
Stock owned by them for a period of 180 days after the date of this Prospectus,
without the prior written consent of Morgan Stanley & Co. Incorporated. The
Company has entered into a similar agreement, except that the Company may grant
options and issue shares of Common Stock under its current stock option and
stock purchase plans and pursuant to other currently outstanding options. The
holders of 243,854 shares of Common Stock issued or issuable upon exercise of
options granted under the 1992 Plan have entered into similar agreements which
are applicable for a period of 120 days after the date of this Prospectus. See
"Underwriters."
Under the agreements related to the Direct Placements, NSP, UE and BEn have
agreed not to directly or indirectly sell or transfer 789,702 of the aggregate
number of shares of Common Stock purchased by them in the Direct Placements for
a period of one year from the effective date of the Offering, and not to
directly or indirectly sell or transfer the remaining 789,702 shares of Common
Stock purchased by them in the Direct Placements for a period of two years from
the effective date of this Offering. Upon expiration of such two year period,
all of such shares will be eligible for immediate public resale, subject to the
provisions of Rule 144. In addition, the Company has also agreed to register up
to one half of the 1,579,404 shares of Common Stock purchased by NSP, UE and BEn
in the Direct Placements upon request at any time after ten months from the
closing of the Offering.
On the date of this Prospectus, no shares other than 366 shares of Common
Stock previously issued and the Shares will be eligible for immediate sale in
the public market. Upon expiration of the various lock-up agreements,
approximately 1,110,521 shares of Common Stock will become eligible for
immediate public resale 120 days after the closing of the Offering (including
866,667 Note Warrant Shares issuable upon the assumed cash exercise of the Note
Warrants) and 31,303,473 shares of Common Stock will become eligible for
immediate public resale 180 days after the closing of the Offering (including
1,733,333 Note Warrant Shares issuable upon the assumed cash exercise of the
Note Warrants) subject in the case of certain shares (including shares held by
affiliates) to the limitations under Rule 144 under the Securities Act. The
remaining approximately 1,680,208 shares held by existing stockholders and
issuable in the Direct Placements will become eligible for public resale at
various times beginning after 180 days after the date of this Prospectus and
subject to the provisions of Rule 144. In addition, approximately 243,854 shares
of Common Stock which are subject to the provisions of Rule 701, and 1,872,244
shares which are subject to
65
<PAGE>
vested options, will be available for sale in the public market, in each case,
120 days after the effective date of the Offering and 267,592 shares which are
subject to vested options will be available for sale in the public market 180
days after the effective date of the Offering.
The holders of approximately 28,188,916 of the shares outstanding
immediately following the completion of the Offering and 1,532,970 shares of
Common Stock issuable upon exercise of outstanding warrants and their permitted
transferees are entitled to certain registration rights with respect to such
shares upon the expiration of the lockup agreements described above. The number
of shares sold in the public market could increase if such registration rights
are exercised. See "Description of Capital Stock -- Registration Rights of
Certain Holders." In addition, as of June 30, 1996, 3,779,136 shares were
subject to outstanding options. All of these shares are subject to the lockup
agreements described above. As soon as practicable after this Offering, the
Company intends to file a Registration Statement on Form S-8 covering shares
issuable under the Company's 1992 Plan and 1994 Plan (including shares subject
to then outstanding options under such plans), and under the Company's Purchase
Plan, thus permitting the resale of such shares by non-affiliates in the public
market without restriction under the Securities Act after expiration of the
applicable lock-up agreements. See "Management -- Incentive Stock Plans."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years (including the holding period of any prior owner, except an
affiliate) is entitled to sell within any three-month period commencing 90 days
after the date of this Prospectus, a number of shares that does not exceed the
greater of (i) one percent of the number of shares of Common Stock then
outstanding (approximately 406,275 shares immediately after this Offering) or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the required filing of a Form 144 with respect to such
sale. Sales under Rule 144 are generally subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed to
have been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
three years, is entitled to sell such shares without having to comply with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. Under Rule 701 under the Securities Act, employees, directors or
consultants who purchase shares upon exercise of options granted prior to the
effective date of this Offering are entitled to sell such shares commencing 90
days after the effective date of this Offering in reliance on Rule 144, without
having to comply with the holding period requirements of Rule 144 and, in the
case of non-affiliates, without having to comply with the public information,
volume limitation or notice provisions of Rule 144.
The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. There can be no assurance as to when or whether such rule changes
will be enacted. If enacted, such modifications will have a material effect on
the times when shares of the Company's Common Stock become eligible for resale.
Prior to this Offering, there has been no public market for the Common Stock
and no prediction can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
66
<PAGE>
PLAN OF DISTRIBUTION
The price of the Common Stock offered hereby is based on the exercise price
of the Note Warrants as provided in the Note Warrant Agreement. As the Company
effected a 2-for-1 stock split of its outstanding Common Stock effective
immediately prior to the effective date of the Offering, the original Note
Warrant exercise price of $0.01 per share has been proportionately adjusted to
$0.005 per share to reflect such split. Similarly, the original number of shares
of Common Stock issuable upon exercise of the Note Warrants has been increased
from an aggregate of 1,300,000 shares to 2,600,000 shares. Certain of the
Company's executive officers will participate in the sale of the Note Warrant
Shares to holders upon exercise of the Note Warrants. These participants, who
will not receive any compensation for these activities, will not be deemed to
brokers pursuant to Rule 3a4-1 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and will merely ensure compliance with the
Company's obligations under the Warrant Agreement in connection with the
issuance of Note Warrant Shares upon exercise of the Note Warrants. The Company
will not pay any finder's fee or commission in connection with the offering
hereby of Note Warrant Shares in connection with the exercise of Note Warrants.
The Company will pay all of the expenses incident to the Note Warrant Offering
which are estimated to be less than $25,000.
The Note Warrants may be exercised for cash or on a cashless basis any time
before the Expiration Date. Any holder electing to exercise on a cashless basis
will receive the number of Note Warrant Shares equal to the product of the
number of Note Warrant Shares for which the Note Warrant is exercisable and the
Cashless Exercise Ratio as defined in the Warrant Agreement. The "Cashless
Exercise Ratio" is defined in Section 2.02(c) of the Warrant Agreement as a
fraction, the numerator of which is the excess of the Current Market Value of
the Common Stock on the date of exercise over the exercise price per share as of
the date of exercise and the denominator of which is the Current Market Value of
the Common Stock on the date of exercise. The "Current Market Value" per share
of the Note Warrant Shares is defined in Section 5.01(n) of the Warrant
Agreement as the average of the daily closing bid prices for each business day
during the period commencing 15 business days before such date and ending on the
date one day prior to such date or, if the security has been registered under
the Exchange Act for less than 15 consecutive business days before such date,
then the average of the daily closing bid prices for all of the business days
before such date for which daily closing bid prices are available. If the
closing bid is not determinable for at least 10 business days in such period,
the Current Market Value of the security shall be determined reasonably and in
good faith by a disinterested majority of the Board of Directors of the Company
and certified in a board resolution, or, if at the time there are not at least
three disinterested members of the Board of Directors, by a nationally
recognized investment banking firm or appraisal firm which is not an affiliate
of the Company.
Delivery of the Note Warrant Shares upon exercise of a Note Warrant will be
made to the holder immediately following receipt by the Company of the original
Note Warrant certificate, an Election to Exercise duly completed and signed by
the registered holder or holders thereof, and full payment of the aggregate
exercise price if the exercise is on a cash basis. If a Note Warrant is
currently held by the Depository Trust Company in global form, the holder must,
by written request, request the Warrant Agent to issue the holder a definitive
Note Warrant certificate which may then be delivered to the Company upon
exercise thereof. Upon receipt by the Company of the Note Warrant certificate
and Election to Exercise and collection of the aggregate exercise price, if
applicable, such Note Warrant certificate and any such payment must be delivered
by the Company immediately to the Warrant Agent. The exercise date shall be
deemed to be the date the Warrant Agent receives the foregoing items, and the
Warrant Agent upon determining that such exercise has been timely, shall then
promptly remit payment of the exercise price, if any, to the Company and advise
the Company with respect to delivery of Note Warrant Shares to the holder. The
Company as soon thereafter as practicable must issue or cause the issuance of
the appropriate number of Note Warrant Shares to such holder. Any such Note
Warrant Shares issued in connection with a timely exercise will be shares of the
Company's Common Stock which have been registered for resale under the
Securities Act as provided in the Warrant Agreement. All Note Warrant Shares are
subject to lock-up agreements which prohibit resale of (i) 866,667 of such
shares for 120 days from the closing of the Offering and (ii) the remaining
1,733,333 Note Warrant Shares for 180 days from the closing of the Offering. See
"Shares Eligible for Future Sale."
67
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. As of the date of this Prospectus, certain members of Wilson
Sonsini Goodrich & Rosati, Professional Corporation and investment partnerships
of which such persons are partners beneficially own 20,528 shares of the
Company's Common Stock. Certain legal matters in connection with this Offering
will be passed upon for the Company by Fish & Richardson, Menlo Park,
California, and by Wilkinson, Barker, Knauer & Quinn, Washington, D.C., and for
the Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements as of December 31, 1994 and 1995 and
for each of the three years in the period ended December 31, 1995 included in
this Prospectus and the related financial statement schedule appearing elsewhere
in this Registration Statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein, and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act, of
which this Prospectus forms a part, with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified by such reference. A copy of the Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may be obtained from the
Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and its public reference facilities
in New York, New York and Chicago, Illinois, at prescribed rates. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by its independent auditors
and with quarterly reports containing unaudited financial information for each
of the first three quarters of each fiscal year.
68
<PAGE>
GLOSSARY
<TABLE>
<CAPTION>
TERM DEFINITION
- -------------------------------- --------------------------------------------------------------------------------
<S> <C>
APPLICATIONS Software programs that enable computers to perform tasks such as, in the case of
utility applications, metering, load management, load research, and distribution
automation.
AUTOMATED METER READING ("AMR") Use of hand-held or drive-by automated meter reading equipment.
BANDWIDTH The amount of message traffic a given medium can accommodate at one time.
Bandwidth may refer to analog or digital data.
CAPACITY For electric utility purposes, a measure (in watts) of the ability to produce,
transport or store electricity at any instant rather than over time.
CELLMASTER The communications gateway between the System Controller and the MCCs and RTUs.
The CellMaster can connect to the System Controller via modem over a leased line
or via privately-owned communications media such as microwave channels or fiber
optic transmission lines. CellNet's 9QPR cellular radio provides the connection
between the CellMaster and the MCCs and RTUs.
CELLNET-REGISTERED TRADEMARK- CellNet's wireless data communications system, which provides NMR services,
SYSTEM control and monitoring of the power distribution network, and other services.
The CellNet system concurrently supports multiple utility applications,
including distribution automation and demand-side management.
CELLULAR DIGITAL PACKET DATA A method of transmitting data over a cellular communications network using
("CDPD") underutilized radio frequency or pauses in voice communication.
DEMAND For electric utility purposes, the rate at which electric energy is delivered to
or used by a system, part of a system, or piece of equipment at a given instant,
or averaged over a designated period. Measured in kilowatts.
DISTRIBUTION AUTOMATION Any program used by an electric utility to monitor, coordinate and operate
distribution components in a real-time mode from remote locations.
DISTRIBUTION NETWORK The utility's wiring grid between the substation and customer sites.
GATEWAY The connection between two computer networks. CellNet uses a gateway to connect
a SCADA system to other computers for billing and other applications.
LEASED LINE A dedicated telephone line connecting two or more fixed locations. CellNet may
use a leased line or radio links to connect a CellMaster and System Controller.
LOAD For electric utility purposes, the amount of electric power delivered or
required at any specific point or points of a system.
LOAD CONTROL The capability to manage electric power consumption by controlling the use of
equipment and appliances. Typically used by a utility to avoid either a brownout
or the necessity of generating high-cost electricity.
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
TERM DEFINITION
- -------------------------------- --------------------------------------------------------------------------------
<S> <C>
LOAD PROFILE A record of a customer's electricity use over time in discrete intervals.
Utility companies use this data to analyze consumption, to calculate demand or
time-of-use data and to detect power theft and meter tampering.
LOCAL AREA NETWORK ("LAN") In the CellNet system, the LAN connects MCCs to radios in endpoint devices.
MAS Multiple address system, a form of radio communication system.
MICRO CELL CONTROLLER ("MCC") A device which manages endpoint devices in a local coverage area (as part of a
LAN), collects and processes data transmissions from such endpoint devices and
transmits such data to a CellMaster.
NETWORK METER READING ("NMR") Fully-automated meter reading on a network.
NETWORK OPERATING SYSTEM ("NOS") A Network Operating System is the software that supports the operation of
distributed applications with communications, database capabilities, and common
Applications Programming Interfaces (APIs).
NODE In the CellNet's system, a node is an internet addressable, responsive,
computer-based subsystem (for example, a System Controller workstation or a MCC)
that is able to take part in internetworking activities.
OBJECT-ORIENTED An adjective that describes a method of software analysis, design, and/or
programming that facilitates sophisticated problem-solving. Object-oriented
systems are flexible and maintainable because of their natural way of handling
user-oriented systems and consistent, powerful, underlying representation for
what is to be built and how it will be built. The CellNet system is built on an
object-oriented, distributed infrastructure.
PACKET A block of data preceded by, and perhaps followed by, one or more bytes of
information specific to the communications service (a communications protocol)
used to transmit the packet.
PERSONAL COMMUNICATIONS SERVICES Digital wireless communications services which are expected to use a microcell
("PCS") technology and operate at a higher frequency than cellular systems.
PROTOCOL Rules and conventions that govern communication between OSI model layers and, in
the CellNet system, subsystems for functions such as format, timing, sequencing,
and error control.
REMOTE TERMINAL UNIT ("RTU") Device typically used to monitor and control components of a utility's
distribution network. The RTU combines digital and analog inputs, which are used
to obtain detailed information about the distribution equipment being monitored.
An RTU can sense remotely such things as current, temperature and power factor.
RF Radio Frequency
SPECIALIZED MOBILE RADIO ("SMR") A two way radio service operating in the 800-900 megahertz band. FCC
restrictions on use of this bandwidth for taxi dispatchers and similar vehicle
"fleet" operators have been relaxed, allowing holders of these frequency
licenses to expand into cellular-like services.
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
TERM DEFINITION
- -------------------------------- --------------------------------------------------------------------------------
<S> <C>
SPREAD SPECTRUM A modulation technique in which a signal is broadcast over a range of
frequencies to minimize noise and interference.
TIME-OF-USE ("TOU") Time-of-use metering allows a utility to bill electric power usage at different
rates, according to the time that the power was consumed.
WIDE AREA NETWORK ("WAN") In the CellNet system the WAN connects the CellMasters to the MCCs in a given
service area.
</TABLE>
A-3
<PAGE>
CELLNET DATA SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (unaudited)................. F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and the six
months ended June 30, 1995 and 1996 (unaudited)........................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1996 (unaudited)................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the six
months ended June 30, 1995 and 1996 (unaudited)........................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
CellNet Data Systems, Inc.:
We have audited the accompanying consolidated balance sheets of CellNet Data
Systems, Inc. and subsidiaries (the "Company") as of December 31, 1994 and 1995,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CellNet Data Systems, Inc. and
subsidiaries at December 31, 1994 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
February 9, 1996
(April 11, 1996 as to the last sentence of the
second paragraph of Note 5 and
September 5, 1996 as to Note 10)
F-2
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------- JUNE 30, JUNE 30,
1994 1995 1996 1996
--------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(NOTE 1)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 12,503 $ 48,018 $ 70,730 $ 74,384
Short-term investments................................. 12,005 95,779 32,237 32,237
Accounts receivable.................................... 703 2,118 1,904 1,904
Prepaid expenses and other............................. 248 940 886 886
--------- --------- ----------- -----------
Total current assets................................. 25,459 146,855 105,757 109,411
Network Components and Inventory......................... 2,146 11,664 12,569 12,569
Networks in Progress..................................... 1,333 12,602 29,850 29,850
Property -- net.......................................... 2,871 7,539 9,129 9,129
Debt Issuance Costs -- net............................... -- 5,646 5,348 5,348
--------- --------- ----------- -----------
Total assets........................................... $ 31,809 $ 184,306 $ 162,653 $ 166,307
--------- --------- ----------- -----------
--------- --------- ----------- -----------
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable....................................... $ 2,050 $ 7,241 $ 6,329 $ 6,329
Accrued compensation and related benefits.............. 402 1,353 735 735
Accrued liabilities.................................... 889 981 990 990
Current portion of capital leases...................... 384 280 296 296
--------- --------- ----------- -----------
Total current liabilities: 3,725 9,855 8,350 8,350
--------- --------- ----------- -----------
Senior Discount Notes -- 13%............................. -- 182,528 194,720 194,720
--------- --------- ----------- -----------
Capital Lease Obligations -- net......................... 162 540 497 497
--------- --------- ----------- -----------
Commitments and Contingencies (Notes 1 and 9)
Series CC Redeemable Convertible Preferred Stock -- $.001
par value; 3,215,768 shares designated and outstanding
and none on a pro forma basis; aggregate liquidation
value of $31,000,000.................................... 29,486 29,486 29,486 --
--------- --------- ----------- -----------
Stockholders' Equity (deficit):
Convertible preferred stock -- $.001 par value;
15,000,000 shares authorized; shares outstanding,
1994: 9,008,518; 1995: 9,136,675; 1996: 9,137,078; no
shares outstanding on a pro forma basis; aggregate
liquidation value of $27,812,000...................... 25,990 27,195 27,196 --
Common stock -- $.001 par value; 50,000,000 shares
authorized; shares outstanding: 1994, 2,716,166; 1995,
5,034,262; 1996, 5,209,472 and 34,048,134 on a pro
forma basis........................................... 26,790 27,608 27,636 90,947
Notes receivable from sale of common stock............. (284) (866) (866 ) (866 )
Warrants............................................... 10 2,984 2,984 9
Accumulated deficit.................................... (54,065) (95,021) (127,334 ) (127,334 )
Net unrealized loss on short-term investments.......... (5) (3) (16 ) (16 )
--------- --------- ----------- -----------
Total stockholders' deficit.......................... (1,564) (38,103) (70,400 ) (37,260 )
--------- --------- ----------- -----------
Total liabilities and stockholders' deficit.............. $ 31,809 $ 184,306 $ 162,653 $ 166,307
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales........................................ $ 1,757 $ 1,447 $ 1,663 $ 938 $ 127
Network service revenues............................. -- -- 35 -- 244
Other revenues....................................... -- 204 428 353 49
--------- ---------- ---------- ---------- ----------
Total revenues..................................... 1,757 1,651 2,126 1,291 420
--------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of product sales................................ 1,840 1,191 1,294 598 109
Cost of network operations........................... -- -- 3,835 1,333 3,374
Research and development............................. 5,262 9,693 22,380 6,735 13,009
Marketing and sales.................................. 1,447 3,257 4,201 1,946 2,924
General and administrative........................... 1,450 2,583 6,805 2,874 5,412
--------- ---------- ---------- ---------- ----------
Total costs and expenses........................... 9,999 16,724 38,515 13,486 24,828
--------- ---------- ---------- ---------- ----------
Loss from operations................................... (8,242) (15,073) (36,389) (12,195) (24,408)
Other income (expense):
Interest income...................................... 66 555 4,590 860 3,458
Interest expense..................................... (198) (101) (9,320) (754) (11,264)
Other -- net......................................... (16) (13) 166 (31) (97)
--------- ---------- ---------- ---------- ----------
Total other income (expense)........................... (148) 441 (4,564) 75 (7,903)
--------- ---------- ---------- ---------- ----------
Loss before income taxes............................... (8,390) (14,632) (40,953) (12,120) (32,311)
Provision for income taxes............................. 1 2 3 1 2
--------- ---------- ---------- ---------- ----------
Net loss............................................... $ (8,391) $ (14,634) $ (40,956) $ (12,121) $ (32,313)
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Pro forma net loss per share........................... $ (1.22) $ (0.37) $ (0.94)
---------- ---------- ----------
---------- ---------- ----------
Shares used in computing pro forma net loss per
share................................................. 33,497 32,817 34,483
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NET
CONVERTIBLE NOTES UNREALIZED
PREFERRED STOCK COMMON STOCK RECEIVABLE LOSS ON
------------------ ------------------ FROM SALE ACCUMULATED SHORT-TERM
SHARES AMOUNT SHARES AMOUNT OF STOCK WARRANTS DEFICIT INVESTMENTS TOTAL
--------- ------- --------- ------- ---------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1,
1993...................... 4,244,858 $4,181 895,492 $26,616 $ -- $ 9 $ (31,040) $-- $ (234)
Sales of Series AA
preferred stock (less
issuance costs of $8)..... 755,142 747 -- -- -- -- -- -- 747
Exercise of stock
options................... -- -- 886,618 46 -- -- -- -- 46
Conversion of subordinated
debt ($3,242) and accrued
interest ($32) into Series
BB preferred stock and
warrants.................. 689,190 3,274 -- -- -- -- -- -- 3,274
Sale of Series BB preferred
stock and warrants (less
issuance costs of $504)... 2,748,020 12,549 -- -- -- -- -- -- 12,549
Sales of Series BB
preferred stock for notes
receivable................ 52,635 250 -- -- (250) -- -- -- --
Sale of common stock (less
issuance costs of $1)..... -- -- 400,400 19 -- -- -- -- 19
Sale of stock warrants..... -- -- -- -- -- 1 -- -- 1
Net loss................... -- -- -- -- -- -- (8,391) -- (8,391)
--------- ------- --------- ------- ---------- -------- ----------- ----------- --------
BALANCES, December 31,
1993...................... 8,489,845 21,001 2,182,510 26,681 (250) 10 (39,431) -- 8,011
Exercise of stock options
and restricted stock
purchase.................. -- -- 533,656 109 (100) -- -- -- 9
Sale of Series DD preferred
stock (net of issuance
costs of $10)............. 518,673 4,989 -- -- -- -- -- -- 4,989
Collection of notes
receivable................ -- -- -- -- 66 -- -- -- 66
Net unrealized loss on
short-term investments.... -- -- -- -- -- -- -- (5) (5)
Net loss................... -- -- -- -- -- -- (14,634) -- (14,634)
--------- ------- --------- ------- ---------- -------- ----------- ----------- --------
BALANCES, December 31,
1994...................... 9,008,518 25,990 2,716,166 26,790 (284) 10 (54,065) (5) (1,564)
Sale of Series DD preferred
stock (net of issuance
costs of $31)............. 128,157 1,205 -- -- -- -- -- -- 1,205
Exercise of stock options
and restricted stock
purchases................. -- -- 2,318,096 818 (628) -- -- -- 190
Common stock warrants
issued in connection with
senior discount notes..... -- -- -- -- -- 2,974 -- -- 2,974
Collection of notes
receivable................ -- -- -- -- 46 -- -- -- 46
Net unrealized gain on
short-term investments.... -- -- -- -- -- -- -- 2 2
Net loss................... -- -- -- -- -- -- (40,956) -- (40,956)
--------- ------- --------- ------- ---------- -------- ----------- ----------- --------
BALANCES, December 31,
1995...................... 9,136,675 27,195 5,034,262 27,608 (866) 2,984 (95,021) (3) (38,103)
Exercise of stock options
and warrants*............. 403 1 175,210 28 -- -- -- -- 29
Net unrealized loss on
short-term investments*... -- -- -- -- -- -- -- (13) (13)
Net loss*.................. -- -- -- -- -- -- (32,313) -- (32,313)
--------- ------- --------- ------- ---------- -------- ----------- ----------- --------
BALANCES, June 30, 1996*... 9,137,078 $27,196 5,209,472 $27,636 $ (866) $2,984 $(127,334) $ (16) $(70,400)
--------- ------- --------- ------- ---------- -------- ----------- ----------- --------
--------- ------- --------- ------- ---------- -------- ----------- ----------- --------
</TABLE>
- ------------
*Unaudited
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (8,391) $ (14,634) $ (40,956) $ (12,121) $ (32,313)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization............................. 699 992 2,295 917 2,257
Amortization of discount on 13% senior notes.............. -- -- 9,665 -- 12,192
Amortization of debt issuance costs....................... -- -- 256 17 298
Deferred rent............................................. (115) (43) (46) 22 21
Loss (gain) on disposition of property.................... 1 2 57 14 (15)
Changes in:
Accounts receivable..................................... (293) (282) (1,415) 208 214
Prepaid expenses and other.............................. (93) (126) (692) (668) 54
Network components and inventory........................ (574) (1,260) -- -- --
Accounts payable........................................ 348 1,389 5,191 2,394 (912)
Accrued compensation and related benefits............... -- -- 951 268 (618)
Accrued liabilities..................................... (673) (676) 138 496 (12)
--------- --------- --------- --------- ---------
Net cash used for operating activities................ (9,091) (14,638) (24,556) (8,453) (18,834)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Network components and inventory............................ -- -- (9,518) (3,597) (905)
Networks in progress........................................ -- (1,333) (11,269) (2,467) (17,482)
Purchase of property........................................ (535) (2,436) (6,222) (3,009) (3,478)
Other assets................................................ 73 -- -- -- --
Purchase of short-term investments.......................... (2,962) (12,548) (285,802) (41,890) (263,980)
Proceeds from sales and maturities of short-term
investments................................................ -- 3,500 202,030 14,317 327,522
--------- --------- --------- --------- ---------
Net cash provided by (used for) investing
activities........................................... (3,424) (12,817) (110,781) (36,646) 41,677
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of senior discount notes and related stock
warrants................................................... -- -- 175,837 125,894 --
Cash paid for debt issuance costs........................... -- -- (5,902) (4,034) --
Subordinated debt borrowings................................ 3,242 350 -- -- --
Repayment of debt obligations............................... (403) (511) (524) (313) (160)
Proceeds from sale of preferred stock....................... 13,296 34,122 1,205 1,205 1
Proceeds from sale of common stock.......................... 66 9 190 14 28
Collection of notes receivable from sale of common stock.... -- 66 46 46 --
--------- --------- --------- --------- ---------
Net cash provided by (used for) financing
activities........................................... 16,201 34,036 170,852 122,812 (131)
--------- --------- --------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS......................... 3,686 6,581 35,515 77,713 22,712
CASH AND CASH EQUIVALENTS, Beginning of period................ 2,236 5,922 12,503 12,503 48,018
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, End of period...................... $ 5,922 $ 12,503 $ 48,018 $ 90,216 $ 70,730
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of subordinated debt and accrued interest into
preferred stock............................................ $ 3,274 $ 353 $ -- $ -- $ --
Acquisition of property under capital leases................ $ 17 $ 232 $ 798 $ 348 $ 133
Sale of common stock for notes receivable................... $ 250 $ 100 $ 628 $ 200 $ --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................... $ 166 $ 101 $ 113 $ 44 $ 56
Cash paid for income taxes.................................. $ 1 $ 2 $ 3 $ 1 $ 2
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(Information as of and for the Six Months Ended June 30, 1995 and 1996 is
Unaudited)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS -- Since 1993, CellNet Data Systems, Inc. and
subsidiaries (the "Company") has focused substantially all of its resources and
efforts on the development of the CellNet wireless data communication system to
provide automated network meter reading and other services to the utility
industry and to providers of non-utility services. The Company's primary
activities since 1993 have included research and development, prototype product
development, field testing, commercial network installation, and provision of
wireless data communication services, in connection with the development and
deployment of its CellNet wireless data communication system.
The Company is in the process of progressively installing its network for
Kansas City Power & Light Company and commenced the installation of its network
for Union Electric Company in the first quarter of 1996. Management plans to
significantly increase operations through the roll-out of additional
installations for other utility companies and intends to fund these operations
through additional debt and equity financing arrangements.
The Company provides its services to utility companies under long-term
contracts by which the Company is obligated to provide meter reading and related
services over the term of the contract. The length of the contracts vary and can
include renewal options under which the Company's commitments under the contract
could exceed 20 years, although there is no assurance that such options would be
exercised, or that contract termination clauses would not be exercised. Renewal
options generally contain terms which are substantially similar to the original
service agreements. Contract termination clauses generally provide for defined
payments intended to cover remaining network asset values.
CONSOLIDATION -- The accompanying consolidated financial statements include
the accounts of CellNet Data Systems, Inc. and its wholly-owned subsidiaries.
All material intercompany accounts and transactions are eliminated in
consolidation.
FINANCIAL STATEMENT ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses during the reporting period. Such estimates
include the level of the allowance for potentially uncollectible accounts
receivable, reserves for network components and inventory that are obsolete,
slow moving or nonsalable, evaluation of network assets for impairment, accrued
liabilities and a valuation allowance for net deferred tax assets. Actual
results could differ from these estimates.
CASH EQUIVALENTS -- Cash equivalents are highly liquid debt instruments
acquired with an original maturity of three months or less. The recorded
carrying amounts of the Company's cash and cash equivalents approximate their
fair market value.
SHORT-TERM INVESTMENTS -- Short-term investments represent debt and equity
securities which are stated at fair value. All short-term investments are
classified as available-for-sale. Any temporary difference between an
investment's amortized cost and its market value is recorded as a separate
component of stockholders' deficit until such gains or losses are realized.
Gains or losses on the sale of securities are computed using the specific
identification method.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities," in
1994. The adoption of this standard did not have a significant effect in the
Company's financial position or results of operations.
CUSTOMER CONCENTRATION AND CONCENTRATION OF CREDIT RISK -- Financial
instruments that potentially subject the Company to credit risk consist
principally of cash and cash equivalents, short-term investments
F-7
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and accounts receivable. The Company sells its products and services to, and
installs its networks primarily for utility companies in the United States. To
reduce credit risk related to accounts receivable, the Company periodically
evaluates its customers' financial condition. Collateral is generally not
required. Reserves are maintained for credit losses, but the Company
historically has not experienced any significant losses related to individual
customers or groups of customers in any particular geographical area. One
utility represented 29% and 73% of revenues for the year ended December 31, 1995
and the six months ended June 30, 1996, respectively and 60% and 27% of accounts
receivable at the end of the respective periods. Another utility accounted for
23% of accounts receivable at June 30, 1996. Another utility represented 18%,
58%, 64% and 16% of revenues for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1996, respectively and 34% of accounts
receivable at December 31, 1994. Another utility represented 37% and 10%, and an
additional utility represented 36% and 14% of revenues for the years ended
December 31, 1993 and 1994, respectively.
The Company invests in a variety of financial instruments such as commercial
paper, debt securities of the U.S. government, foreign debt securities and
preferred stock. The Company's policy limits the amount of credit exposure with
any one financial instrument or commercial issuer. All such instruments are
rated by Standard and Poors as A- or higher. The Company also places its
investments for safekeeping with high-credit-quality financial institutions.
NETWORK COMPONENTS AND INVENTORY -- Network components and inventory are
stated at the lower of cost (first-in, first-out method) or market. At December
31, 1995 and June 30, 1996, such network components and inventory consisted
primarily of purchased and in process materials to be included in the Company's
installed networks and also for product sales. Network components, upon
completion of assembly, are either sold to customers or transferred to a
particular network location and included in networks in progress.
NETWORKS IN PROGRESS -- Networks in progress, which are stated at cost,
include both equipment assembled at the Company and systems partially installed
at customer sites. Interest is capitalized using the Company's cost of capital
until the point in the installation process at which each network begins
generating revenue. Accordingly, $458,000 of interest was capitalized during
1995 and $983,000 of interest was capitalized for the six months ended June 30,
1996. Depreciation is computed on a straight-line basis over the shorter of the
estimated useful lives of the network assets or the expected minimum period of
revenue generation under the related contract (estimated to be approximately ten
years).
PROPERTY -- Property is stated at cost. Depreciation and amortization are
computed on a straight-line basis over estimated useful lives of three to five
years or the capital lease term, if shorter.
DEBT ISSUANCE COST is comprised of debt issue costs associated with the
Senior Discount Notes (see Note 5). These costs are capitalized and amortized
using the effective interest method over the lives of the related debt.
RECENTLY ISSUED ACCOUNTING STANDARDS -- In October 1995, the Financial
Accounting Standards Board (FASB) issued SFAS No. 123, "Accounting for
Stock-Based Compensation." The new standard defines a fair value method of
accounting for stock options and other equity instruments. The new standard
permits companies to continue to account for equity transactions with employees
under existing accounting rules but requires disclosure in a note to the
financial statements of the pro forma net income as if the Company had applied
the new method of accounting. The Company intends to follow the disclosure
alternative for its employee stock plans at December 31, 1996. Adoption of the
new standard will not impact reported earnings and will have no effect on the
Company's cash flows.
F-8
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets to be Disposed Of," which became effective January 1, 1996.
This statement requires the Company to review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recovered. Implementation did not have a material impact on
the Company's financial statements.
REVENUE RECOGNITION -- Network service revenue, associated with installed
networks, is recognized in the period of service. Product sales are recognized
upon product shipment. Estimated warranty costs are recorded at the time the
product sales are recognized.
RESEARCH AND DEVELOPMENT -- Research and development costs are expensed as
incurred. The Company's networks include certain software applications which are
integral to their operation. The costs to develop such software have not been
capitalized as the Company believes its software development processes are
essentially completed concurrent with the establishment of technological
feasibility of the software and/or development of the related network hardware.
FOREIGN CURRENCY TRANSLATION -- The functional currency of the Company's
U.K. subsidiary is the U.S. dollar. Accordingly, all monetary assets and
liabilities are translated at the current exchange rate at the end of the
period, nonmonetary assets and liabilities are translated at historical rates
and operating expenses are translated at average exchange rates in effect during
the period. Transaction gains and losses, which are included in other income
(expense) in the accompanying consolidated statements of operations, have not
been significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The recorded carrying amounts of the
Company's financial instruments, namely cash and cash equivalents and short-term
investments, approximate their fair value. The estimated fair value of the
Company's Senior Discount Notes was $179,563,000 at December 31, 1995 and
$212,469,000 at June 30, 1996. The fair values of cash equivalents and
short-term investments are based on quoted market prices and the estimated fair
value of the Senior Discount Notes is based on information provided by the
initial purchaser of the original notes.
PRO FORMA NET LOSS PER SHARE -- Pro forma net loss per share is computed
using the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares include preferred stock
and certain warrants (using the "if converted" method) and stock options and the
remaining warrants (using the treasury stock method). Common equivalent shares
are excluded from the computation if their effect is anti-dilutive, except that,
pursuant to the Securities and Exchange Commission's Staff Accounting Bulletins
and staff policy, such computations include all common and common equivalent
shares issued within the 12 months preceding the initial filing date as if they
were outstanding for all periods presented. In addition, all outstanding
preferred stock that converts and all warrants that are assumed to be exercised
in connection with the proposed offering are included in the computation as
common equivalent shares even when the effect is anti-dilutive.
UNAUDITED INTERIM FINANCIAL INFORMATION -- The unaudited interim financial
information as of June 30, 1996 and for the six months ended June 30, 1995 and
1996 has been prepared on the same basis as the audited financial statements. In
the opinion of management, such unaudited information includes all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of this interim information. Operating results for the six months ended June 30,
1996 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996.
UNAUDITED PRO FORMA INFORMATION -- Unaudited pro forma information reflects
the conversion of each of the outstanding shares of Series CC redeemable
convertible preferred stock into two shares of common
F-9
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
stock, the conversion of each of the outstanding shares of Series AA, BB and DD
convertible preferred stock into two shares of common stock, the assumed
exercise and conversion of each of the outstanding warrants to purchase Series
BB preferred stock into two shares of common stock, and the assumed exercise of
each of the outstanding warrants issued in connection with the Company's Senior
Discount Notes (see Notes 5 and 7) for one share of common stock, upon the
closing of the initial public offering as contemplated by this Prospectus.
2. SHORT-TERM INVESTMENTS
The fair value and the amortized cost of short-term investments at December
31, 1994 and 1995 and June 30, 1996 are presented as follows. Fair values are
based on quoted market prices obtained from the Company's broker. All of the
Company's short-term investments are classified as available-for-sale, since the
Company intends to sell them as needed for operations. The following tables
present the unrealized holding gains and losses related to each category of
investment security (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------
UNREALIZED
AMORTIZED LOSS ON MARKET
COST INVESTMENT VALUE
----------- ---------- ---------
<S> <C> <C> <C>
Equity securities................................................... $ 6,001 $ (1) $ 6,000
Corporate debt securities........................................... 3,509 (4) 3,505
Debt securities of states of the United States and political
subdivisions of the states......................................... 2,500 -- 2,500
----------- ---------- ---------
Total............................................................... $ 12,010 $ (5) $ 12,005
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED LOSS ON GAIN ON MARKET
COST INVESTMENT INVESTMENT VALUE
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Auction-rate preferred stock........................... $ 19,803 $ (3) $ -- $ 19,800
Corporate debt securities.............................. 64,664 -- -- 64,664
Debt securities of states of the United States and
political subdivisions of the states.................. 3,000 -- -- 3,000
Debt securities issued by United States government
agencies.............................................. 4,647 -- 2 4,649
Foreign debt securities................................ 3,668 (2) -- 3,666
----------- ---------- ---------- ---------
Total.................................................. $ 95,782 $ (5) $ 2 $ 95,779
----------- ---------- ---------- ---------
----------- ---------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED LOSS ON GAIN ON MARKET
COST INVESTMENT INVESTMENT VALUE
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Auction-rate preferred stock........................... $ 22,800 $ -- $ -- $ 22,800
Corporate debt securities.............................. 9,453 (16) -- 9,437
----------- ---------- ---------- ---------
Total.................................................. $ 32,253 $ (16) $ -- $ 32,237
----------- ---------- ---------- ---------
----------- ---------- ---------- ---------
</TABLE>
F-10
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
2. SHORT-TERM INVESTMENTS (CONTINUED)
The final maturity periods of short-term investments at December 31, 1995
were as follows (in thousands):
<TABLE>
<CAPTION>
MARKET VALUE
-----------------------------------------------------
ONE TO GREATER
WITHIN FIVE THAN 10 NO
ONE YEAR YEARS YEARS MATURITY TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Auction-rate preferred stock............................... $ -- $ -- $ -- $ 19,800 $ 19,800
Corporate debt securities.................................. 17,064 10,000 28,400 9,200 64,664
Debt securities of states of the United States and
political subdivisions of the states...................... -- -- 3,000 -- 3,000
Debt securities issued by United States government
agencies.................................................. 4,649 -- -- -- 4,649
Foreign debt securities.................................... 3,666 -- -- -- 3,666
--------- --------- --------- --------- ---------
Total.................................................. $ 25,379 $ 10,000 $ 31,400 $ 29,000 $ 95,779
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The final maturity periods of short-term investments at June 30, 1996 were
as follows (in thousands):
<TABLE>
<CAPTION>
MARKET VALUE
---------------------------------------------------------
ONE TO GREATER
WITHIN ONE FIVE THAN 10 NO
YEAR YEARS YEARS MATURITY TOTAL
----------- --------- ----------- --------- ---------
Auction-rate preferred stock................. $ -- $ -- $ 22,800 $ -- $ 22,800
<S> <C> <C> <C> <C> <C>
Corporate debt securities.................... 9,437 -- -- -- 9,437
----------- --------- ----------- --------- ---------
$ 9,437 $ -- $ 22,800 $ -- $ 32,237
----------- --------- ----------- --------- ---------
----------- --------- ----------- --------- ---------
</TABLE>
All short-term investments with a final maturity exceeding one year have
provisions requiring their repurchase at par at the option of the holder and for
adjustment to market rates of interest on at least an annual basis (auction-rate
preferred stock). The Company treats such investments as having a maturity of
one year or less for purposes of compliance with investment limitations provided
in the Senior Discount Note Indenture (see Note 5).
3. PROPERTY
Property consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
Manufacturing equipment and tools............................... $ 1,363 $ 4,870 $ 6,403
<S> <C> <C> <C>
Office furniture and equipment.................................. 3,639 4,111 5,712
Engineering equipment........................................... 1,639 2,119 2,604
--------- --------- -----------
Total........................................................... 6,641 11,100 14,719
Accumulated depreciation and amortization....................... (3,770) (3,561) (5,590)
--------- --------- -----------
Total........................................................... $ 2,871 $ 7,539 $ 9,129
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-11
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
4. ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
Accrued contractual obligations..................................... $ 325 $ 273 $ 315
<S> <C> <C> <C>
Deferred revenue.................................................... 210 190 192
Warranty reserve.................................................... 130 15 14
Other............................................................... 224 503 469
--------- --------- -----------
Total............................................................... $ 889 $ 981 $ 990
--------- --------- -----------
--------- --------- -----------
</TABLE>
5. SENIOR DISCOUNT NOTES
In 1995, the Company received $175,837,000 in gross proceeds from the
issuance of $325,000,000 aggregate principal amount at maturity of its 13%
Senior Discount Notes due June 15, 2005 and related warrants to purchase
2,600,000 shares of common stock at $0.005 per share (the Notes and Common Stock
Warrants). Aggregate proceeds of $2,974,000 were attributed to the Common Stock
Warrants. Commencing December 15, 2000, interest will be payable on the Notes
semi-annually in arrears on each December 15 and June 15 at the rate of 13% per
annum.
The Notes are redeemable at the option of the Company, in whole or in part,
at any time on and after June 15, 2000 at specified redemption prices for the
relevant year of redemption, plus accrued and unpaid interest to the date of
redemption. In addition, the Company may redeem in cash at its option at any
time prior to June 15, 1998 up to 25% of the aggregate principal amount of the
Notes at 113% of the accreted value thereof on the date of redemption plus
accrued and unpaid interest, if any, from the proceeds of a public equity
offering (as defined). There are no sinking fund requirements. In the event of a
change of control (as defined), each holder of the Notes has the option to
require the Company to repurchase such holder's Notes at 101% of the accreted
value thereof on the date of repurchase (if prior to June 15, 2000) or 101% of
the aggregate principal face amount thereof, plus accrued and unpaid interest,
if any, to the repurchase date (if on or after June 15, 2000). The Notes rank
senior in right of payment to all existing and future subordinated indebtedness
of the Company and pari passu with all existing and future senior indebtedness
of the Company. The Indenture pursuant to which the Senior Discount Notes were
issued contains certain covenants that, among other things, limit the ability of
the Company to make dividend payments, make investments, repurchase outstanding
shares of stock, prepay other debt obligations, incur additional indebtedness,
effect asset dispositions, engage in sale and leaseback transactions,
consolidate, merge or sell all or substantially all of the Company's assets,
engage in transactions with affiliates, or effect certain transactions by its
restricted subsidiaries (as defined). At December 31, 1995, a portion of the
Company's short-term investments had been made in corporate debt securities and
auction-rate preferred stock in amounts which exceeded the investment
limitations under the Indenture. The Company was otherwise in compliance with
the financial covenants of the Indenture at December 31, 1995. The Company
subsequently adjusted its investment portfolio to bring it into compliance with
such limitations within the period provided by the Indenture, and at June 30,
1996 the Company was in compliance with all covenants of the Indenture.
6. SERIES CC REDEEMABLE CONVERTIBLE PREFERRED STOCK
In conjunction with the proposed initial public offering of the Company's
common stock, all outstanding shares of Series CC redeemable convertible
preferred stock will automatically convert into common stock upon the closing of
the offering (see Note 1).
F-12
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
6. SERIES CC REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
At December 31, 1995 and June 30, 1996, 3,215,768 shares of Series CC
redeemable convertible preferred stock were designated and outstanding. Each
share is convertible into two shares of common stock, subject to adjustments for
events of dilution. In addition to converting upon an initial public offering,
the Series CC redeemable convertible preferred stock is also automatically
convertible into common stock upon the election of the holders of more than 60%
of the outstanding shares of such series, or at such time as fewer than 500,000
shares remain outstanding. Each share has the same voting rights as the number
of shares of common stock into which it is convertible.
Holders are entitled to noncumulative dividends of $0.964 per share or, in
the event of liquidation or merger, liquidation distributions of $9.64 per share
in preference to all convertible preferred stock. The holders of Series CC
preferred stock have the right of first refusal to purchase a pro rata portion
of preferred or common stock the Company proposes to issue to any public or
private utility. Further, the holders of Series CC preferred stock have the
right of first refusal to purchase a pro rata portion of any preferred or common
stock that any subsidiary of the Company proposes to issue to any public or
private utility if the subsidiary's business is unrelated to the market area of
such utility or if such securities are convertible into common or preferred
stock of the Company. The right of first refusal terminates three years after an
initial public offering.
Under a Put Agreement dated August 15, 1994 (the Put Agreement), the holders
of Series CC preferred stock, acting as a group representing not less than 25%
of the outstanding Series CC preferred stock, have the right to "put" those
shares to the Company after May 12, 2001 (Investor Put) at the higher of $9.64
per share or the fair market value at the time of exercise of the Investor Put
(the Redemption Price). The Investor Put will be extinguished in the event of an
initial pubic offering by the Company of its common stock in which the net
proceeds to the Company are at least $20 million, in the event of the sale of
the Company or if not exercised by November 13, 2002. In the event the Investor
Put is not completed by the Company for any reason within six months after the
right is exercised then (a) the Redemption Price shall increase annually from
the date the Investor Put was exercised at a rate of 15% for the first year, and
five additional percentage points for each year thereafter (pro rated for any
partial year), and (b) the holders of Series CC preferred stock shall have the
right to initiate a separate demand registration at the Company's expense only
for the holders of shares with rights under the Investor Put. In the event the
fair market value of the Series CC preferred stock exceeds $96.40 (as adjusted
for any stock split, stock dividend, or other combinations or reclassifications)
per share at the time the Investor Put is exercised, the amount payable to the
holders of the Series CC preferred stock who participate in the Investor Put may
be paid 50% at closing and the balance, plus interest at the prime rate, on the
first anniversary of the closing. The Company's obligations under the Put
Agreement will be suspended for such time that performance of such obligations
would result in a breach of, a default, or an event of default under the
Indenture governing the Company's Senior Discount Notes or would otherwise
result in a violation of law.
F-13
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
7. STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE PREFERRED STOCK -- In conjunction with the proposed initial
public offering of the Company's common stock, all outstanding shares of
convertible preferred stock will automatically convert into common stock upon
the closing of the offering (See Note 1). At December 31, 1995, convertible
preferred stock consists of:
<TABLE>
<CAPTION>
AMOUNT (NET OF
ISSUE ISSUANCE LIQUIDATION
DESIGNATED OUTSTANDING PRICE COSTS) PREFERENCE
---------- ----------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Series AA...................................... 5,000,000 5,000,000 $ 1.00 $ 4,928,000 $ 5,000,000
Series BB...................................... 4,256,733 3,489,845 4.75 16,073,000 16,577,000
Series DD...................................... 647,923 646,830 9.64 6,194,000 6,235,000
---------- ----------- -------------- -------------
9,904,656 9,136,675 $ 27,195,000 $ 27,812,000
---------- ----------- -------------- -------------
---------- ----------- -------------- -------------
</TABLE>
Significant terms of the convertible preferred stock are as follows:
- Each share is convertible into two shares of common stock, subject to
adjustments for events of dilution. Shares of Series AA, BB and DD
preferred stock will automatically be converted into common stock upon
completion of a public offering with net proceeds in excess of $20 million
and at a price equal to or greater than $2.00, $6.00 ($12.05 after January
1, 1997) and $9.64 ($12.05 after January 1, 1997) per common share,
respectively (see Note 1). Each series of preferred stock is also
automatically convertible into common stock upon the election of the
holders of more than 50% of the outstanding shares of such series, or at
such time as fewer than 500,000 shares (1,000,000 shares in the case of
Series AA preferred stock) of such series (as adjusted for stock splits,
stock dividends and combinations) remain outstanding.
- Each share has the same voting rights as the number of shares of common
stock into which it is convertible.
- Holders of preferred stock are entitled to noncumulative dividends or, in
the event of liquidation or merger, distributions in the order of
preference shown as follows:
<TABLE>
<CAPTION>
NON-CUMULATIVE LIQUIDATION
DIVIDENDS PER DISTRIBUTION
SHARE PER SHARE
--------------- -------------
<S> <C> <C>
Series BB....................................................... $ 0.475 $ 4.75
Series AA....................................................... $ 0.100 $ 1.00
Series DD....................................................... $ 0.964 $ 9.64
</TABLE>
- Each series of preferred stock must receive their full dividend before the
next series receives any dividends. Additionally, any dividends exceeding
these minimum amounts are shared between the common and preferred shares
on a pro-rata basis.
- Each series of preferred stock must receive their full preferential
amounts before the next series receives any liquidation distributions.
Additionally, any funds available for distribution in excess of these
minimum amounts, plus $0.25 per share for common stock, is to be
distributed ratably among the holders of the common, redeemable
convertible preferred and convertible preferred stock.
- The holders of at least 5,000 shares of Series AA or BB preferred stock
have the right of first refusal to purchase their pro rata portion of
certain issues of preferred or common stock of the Company on the same
terms and conditions as the Company offers such securities to other
investors, subject to certain conditions and limitations. The right of
first refusal of all holders terminates upon the registered public
offering of the Company's common stock with net proceeds of at least $20
million.
F-14
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
COMMON STOCK -- At December 31, 1995 and June 30, 1996, the Company had
reserved shares of common stock for issuance as follows:
<TABLE>
<CAPTION>
DECEMBER JUNE 30,
31, 1995 1996
---------- -----------
Conversion of preferred stock.......................... 24,704,886 24,705,692
<S> <C> <C>
Issuance under stock option plans...................... 5,261,630 5,086,420
Issuance upon exercise of common stock warrants........ 2,653,832 2,653,832
Issuance upon exercise and conversion of Series BB
preferred stock warrants.............................. 1,533,776 1,532,970
---------- -----------
Total.................................................. 34,154,124 33,978,914
---------- -----------
---------- -----------
</TABLE>
WARRANTS -- At December 31, 1995, the following warrants to purchase stock
were outstanding:
Warrants to purchase 2,310 shares of common stock at $126.92 per share are
exercisable and expire at various dates through December 9, 1996, or, with
notice from the Company immediately prior to (a) the closing of a firm
committment underwritten initial public offering of the Company's securities,
(b) the merger of the Company into or with another corporation in which the
Company is not the survivor and the stockholders of the Company own less than
50% of the voting securities of the surviving corporation, or (c) the sale,
transfer or lease of all or substantially all of the assets of the Company.
Warrants to purchase 750 shares (300 shares at June 30, 1996) of common
stock at $20.00 per share, are exercisable and expire at various dates through
February 6, 1997, or, with notice from the Company immediately prior to (a) the
merger of the Company into or with another corporation in which the stockholders
of the Company hold less than 50% of the voting securities of the surviving
corporation or its parent; (b) the sale, conveyance or disposition of all or
substantially all of the assets of the Company, or (c) the liquidation,
dissolution or winding up of the Company.
Warrants to purchase 50,000 shares of common stock at $2.00 per share become
exercisable over a five-year period at the rate of 20% per year commencing
August 21, 1992, subject to certain conditions. The purchase right may not be
exercised prior to either (a) February 24, 1998, (b) the effective date of a
registration statement filed by the Company for an initial public offering of
its common stock, (c) five days prior to the merger of the Company with or into
another corporation as a result of which the stockholders of the Company hold
less than 50% of the equity securities of the surviving corporation or its
parent, or (d) five days prior to a sale, conveyance or disposition of all or
substantially all of the assets of the Company. The warrants expire on February
24, 1999, or, with written notice from the Company, two days prior to (a) the
merger of the Company with or into a corporation as a result of which the
stockholders of the Company hold less than 50% of the equity securities of the
surviving corporation or its parent (unless the securities received are freely
tradable and listed on a national securities exchange or on the Nasdaq National
Market), (b) the sale, conveyance or disposition of all or substantially all of
the assets of the Company, or (c) the liquidation, dissolution or winding up of
the Company.
In connection with the sale of Series BB preferred stock in 1993 certain
purchasers were granted warrants to purchase an additional 766,888 shares
(766,485 shares at June 30, 1996) of Series BB preferred stock at $4.75 per
share. The warrants are exercisable from the date of grant through the earlier
of (a) September 30, 1998 or (b) with written notice from the Company,
immediately prior to (i) the closing of a firm committment underwritten initial
public offering of the Company's securities (see Note 1), (ii) the merger of the
Company into or with another corporation in which the Company is not the
survivor and the stockholders of the Company hold less than 50% of the voting
securities of the surviving corporation, or (iii) the sale, transfer or lease of
all or substantially all of the assets of the Company.
F-15
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Warrants to purchase 2,600,000 shares of common stock at $0.005 per share
were granted in connection with the issuance and sale in 1995 of the Company's
Senior Discount Notes (see Note 5). The warrants expire on the earliest to occur
of (a) June 15, 2005, (b) 90 days after a change of control of the Company (as
defined) (see Note 1), and (c) 90 days after the consummation of a public equity
offering of the Company (as defined). The warrants may be exercised on the
earliest to occur of (a) the seventh day prior to a change of control of the
Company (as defined), (b) the consummation of a public equity offering (as
defined), or (c) 90 days prior to expiration.
STOCK OPTION PLANS -- The Company has stock option plans (the Plans) under
which shares are reserved for issuance to officers, directors, employees and
consultants. Under the Plans, both incentive and nonstatutory stock options to
purchase common stock may be granted or restricted common stock may be sold at
prices not less than the fair market value of the common stock at the date of
grant. The fair market value and terms of exercise are determined by the Board
of Directors. Options outstanding at December 31, 1995 generally become
exercisable ratably over five years, commencing six months from the date of the
individual's employment or the date of grant and expire ten years from the date
of grant. At December 31, 1995, there were 1,827,000 shares available for future
grants under the Plans.
A summary of stock option activity under the Plans on a combined basis is as
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------
NUMBER OF
SHARES PRICE PER SHARE
----------- ----------------
<S> <C> <C>
Balances, January 1, 1994......................................................... 1,618,434 $ 0.05 to $0.25
Granted........................................................................... 4,447,850 0.25 to 0.50
Exercised......................................................................... (533,656) 0.25 to 0.50
Cancelled......................................................................... (292,000) 0.25 to 0.50
-----------
Balances, December 31, 1994 5,240,628 0.05 to 0.50
Granted........................................................................... 514,600 0.50 to 1.50
Exercised......................................................................... (2,318,096) 0.05 to 0.50
Cancelled......................................................................... (163,498) 0.05 to 1.50
-----------
Balances, December 31, 1995 3,273,634 0.05 to 1.50
Granted........................................................................... 743,310 1.75 to 3.00
Exercised......................................................................... (175,210) 0.05 to 1.50
Cancelled......................................................................... (62,598) 0.50 to 2.00
-----------
Balances, June 30, 1996........................................................... 3,779,136 $ 0.05 to 3.00
-----------
-----------
</TABLE>
RESTRICTED STOCK -- Certain officers, employees and consultants exercised
unvested stock options with cash or full recourse notes. The related shares of
common stock are subject to repurchase by the Company at the orginal purchase
price per share upon the purchaser's cessation of service prior to the vesting
of such shares. The restricted stock continues to vest in accordance with the
terms of the original stock option. The related notes bear interest at rates
ranging from 6.04% to 7.92% and are due in 1999 through 2000. At December 31,
1995, 1,847,156 outstanding shares of such stock were subject to repurchase at
the original exercise price (1,688,908 shares at June 30, 1996).
F-16
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
8. INCOME TAXES
No federal income taxes were provided in 1993, 1994, 1995 or for the six
months ended June 30, 1996 due to the Company's net losses. The provisions for
income taxes for these periods represent various state minimum income and
franchise taxes. The provision for income taxes differs from the amount computed
by applying the federal statutory income tax rate to the loss before income
taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS
------------------------------- ENDED JUNE
1993 1994 1995 30, 1996
--------- --------- --------- -----------
Taxes computed at federal statutory rate............. 35.0% 35.0% 35.0% 35.0%
<S> <C> <C> <C> <C>
State income taxes, net of federal effect............ 4.5 4.5 4.5 4.5
Research tax credits................................. 2.8 3.1 1.0 0.6
Change in valuation allowance........................ (42.2) (42.5) (40.4) (40.0)
--------- --------- --------- -----------
Total provision...................................... 0.1% 0.1% 0.1% 0.1%
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
The tax effects of temporary differences that give rise to deferred taxes
were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
Deferred tax assets:
<S> <C> <C> <C>
Expenses not currently deductible for tax purposes......... $ 1,504 $ 2,182 $ 1,995
Senior discount note interest.............................. -- 3,817 8,274
Tax net operating loss and credit carryforwards............ 18,939 30,910 40,723
Research and development expenses capitalized for tax
purposes.................................................. 1,991 3,645 2,044
--------- --------- -----------
Total deferred tax assets.................................... 22,434 40,554 53,036
Valuation allowance on deferred tax assets................... (22,434) (40,554) (53,036)
--------- --------- -----------
Net deferred income taxes.................................... $ -- $ -- $ --
--------- --------- -----------
--------- --------- -----------
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $82,500,000 and $7,300,000 available to offset future federal and
California taxable income, respectively. The extent to which the loss
carryforwards can be used to offset future taxable income may be limited,
depending on the extent of ownership changes within any three-year period as
provided in the Tax Reform Act of 1986 and the California Conformity Act of
1987. Such federal carryforwards expire in 2001 through 2010. Such state
carryforwards expire in 1996 through 2000.
Equity issuances in April 1991 triggered such a limitation on loss
carryforwards. At that time, the Company had federal net operating loss
carryforwards of approximately $10,500,000. As of December 31, 1995,
approximately $4,000,000 of this net operating loss remains limited to an annual
usage of approximately $1,400,000 for federal income tax purposes. Any
significant stock issuances after December 31, 1995 will likely result in
another such ownership change. The annual limitation for utilization of the net
operating losses and tax credit carryforwards incurred up to the point of change
will be equal to the fair market value of the Company immediately before such
change multiplied by the then current long-term tax exempt interest rate.
The Company has capitalized approximately $59,400,000 of research and
development expenditures for California purposes which are available for
amortization in future years. Realization of the deferred tax assets associated
with these expenditures is contingent upon the amount of income or loss
apportioned to
F-17
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
8. INCOME TAXES (CONTINUED)
California during the subject amortization periods. Research and development tax
credit carryforwards of approximately $1,800,000 and $900,000 are also available
to offset future federal and California income taxes payable, respectively.
A valuation allowance has been recorded against tax assets for which
realization is uncertain. Based upon the Company's history of operating losses
and the expiration dates of the loss carryforwards, the Company has recorded a
valuation allowance to the full extent of its net deferred tax assets.
9. CONTINGENCIES AND COMMITMENTS
The industry in which the Company operates is characterized by frequent
litigation regarding patent and other intellectual property rights. The Company
is party to a trademark claim. Although the ultimate outcome of this matter is
not presently determinable, management believes that its resolution will not
have a material effect on the Company's financial position or results of
operations.
At December 31, 1994 and 1995 and June 30, 1996, equipment with a net book
value of $456,000, $854,000 and $822,000 (net of accumulated amortization of
$1,495,000, $372,000 and $536,000, respectively), has been leased under capital
leases.
The Company leases its manufacturing and office facilities under a
noncancelable operating lease which expires in December 2000. Deferred rent
results from the difference between facilities rent expense recognized on the
straight-line basis over the term of the lease as compared to the contractual
payments made.
Future minimum annual rental payments under capital and operating leases are
as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING DECEMBER 31, LEASES LEASES
- ----------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1996..................................................................................... $ 360 $ 1,087
1997..................................................................................... 315 1,059
1998..................................................................................... 158 1,040
1999..................................................................................... 91 1,046
2000..................................................................................... 54 1,081
Thereafter............................................................................... -- 749
----------- -----------
Total minimum lease payments............................................................. 978 $ 6,062
-----------
-----------
Amount representing interest............................................................. (158)
-----------
Present value of minimum lease payments.................................................. $ 820
-----------
-----------
</TABLE>
Facilities rent expense was $245,000, $421,000, $901,000, and $599,000 for
1993, 1994, 1995 and for the six months ended June 30, 1996, respectively. Rent
expense is net of sublease income of $296,000 and $175,000 in 1993 and 1994,
respectively.
10. SUBSEQUENT EVENTS
On August 30, 1996 the Company reincorporated in Delaware. The Board of
Directors of the Company approved a two-for-one split of all outstanding shares
of common stock effective as of September 5, 1996. All shares and per-share
amounts have been adjusted to reflect this split.
* * * * *
F-18
<PAGE>
THE CELLNET NETWORK ENABLES:
UTILITY APPLICATIONS
- -Time-of-use and demand energy rates
- -Real-time response to billing inquiries
- -Real-time power outage detection, location, and notification
- -On-demand meter reads
- -Customer-selected billing dates and consolidated, multi-location billing
- -Automatic move-in/move-out meter reading
- -Distribution automation
- -Internet access to consumption, rate, and billing information
FUTURE NON-UTILITY APPLICATIONS
- -Security services for home security, fire alarm, and personal safety devices
- -Remote status monitoring for vending, postage, change, and commercial washing
machines; office and factory equipment; and intelligent home devices, such as
remote-control thermostats
- -Intelligent transportation systems for traffic lights, parking meters, and toll
booths
[Graphic: Collage showing various components and applications of the CellNet
System.]
<PAGE>
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