<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 9, 1996
REGISTRATION NO. 333-09537
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
CELLNET DATA SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4825 94-2951096
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
125 SHOREWAY ROAD
SAN CARLOS, CA 94070
(415) 508-6000
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
---------------------
JOHN M. SEIDL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CELLNET DATA SYSTEMS, INC.
125 SHOREWAY ROAD
SAN CARLOS, CA 94070
(415) 508-6000
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
---------------------
COPIES TO:
BARRY E. TAYLOR, ESQ. JERRY V. ELLIOTT, ESQ.
MICHAEL J. DANAHER, ESQ. SHEARMAN & STERLING
TREVOR J. CHAPLICK, ESQ. 599 LEXINGTON AVENUE
WILSON SONSINI GOODRICH & ROSATI NEW YORK, NEW YORK 10022-4676
PROFESSIONAL CORPORATION (212) 848-4000
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
(415) 493-9300
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to rule 434,
please check the following box.
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED (1) PER SHARE (2) OFFERING PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value.................. 5,750,000 shares $21.00 $120,750,000 $41,635
</TABLE>
(1) Includes 750,000 shares that the U.S. Underwriters have the option to
purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933, as amended.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of Prospectus: (i) one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and (ii) the other to be used in a concurrent offering outside the
United States and Canada (the "International Prospectus"). The two prospectuses
are identical in all material respects except for the front cover page. The form
of U.S. Prospectus is included herein and is followed by the alternate page to
be used in the International Prospectus. The alternate page for the
International Prospectus included herein is labeled "Alternate Page for
International Prospectus." Final forms of each Prospectus will be filed with the
Securities and Exchange Commission under Rule 424(b).
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED SEPTEMBER 9, 1996
5,000,000 SHARES
[LOGO]
COMMON STOCK
-----------------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY.
OF THE 5,000,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 4,000,000 SHARES
ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS AND 1,000,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE
UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. PRIOR TO
THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF
THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC
OFFERING PRICE PER SHARE WILL BE BETWEEN $19.00 AND $21.00. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
CONCURRENTLY WITH THE CLOSING OF THIS OFFERING, NORTHERN STATES POWER COMPANY
("NSP") AND UNION ELECTRIC COMPANY ("UE") WILL PURCHASE DIRECTLY FROM THE
COMPANY SHARES OF COMMON STOCK HAVING AN AGGREGATE PURCHASE PRICE OF
$15,000,000 AND $10,000,000, RESPECTIVELY. ALL OF SUCH SHARES OF
COMMON STOCK TO BE PURCHASED BY NSP AND UE WILL BE PURCHASED AT
THE INITIAL PER SHARE PRICE TO PUBLIC SET FORTH BELOW, LESS
THE UNDERWRITING DISCOUNT IN THE CASE OF UE AND LESS A
SEPARATE DISCOUNT IN THE CASE OF NSP. SEE "UTILITY
STOCK PURCHASES."
------------------------
THE COMMON STOCK HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET,
SUBJECT TO OFFICIAL NOTICE OF ISSUANCE.
------------------------
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 $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
------------------ ------------------ ------------------
<S> <C> <C> <C>
PER SHARE.......................................... $ $ $
TOTAL (3).......................................... $ $ $
</TABLE>
- ---------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SEE "UNDERWRITERS."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $1,200,000.
(3) THE COMPANY HAS GRANTED THE U.S. UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF
750,000 ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS UNDERWRITING
DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF
ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE
TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO COMPANY
WILL BE $ , $ AND $ , RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY SHEARMAN & STERLING, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT
DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1996 AT THE OFFICE
OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST PAYMENT THEREFOR
IN IMMEDIATELY AVAILABLE FUNDS.
-------------------
MORGAN STANLEY & CO.
INCORPORATED
COWEN & COMPANY
MONTGOMERY SECURITIES
SMITH BARNEY INC.
, 1996
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED SEPTEMBER 9, 1996
5,000,000 SHARES
[LOGO]
COMMON STOCK
-----------------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY CELLNET DATA
SYSTEMS, INC. OF THE 5,000,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY,
1,000,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND
CANADA BY THE INTERNATIONAL UNDERWRITERS AND 4,000,000 SHARES ARE BEING
OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET
FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT
THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL BE BETWEEN $19.00
AND $21.00. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS
CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
CONCURRENTLY WITH THE CLOSING OF THIS OFFERING, NORTHERN STATES POWER COMPANY
("NSP") AND UNION ELECTRIC COMPANY ("UE") WILL PURCHASE DIRECTLY FROM THE
COMPANY SHARES OF COMMON STOCK HAVING AN AGGREGATE PURCHASE PRICE OF
$15,000,000 AND $10,000,000, RESPECTIVELY. ALL OF SUCH SHARES OF COMMON
STOCK TO BE PURCHASED BY NSP AND UE WILL BE PURCHASED AT THE INITIAL
PER SHARE PRICE TO PUBLIC SET FORTH BELOW, LESS THE UNDERWRITING
DISCOUNT IN THE CASE OF UE AND LESS A SEPARATE
DISCOUNT IN THE CASE OF NSP. SEE "UTILITY
STOCK PURCHASES."
------------------------
THE COMMON STOCK HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET,
SUBJECT TO OFFICIAL NOTICE OF ISSUANCE.
------------------------
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 $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
------------------- ------------------- -------------------
<S> <C> <C> <C>
PER SHARE........................................ $ $ $
TOTAL (3)........................................ $ $ $
</TABLE>
- ---------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SEE "UNDERWRITERS."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT
$1,200,000.
(3) THE COMPANY HAS GRANTED THE U.S. UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF
750,000 ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS UNDERWRITING
DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF
ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL
PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO
COMPANY WILL BE $ , $ AND $ , RESPECTIVELY. SEE
"UNDERWRITERS."
------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY SHEARMAN & STERLING, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT
DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1996 AT THE OFFICE
OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST PAYMENT THEREFOR
IN IMMEDIATELY AVAILABLE FUNDS.
-------------------
MORGAN STANLEY & CO.
INTERNATIONAL
COWEN & COMPANY
MONTGOMERY SECURITIES
SMITH BARNEY INC.
, 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 THIS 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 , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE 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 and the Underwriters 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............................................................................................ 19
Utility Stock Purchases.................................................................................... 19
Dividend Policy............................................................................................ 19
Capitalization............................................................................................. 20
Dilution................................................................................................... 21
Selected Consolidated Financial Data....................................................................... 22
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 23
Business................................................................................................... 29
Management................................................................................................. 47
Certain Transactions....................................................................................... 54
Principal Stockholders..................................................................................... 57
Description of Capital Stock............................................................................... 60
Shares Eligible for Future Sale............................................................................ 64
Underwriters............................................................................................... 66
Legal Matters.............................................................................................. 69
Experts.................................................................................................... 69
Additional Information..................................................................................... 69
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 (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 THIS OFFERING, (III) ASSUMES THE
EXERCISE OF WARRANTS TO PURCHASE 4,132,970 SHARES OF COMMON STOCK EFFECTIVE UPON
THE CLOSING OF THIS OFFERING, (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 937,500 AND 533,333 SHARES OF COMMON STOCK TO NSP AND UE,
RESPECTIVELY, CONCURRENTLY WITH THE CLOSING OF THIS OFFERING AT AN ASSUMED PRICE
OF $16.00 PER SHARE AND $18.75 PER SHARE, RESPECTIVELY. SEE "UTILITY STOCK
PURCHASES," "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITERS." REFERENCES HEREIN
TO "CELLNET" OR THE "COMPANY" REFER TO CELLNET DATA SYSTEMS, INC. AND ITS
SUBSIDIARIES. THE 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 joint ventures. The Company is currently exploring projects with
electric utilities in the U.K., Singapore and Thailand.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered:
U.S. Offering (1)............................. 4,000,000 shares
International Offering........................ 1,000,000 shares
Total Common Stock Offered (1)............ 5,000,000 shares
Common Stock to be outstanding after the
Offering (1)(2)................................ 40,518,967 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 and UE have agreed to acquire $15.0 million and $10.0
million, respectively, of restricted Common Stock from the Company (the "NSP
Purchase" and the "UE Purchase," respectively, and together, the "Utility Stock
Purchases") concurrently with the closing of this Offering. NSP will purchase
937,500 shares of Common Stock at a purchase price of $16.00 per share (the
initial public offering price, less a discount of up to 20%, which discount is
dependent upon entering into a letter of intent and the signing of a services
agreement with Wisconsin Electric Power Company for at least 750,000 meters (if
neither such event occurs, the purchase price per share will be adjusted to 90%
of the initial public offering price; and if only one such event occurs, the
purchase price per share will be adjusted to 85% of the initial public offering
price)). UE will purchase 533,333 shares of Common Stock at a purchase price of
$18.75 per share (the initial public offering price less the underwriting
discounts and commissions). Upon the closing of this Offering and the Utility
Stock Purchases, NSP and UE will own approximately 2.31% and 1.32%,
respectively, of the Common Stock. The closing of this Offering is not
conditioned upon the closing of the Utility Stock Purchases. See "Utility Stock
Purchases."
- ---------
(1) Assumes the U.S. Underwriters' over-allotment option is not exercised. See
"Underwriters."
(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 exercise of warrants to purchase 4,132,970
shares of Common Stock effective upon the closing of this Offering. Also
includes the sale of 1,470,833 shares of Common Stock pursuant to the
Utility Stock Purchases concurrently with the closing of this Offering. See
"Utility Stock Purchases." 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 $0.625 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 $ 224,131
Total assets....................................................... 162,653 166,307 283,817
Long-term obligations.............................................. 195,513 195,513 195,513
Series CC redeemable convertible preferred stock................... 29,486 -- --
Total stockholders' equity (deficit)............................... (70,400) (37,260) 80,250
</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 143,373 meters in revenue service.
(3) Reflects the conversion of all outstanding shares of Preferred Stock into
Common Stock and the exercise 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 this Offering.
(4) Adjusted to reflect the proceeds of this Offering at an assumed 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 1,470,833 shares
of Common Stock pursuant to the Utility Stock Purchases, less estimated
issuance costs of $40,000 with respect to such purchases. See "Utility Stock
Purchases."
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
8
<PAGE>
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
9
<PAGE>
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 June 30, 1996, the Company had $103.0 million in cash,
cash equivalents and short-term investments. The Company believes that the net
proceeds of this Offering and from the sale of Common Stock pursuant to the
Utility Stock Purchases, 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.
10
<PAGE>
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."
11
<PAGE>
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 is engaged in a program to license 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
12
<PAGE>
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
13
<PAGE>
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 and
14
<PAGE>
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."
15
<PAGE>
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 intends to enter into joint ventures in order to facilitate its
entry into international markets. The Company may or may not have a majority
interest or control of the board of directors of any such joint venture. 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 69.6% of the outstanding
Common Stock after completion of this Offering and the Utility Stock Purchases,
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 Company agreed
to set the authorized number of directors at ten directors. Of these, after the
closing of this
16
<PAGE>
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 this 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 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. See "Underwriters" for a discussion of the
factors considered in determining the initial public offering price. 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.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public market
following this 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 26,420,242 shares
for 180 days after the date of this Prospectus 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 2,839,906 shares for 120 days after the date of
this Prospectus. After the expiration of the lock-up agreements, such shares
will generally be eligible for sale in the public market subject in the case of
certain shares (including shares held by affiliates) to the limitations of Rule
144 under the Securities Act. On the date of this Prospectus, no shares other
than 366 shares of Common Stock and the Shares will be eligible for immediate
sale in the public market. In addition, the Company intends to register,
following this Offering, a total of 3,779,136 shares of Common Stock subject to
outstanding options or reserved for issuance under the Company's 1992 Stock
Option Plan or 1994 Stock Plan, 1,200,000 shares of Common Stock reserved for
issuance under its 1996 Employee Stock Purchase Plan, and 2,600,000 shares of
Common Stock issuable upon exercise of warrants which this Prospectus assumes
will be exercised upon the closing of this Offering. Furthermore, upon
expiration of the lock-up agreements referred to above, the holders of
28,188,916 shares of Common Stock will be entitled to certain registration
rights with respect to such shares. Pursuant to the agreements related to the
Utility Stock Purchases, NSP and UE 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 this Offering. The 1,470,833 shares sold
to NSP and UE will be eligible for sale in the public market two years from the
closing of the Offering, provided that the Company has agreed to register up to
one-half of the shares purchased by NSP and UE for public sale at any time one
year after the closing of the Offering. If such holders, by exercising their
registration rights,
17
<PAGE>
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 this 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 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."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares offered hereby
are estimated to be approximately $92.6 million ($106.6 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
Utility Stock Purchases, which are expected to close concurrently with the
closing of this Offering, are estimated to be approximately $24.96 million after
deducting estimated issuance costs related thereto, in each case assuming an
initial public offering price of $20.00 per share. See "Utility Stock
Purchases."
The Company anticipates that the net proceeds of this Offering and the
Utility Stock Purchases 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 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 Utility Stock
Purchases 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 this Offering and the Utility Stock Purchases, 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."
UTILITY STOCK PURCHASES
NSP has agreed to purchase from the Company, in a private placement that
will occur concurrently with the closing of this 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 this Offering, shares of Common
Stock at an aggregate purchase price of $10,000,000. The purchase price per
share to be paid by NSP will be an amount equal to 80% of the initial public
offering price, and the purchase price per share to be paid by UE will be an
amount equal to the initial public offering price less the underwriting
discounts and commissions. Assuming an initial public offering price of $20.00
per share, NSP and UE would purchase 937,500 shares and 533,333 shares,
respectively. Of the 937,500 shares to be purchased by NSP, 104,167 of these
shares will be placed in escrow (the "Escrow Shares"), with their release to NSP
dependent upon NSP causing Wisconsin Electric Power Company ("WEPC") to enter
into a letter of intent with the Company by September 16, 1996 and a services
agreement for at least 750,000 meters with the Company by December 31, 1997. If
either or both such events do not occur, 50% or 100% as the case may be, of the
Escrow Shares will revert to the Company, which will effectively increase NSP's
purchase price per share to 85% or 90%, respectively, 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 WEPC, 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.
19
<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 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 offered hereby at an assumed 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 $24.9 million from the sale of Common Stock to NSP and
UE.
<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 40,518,967 shares outstanding as adjusted(3)........... 27,636 90,947 208,457
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) 80,250
----------- ------------- -----------
Total capitalization.............................................. $ 154,599 $ 158,253 $ 275,763
----------- ------------- -----------
----------- ------------- -----------
</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 $0.625 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) Includes 104,167 shares of Common Stock that will be issued and outstanding
at the closing of this Offering and held in escrow in connection with the
NSP Purchase. If NSP achieves certain milestones under the NSP Stock
Purchase Agreement, such Escrow Shares will be released to NSP. If NSP does
not achieve such milestones, such Escrow Shares will revert to the Company.
See "Utility Stock Purchases."
20
<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 this Offering). Dilution per share represents the
difference between the price per share paid by investors in this Offering and
the as adjusted pro forma net tangible book value per share immediately after
this Offering. After giving effect to the sale of the 5,000,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $20.00 per
share (after deducting the estimated underwriting discounts and commissions and
offering expenses) and the sale of 1,470,833 shares of Common Stock in the
Utility Stock Purchases for aggregate net proceeds of $24.96 million, the as
adjusted pro forma net tangible book value of the Company at June 30, 1996 would
have been $74.1 million, or approximately $1.83 per share. This represents an
immediate decrease in the pro forma deficit in net tangible book value of $3.10
per share to existing stockholders and an immediate dilution of $18.17 per share
to new investors purchasing shares at the assumed initial public offering price.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed 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 Utility Stock Purchases.................... 0.75
Increase attributable to sale of Shares in the Offering................. 2.35
---------
As adjusted pro forma net tangible book value per share after the
Offering................................................................. 1.83
---------
Dilution per share to investors in the Offering........................... $ 18.17
---------
---------
</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 an assumed initial public offering price of $20.00 per share,
and by NSP and UE in the Utility Stock Purchases:
<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 84.0% $ 106,621,000 46.0% $ 3.13
Utility Stock Purchases........................ 1,470,833 3.6 25,000,000 10.8 $ 17.00
Investors in the Offering...................... 5,000,000 12.4 100,000,000 43.2 $ 20.00
------------ --- -------------- ---
Total...................................... 40,518,967 100% $ 231,621,000 100%
------------ --- -------------- ---
------------ --- -------------- ---
</TABLE>
The foregoing table assumes the automatic conversion of all Preferred Stock,
the exercise 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 $0.625 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.
21
<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................... 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 exercise 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 this Offering.
22
<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
23
<PAGE>
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 are 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
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 occurrence of certain milestones associated with
entering into a letter of intent and 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, in the event that such
milestones are achieved. See "Utility Stock Purchases."
24
<PAGE>
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
25
<PAGE>
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 Warrants to purchase 2,600,000 shares of Common Stock
("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 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 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
26
<PAGE>
ownership changes within any three-year period as provided in the Tax Reform Act
of 1986 and the California Conformity Act of 1987. This Offering is expected to
trigger such a limitation. The annual usage will be limited by the market value
of the Company at the closing of this 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 immediately prior to
the closing of this 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 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 Warrants, together with interest income of $3.5
million. In September 1996, NSP and UE signed agreements to purchase shares of
Common Stock concurrent with the closing of this Offering at an estimated
aggregate purchase price of $25,000,000. See "Utility Stock Purchases." As of
June 30, 1996, the Company had cash, cash equivalents and short-term investments
totalling $103.0 million.
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, 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
27
<PAGE>
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. 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 operations for several years.
The Company believes that the net proceeds of the Offering and from the sale
of Common Stock pursuant to the Utility Stock Purchases, 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."
28
<PAGE>
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
29
<PAGE>
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 joint ventures. 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
30
<PAGE>
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.
31
<PAGE>
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.
32
<PAGE>
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
33
<PAGE>
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 joint
ventures with local utilities and other partners that would facilitate the
adoption of CellNet's system. In considering international expansion
opportunities for its system, the Company expects that its targeted markets will
be 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. 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
34
<PAGE>
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.]
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.
35
<PAGE>
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 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;
36
<PAGE>
- 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 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
37
<PAGE>
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 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.
38
<PAGE>
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 44 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 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
39
<PAGE>
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.
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
40
<PAGE>
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 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.
41
<PAGE>
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. The Company has a
sales and marketing organization of 24 persons, including six dedicated sales
representatives with a mix of utility and 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
42
<PAGE>
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 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.
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 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."
43
<PAGE>
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 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
44
<PAGE>
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
or 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 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
45
<PAGE>
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 446 employees, including 88 in product
development, 229 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.
46
<PAGE>
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.
47
<PAGE>
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
48
<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 69.6% 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 Utility Stock Purchases), 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 &
49
<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.
50
<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 $0.05 to $0.50 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 $0.05 to $0.50 per share, with
the
51
<PAGE>
purchase prices of such shares equal to the original exercise prices of such
options. Such shares of restricted stock were purchased with cash or by
delivery of promissory notes by such Named Executive Officers to the
Company. See "Certain Transactions." The loans represented by such
promissory notes are full recourse, bear interest at rates ranging from
6.04% to 7.92% per annum and mature on the fifth anniversary of such note.
Each such promissory note is secured by the shares of Common Stock purchased
with the proceeds of the loans. These shares are subject to repurchase by
the Company at the original price paid per share upon the purchaser's
cessation of service prior to the vesting of such shares. This repurchase
right lapsed and the purchaser vested as to a certain percentage of the
shares on the date of purchase and the repurchase right will lapse and the
purchaser will vest in the balance of the shares in a series of equal
quarterly or annual installments in accordance with the vesting schedule of
the exercised options. Information with respect to the shares of restricted
stock purchased by such Named Executive Officers is set forth below:
<TABLE>
<CAPTION>
NUMBER OF
RESTRICTED NUMBER OF VALUE OF
SHARES UNVESTED SHARES UNVESTED SHARES
NAME PURCHASED(#) AT 12/31/95(#) AT 12/31/95($)
- ----------------------------------------- ---------------- --------------- ---------------
<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 will be submitted to the stockholders for approval in September
1996. A total of 1,200,000 shares of Common Stock are reserved for issuance
under the Purchase Plan. Under the Purchase Plan, the Company will withhold a
specified percentage of
52
<PAGE>
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 $0.25 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.
53
<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1993, the Company has sold shares of Preferred Stock
convertible into an aggregate of 14,704,886 shares of Common Stock in a series
of private financings. 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 BB SERIES CC SERIES DD WARRANTS (2)
- -------------------------------------------------------- ---------- ---------- ----------- ------------------
<S> <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............. 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 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 0.3 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.
54
<PAGE>
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 $0.05.
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 $0.50. 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 $0.25 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 $0.50 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 $0.50 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 $0.05 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 $0.25 per share 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 $0.50 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,
55
<PAGE>
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.
56
<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, R.I. 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 4.0
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)........................................................... 1,367,202 4.6 3.4
Paul J. Salem (16)............................................................ 2,162,776 7.2 5.3
</TABLE>
57
<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)......................................................... 1,772,866 5.9% 4.4%
All directors and executive officers as a group (16 persons) (18)............. 19,569,672 61.6 46.2
</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 40,518,967 shares of Common Stock then outstanding and
assumes the exercise of warrants 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.
(10) Consists of 136,000 shares issuable upon the exercise of options
exercisable within 60 days of June 30, 1996 held by Mr. Hayes.
58
<PAGE>
(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, 88,945 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 738 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 97,424 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 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 31,722 shares issuable upon
the exercise of warrants held by Sundance Capital Corporation, of which
82,404 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.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 50,000,000 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 this
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 this Offering, be fully paid and
non-assessable.
PREFERRED STOCK
Effective upon the closing of this 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 this Offering, the Company will have outstanding
warrants to purchase an aggregate of 50,914 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
60
<PAGE>
of Common Stock at an exercise price of $2.00 per share (the "$2.00 Warrants"),
warrants to purchase an aggregate of 150 shares of Common Stock at an exercise
price of $20.00 per share (the "$20.00 Warrants") and warrants to purchase an
aggregate of 764 shares of Common Stock at an exercise price of $126.92 per
share (the "$126.92 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. The
$126.92 warrants are currently exercisable and will expire at various dates in
December 1996.
In addition, the Company has outstanding warrants to purchase an aggregate
of 2,600,000 shares of Common Stock at an exercise price of $0.005 per share
(the "Note Warrants"), 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 90 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 this Offering.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After this Offering, the holders of 28,188,916 shares of Common Stock and
warrants to purchase 1,532,970 shares of 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 this 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 this 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 this Offering or (ii)
such time as such holder may sell all his or her shares under Rule 144 in any
three month period.
The Company is required to cause the offer and sale of the 2,600,000 shares
of Common Stock issuable upon exercise of the Note Warrants (the "Note Warrant
Shares") to be registered under the Securities Act prior to the date of this
Prospectus subject to a 90-day lock-up agreement as discussed below . In
addition, the holders of Note Warrant Shares will be entitled to certain rights
with respect to the registration of such shares for resale to the public. Under
a Warrant Registration Rights Agreement dated June 15, 1995, as supplemented on
November 21, 1995 (the "Warrant Registration Rights Agreement"), after this
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 in certain circumstances. The Company will pay certain expenses in
connection with the exercise of the
61
<PAGE>
foregoing rights. The holders of the Note Warrant Shares are subject to a
lock-up agreement for 90 days following the closing of this Offering. The
registration rights of the holders of the Note Warrant Shares 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 1,470,833
shares of Common Stock purchased by NSP and UE in the Utility Stock Purchases
upon request at any time after one year 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.
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
Utility Stock Purchase 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 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
62
<PAGE>
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.
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this Offering and the Utility Stock Purchases, the
Company will have 40,518,967 shares of Common Stock outstanding, after giving
effect to the assumed exercise of warrants to purchase 4,132,970 shares of
Common Stock. Of these shares, the 5,000,000 shares sold in this 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. The remaining 35,518,967 shares of Common Stock held by existing
stockholders and by NSP and UE 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 2,600,000 Note Warrant Shares have entered into similar agreements
which are applicable for a period of 90 days after the date of this Prospectus,
and the holders of 2,839,906 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 Utility Stock Purchases, NSP and UE have
agreed not to directly or indirectly sell or transfer 735,417 of the aggregate
number of shares of Common Stock purchased by them in the Utility Stock
Purchases for a period of one year from the effective date of this Offering, and
not to directly or indirectly sell or transfer the remaining 735,417 shares of
Common Stock purchased by them in the Utility Stock Purchases 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 1,470,833 shares of Common Stock purchased by
NSP and UE in the Utility Stock Purchases upon request at any time after one
year from the closing of the Offering.
Upon expiration of the applicable 180 day lockup agreements, approximately
26,420,242 such shares of Common Stock will become eligible for immediate public
resale, subject in some cases to the limitations imposed by Rule 144. The
remaining approximately 654,650 shares held by existing stockholders 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 2,839,906 shares of Common Stock, subject to the provisions of
Rule 701, and 2,137,754 shares 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.
The holders of approximately 28,188,916 of the shares outstanding
immediately following the completion of this Offering and 4,132,970 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
64
<PAGE>
the public market without restriction under the Securities Act after expiration
of the applicable lock-up agreements. See "Management -- Incentive Stock Plans."
The Company is also required to cause the offer and sale of the 2,600,000 Note
Warrant Shares to be registered under the Securities Act on or prior to the
effective date of this Offering if legally permissible.
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 405,190 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.
65
<PAGE>
UNDERWRITERS
Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement") , the U.S.
Underwriters named below, for whom Morgan Stanley & Co. Incorporated, Cowen &
Company, Montgomery Securities and Smith Barney Inc. are acting as U.S.
Representatives, and the International Underwriters named below, for whom Morgan
Stanley & Co. International Limited, Cowen & Company, Montgomery Securities and
Smith Barney Inc. are acting as International Representatives, have severally
agreed to purchase, and the Company has agreed to sell to them severally, the
respective number of shares of Common Stock set forth opposite the names of each
Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated..................................................................
Cowen & Company....................................................................................
Montgomery Securities..............................................................................
Smith Barney Inc...................................................................................
----------
Subtotal....................................................................................... 4,000,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited.........................................................
Cowen & Company....................................................................................
Montgomery Securities..............................................................................
Smith Barney Inc...................................................................................
----------
Subtotal....................................................................................... 1,000,000
----------
Total...................................................................................... 5,000,000
----------
----------
</TABLE>
The U.S. Underwriters and the International Underwriters are collectively
referred to as the "Underwriters," and the U.S. Representatives and the
International Representatives are collectively referred to as the
"Representatives." The Underwriting Agreement provides that the obligations of
the Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the U.S. Underwriters' over-allotment option described below) if any
such shares are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (a)
it is not purchasing any U.S. Shares (as defined herein) for the account of
anyone other than a United States or Canadian Person (as defined herein) and (b)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside
of the United States or Canada or to anyone other than a United States or
Canadian Person. Pursuant to the Agreement between U.S. and International
Underwriters, each International Underwriter has represented and agreed that,
with certain exceptions: (i) it is not purchasing any International Shares (as
defined herein) for the account of any United States or Canadian Person and (ii)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any International Shares or distribute any prospectus relating to the
International Shares in the United States or in any province or territory of
Canada or to any United States or Canadian Person. The foregoing limitations do
66
<PAGE>
not apply to stabilization transactions or to certain other transactions
specified in the Agreement between U.S. and International Underwriters. As used
herein, "United States or Canadian Person" means any national or resident of the
United States or of any province or territory of Canada, or any corporation,
pension, profit-sharing or other trust or other entity organized under the laws
of the United States or Canada or of any political subdivision thereof (other
than a branch located outside the United States and Canada of any United States
or Canadian Person) and includes any United States or Canadian branch of a
person who is otherwise not a United States or Canadian Person. All shares of
Common Stock to be purchased by the U.S. Underwriters and the International
Underwriters are referred to herein as the "U.S. Shares" and the "International
Shares," respectively.
Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of any
number of shares of Common Stock to be purchased pursuant to the Underwriting
Agreement as may be mutually agreed. The per share price of any shares sold
shall be the Price to Public set forth on the cover page hereof, in United
States dollars, less an amount not greater than the per share amount of the
concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of common stock, directly or indirectly, in any
province or territory of Canada in contravention of the securities laws thereof
and has represented that any offer of Common stock in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
shares of Common Stock a notice stating in substance that, by purchasing such
Common Stock, such dealer represents and agrees that it has not offered or sold,
and will not offer or sell, directly or indirectly, any of such Common Stock in
any province or territory of Canada or to, or for the benefit of, any resident
of any province or territory of Canada in contravention of the securities laws
thereof and that any offer of Common Stock in Canada will be made only pursuant
to an exemption from the requirement to file a prospectus in the province or
territory of Canada in which such offer is made, and that such dealer will
deliver to any other dealer to whom it sells any of such Common Stock a notice
to the foregoing effect.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and during the period of six months after the date hereof will not offer
to sell any shares of Common Stock to persons in the United Kingdom except to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes of their
business or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995 (the "U.K. Regulations"); (ii) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the U.K. Regulations (to the extent applicable) with
respect to anything done by it in relation to the shares of Common Stock offered
hereby in, from or otherwise involving the United Kingdom; and (iii) it has only
issued or passed on and will only issue or pass on to any person in the United
Kingdom any document received by it in connection with the issue of the shares
of Common Stock, other than any document which consists of, or is a part of,
listing particulars, supplementary listing particulars or any other document
required or permitted to be published by listing rules under Article IV of the
Financial Services Act 1986, if that person is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995, or is a person to whom the document may otherwise
lawfully be issued or passed on.
The Underwriters initially propose to offer part of the shares of Common
Stock offered hereby directly to the public at the Price to Public set forth on
the cover page of this Prospectus and part to certain dealers at a price that
represents a concession not in excess of $ per share under the Price
to Public. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to other Underwriters or to
certain other dealers. After the initial offering of the shares of Common Stock,
the offering price and other selling terms may from time to time be varied by
the Representatives.
67
<PAGE>
Pursuant to the Underwriting Agreement, the Company has granted to the U.S.
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to 750,000 additional shares of Common Stock at the
Price to Public set forth on the cover page hereof, less underwriting discounts
and commissions. To the extent such option is exercised, each U.S. Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares of Common Stock as the number set
forth next to such U.S. Underwriter's name in the preceding table bears to the
total number of U.S. Shares offered by the U.S. Underwriters hereby.
The Company and each of its officers, directors and certain other
stockholders have agreed that without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, they will not (i)
register for sale, make any demand for or extend any right with respect to such
registration, issue, offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock (whether such shares or any such
securities are now owned or are acquired after the date of this Prospectus) or
(ii) enter into any swap or similar agreement that transfers, in whole or in
part, any of the economic consequences of ownership of the Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise for a
period of 180 days after the date of this Prospectus, other than (x) the shares
of Common Stock to be sold hereunder, (y) any shares of Common Stock issued by
the Company upon the exercise of options issued pursuant to the Company's 1992
Plan or 1994 Plan, pursuant to the Company's Purchase Plan or upon exercise of
outstanding warrants and (z) the issuance of additional options to purchase
shares of Common Stock pursuant to the Company's 1994 Plan. The holders of
substantially all remaining shares have entered into agreements restricting the
sale or other disposition of Common Stock which are applicable for a periods of
90 to 180 days after the date of this Prospectus. See "Shares Eligible for
Future Sale."
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed 5% of the total number of shares of Common
Stock offered by them.
At the request of the Company, the Underwriters have reserved approximately
250,000 shares of Common Stock, representing 5.0% of the Shares to be sold in
the Offering, for sale to its non-employee directors and certain other persons
at the initial public offering price set forth on the cover page hereof. If such
shares are not so sold to such persons, they will be sold to the public.
Smith Barney Inc. acted as the initial purchaser of the Senior Discount
Notes and received customary compensation in connection therewith.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiations
between the Company and the Representatives. Among the factors to be considered
in determining the initial public offering price will be the future prospects of
the Company and its industry in general; sales, earnings and certain other
financial and operating information of the Company in recent periods; and
certain ratios and market prices of securities and certain financial and
operating information of companies engaged in activities similar to those of the
Company. The estimated initial public offering price range set forth on the
cover page of this Preliminary Prospectus is subject to change as a result of
market conditions and other factors.
68
<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.
69
<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
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
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
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
Senior discount notes -- 13%............................. -- 182,528 194,720 194,720
Capital lease obligations................................ 546 820 793 793
--------- --------- ----------- -----------
Total liabilities...................................... 3,887 192,923 203,567 203,567
--------- --------- ----------- -----------
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% and 64% of revenues for the years ended December 31, 1993, 1994 and 1995,
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. Once the assembly process is complete, the inventory item is
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.
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
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)
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 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
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)
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>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 41,635
NASD filing fee................................................. 17,750
Nasdaq National Market listing fee.............................. 50,000
Printing and engraving costs.................................... 150,000
Legal fees and expenses......................................... 375,000
Accounting fees and expenses.................................... 300,000
Blue Sky fees and expenses...................................... 22,500
Transfer Agent and Registrar fees............................... 10,000
Directors and Officers insurance coverage premiums.............. 150,000
Miscellaneous expenses.......................................... 83,115
---------
Total..................................................... $1,200,000
---------
---------
</TABLE>
- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 7 of the Registrant's Restated Certificate of Incorporation provides
for the indemnification of directors to the fullest extent permissible under
Delaware law.
Article 6 of the Registrant's Bylaws provides for the indemnification of
officers, directors, employees and agents of the corporation if such person
acted in good faith and in a manner reasonably believed to be in and not opposed
to the best interest of the corporation, and, with respect to any criminal
action or proceeding the indemnified party had no reason to believe his conduct
was unlawful.
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
The Registrant has entered into indemnification agreements with its
directors and executive officers, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors, and by the Registrant of the Underwriters, for
certain liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1993, the Registrant has issued and sold (without payment
of any selling commission to any person except as noted below) the following
unregistered securities:
(1) From inception of each respective plan, the Registrant issued and
sold an aggregate of 3,913,580 shares of Common Stock to employees,
directors and consultants at prices ranging from an aggregate of $0.05 to
$3.00, upon exercise of incentive stock options under the Registrant's 1992
Stock Option Plan and 1994 Stock Plan, or as stock purchases in connection
with their employment with or services to the Company.
(2) In October 1993 and December 1993, the Registrant issued 2,963,530
and 526,315 shares of Series BB Preferred Stock, respectively, and warrants
to purchase 661,625 and 105,263 shares of
II-1
<PAGE>
Series BB Preferred Stock, respectively, to a group of 73 investors for an
aggregate cash purchase price of $16,576,763.75. The Company paid placement
fees of $419,783 to Hambrecht & Quist in connection with these issuances.
(3) In August 1994, the Registrant issued and sold 3,215,768 shares of
Series CC Preferred Stock, respectively, to a group of 28 investors for an
aggregate cash purchase price of $31,000,003.52. The Company paid placement
fees of $639,805 to Barclay's Bank and $615,853 to Toronto Dominion Bank in
connection with these issuances.
(4) From December 1994 to February 1995, the Registrant issued and sold
an aggregate of 646,830 shares of Series DD Preferred Stock to a group of 25
investors for an aggregate cash purchase price of $6,235,441.20.
(5) In June 1995 and December 1995, the Registrant sold 235,000 units
and 90,000 units consisting of $235,000,000 and $90,000,000 principal amount
at maturity, respectively, of 13% Senior Discount Notes due 2005 and
warrants to purchase 1,880,000 shares and 720,000 shares, respectively, of
Common Stock of the Company at an exercise price of $.005 per Warrant, to a
group of qualified institutional buyers and accredited and offshore
investors for aggregate cash proceeds of $171,616,925. The Company paid
placement fees of $4,220,085 to Smith Barney Inc. and $1,050,000 to Toronto
Dominion Bank in connection with these issuances.
(6) Concurrently with the closing of the Offering, the Registrant will
issue an aggregate of 1,470,833 shares of Common Stock to Northern States
Power Company ("NSP") and Union Electric Company, each of which are
accredited investors, for aggregate cash proceeds of $25,000,000. 104,167 of
the shares to be issued to NSP will be deposited into escrow and released to
NSP upon the achievement of certain customer milestones. If such milestones
are not met by December 31, 1997, such shares will released from escrow to
the Registrant.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act, as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1A* Restated Certificate of Incorporation.
3.1B** Form of Restated Certificate of Incorporation to be filed upon the closing of the offering
made under this Registration Statement.
3.2* Bylaws.
4.1** Specimen Common Stock Certificate.
4.2* Indenture between the Company and the Bank of New York dated June 15, 1995, including form
of Senior Discount Note.
4.3* Warrant Agreement between the Company and the Bank of New York dated June 15, 1995,
including form of Warrant.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
<C> <S>
4.4* Notes Registration Rights Agreement dated June 15, 1995 by and between the Company and
Smith Barney Inc.
4.5* Warrants Registration Rights Agreement dated June 15, 1995 by and between the Company and
Smith Barney Inc.
4.6* First Supplemental Indenture between the Company and the Bank of New York dated November
21, 1995.
4.7* First Supplemental Warrant Agreement between the Company and the Bank of New York dated
November 21, 1995.
4.8* First Supplemental Notes Registration Rights Agreement dated November 21, 1995 by and
between the Company and Smith Barney Inc.
4.9* First Supplemental Warrants Registration Rights Agreement dated November 21, 1995 by and
between the Company and Smith Barney Inc.
4.10* Form of Warrant to purchase shares of Series BB Preferred Stock.
4.11* Warrant Agreement between the Company and Axonn Corporation dated August 12, 1992.
4.12* Form of Warrant Agreement between the Company and Diablo Research Corporation.
4.13* Form of Series E Warrant.
4.14 Stock Purchase Agreement dated September 6, 1996 between the Company and Northern States
Power Company.
4.15 Stock Purchase Agreement dated September 4, 1996 between the Company and Union Electric
Development Corporation.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement for directors and officers.
10.2(a)* 1992 Stock Option Plan and forms of agreements thereunder.
10.2(b)* 1994 Stock Plan and forms of agreements thereunder.
10.3* 1996 Employee Stock Purchase Plan.
10.4* Shareholders' Agreement between the Company and certain shareholders dated August 15, 1994,
as amended by Amendment No. 1 on December 22, 1994, Amendment No. 2 on June 15, 1995 and
Amendment No. 3 on November 21, 1995.
10.5* Lease between the Company and WDT Shoreway dated April 6, 1989 for the Company's San Carlos
headquarters.
10.6* Restricted Stock Purchase Agreement between the Company and John Seidl dated December 27,
1994.
10.7* Restricted Stock Purchase Agreement between the Company and James Jennings dated August 1,
1995.
10.8* Restricted Stock Purchase Agreement between the Company and Philip Mallory dated July 21,
1995.
10.9* Restricted Stock Purchase Agreement between the Company and Larsh Johnson dated August 1,
1995.
10.10+* License Agreement between the Company and Axonn Corporation dated August 21, 1992, as
amended by an Addendum and a Second Addendum, each dated November 8, 1993.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
<C> <S>
10.11+* License Agreement between the Company and Axonn Corporation dated March 25, 1996.
10.12+* License Agreement between the Company and Life Point Systems Limited Partnership dated
August 12, 1994.
10.13* Agreement between the Company and James Jennings dated July 11, 1994.
10.14* Form of Employee Severance Agreement
10.15* Purchase Agreement between the Company and Smith Barney Inc. dated June 15, 1995.
10.16* Purchase Agreement between the Company and Smith Barney Inc. dated November 21, 1995.
10.17* Form of Promissory Note between the Company and certain officers of the Company in
connection with the purchase of restricted stock.
11.1 Statement regarding computation of per share earnings.
21.1* Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent and Report on Schedule.
23.3 Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney.
27.1 Financial Data Schedule
</TABLE>
- ---------
* Filed previously.
** To be filed by amendment.
+ Confidential treatment requested as to a portion of this exhibit.
(B) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
The following financial statement schedule is filed as part of this
Registration Statement:
Schedule II -- Valuation and Qualifying Accounts and Reserves.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-4
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of San Carlos, State
of California on the 9th day of September, 1996.
CELLNET DATA SYSTEMS, INC.
By: /s/ JOHN M. SEIDL
-----------------------------------
John M. Seidl,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
/s/ JOHN M. SEIDL President, Chief Executive
------------------------------------------- Officer and Director (Principal September 9, 1996
(John M. Seidl) Executive Officer)
Vice President and Chief
/s/ PAUL G. MANCA* Financial Officer (Principal
------------------------------------------- Financial and Accounting September 9, 1996
(Paul G. Manca) Officer)
/s/ PAUL M. COOK*
------------------------------------------- Chairman of the Board, Director September 9, 1996
(Paul M. Cook)
/s/ NEAL M. DOUGLAS*
------------------------------------------- Director September 9, 1996
(Neal M. Douglas)
/s/ WILLIAM C. EDWARDS*
------------------------------------------- Director September 9, 1996
(William C. Edwards)
/s/ WILLIAM HART*
------------------------------------------- Director September 9, 1996
(William Hart)
/s/ BRIAN KWAIT*
------------------------------------------- Director September 9, 1996
(Brian Kwait)
/s/ NANCY E. PFUND*
------------------------------------------- Director September 9, 1996
(Nancy E. Pfund)
/s/ PAUL J. SALEM*
------------------------------------------- Director September 9, 1996
(Paul J. Salem)
/s/ HENRY B. SARGENT*
------------------------------------------- Director September 9, 1996
(Henry B. Sargent)
</TABLE>
*By: /s/ JOHN M. SEIDL
- ------------------------------------
(John M. Seidl)
(ATTORNEY-IN-FACT)
II-6
<PAGE>
SCHEDULE II
CELLNET DATA SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
ADDITIONS (DEDUCTIONS):
BALANCE AT CHARGED TO DEDUCTIONS: TRANSFERS
BEGINNING OF COSTS AND WRITE-OFFS OF BETWEEN BALANCE AT
YEAR EXPENSES ACCOUNTS ACCOUNTS END OF YEAR
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts receivable
Year ended December 31:
1993....................................... $ 60 $ -- $ -- $ (1) $ 59
1994....................................... 59 -- -- (34) 25
1995....................................... 25 -- -- -- 25
Warranty reserves
Year ended December 31:
1993....................................... $ 495 $ 315 $ (110) -- $ 700
1994....................................... 700 20 (624) 34 130
1995....................................... 130 16 (131) -- 15
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------- ---------
<C> <S> <C>
1.1** Form of Underwriting Agreement..................................................
3.1A* Restated Certificate of Incorporation.
3.1B** Form of Restated Certificate of Incorporation to be filed upon the closing of
the offering made under this Registration Statement.
3.2* Bylaws.
4.1** Specimen Common Stock Certificate...............................................
4.2* Indenture between the Company and the Bank of New York dated June 15, 1995,
including form of Senior Discount Note.
4.3* Warrant Agreement between the Company and the Bank of New York dated June 15,
1995, including form of Warrant.
4.4* Notes Registration Rights Agreement dated June 15, 1995 by and between the
Company and Smith Barney Inc.
4.5* Warrants Registration Rights Agreement dated June 15, 1995 by and between the
Company and Smith Barney Inc.
4.6* First Supplemental Indenture between the Company and the Bank of New York dated
November 21, 1995.
4.7* First Supplemental Warrant Agreement between the Company and the Bank of New
York dated November 21, 1995.
4.8* First Supplemental Notes Registration Rights Agreement dated November 21, 1995
by and between the Company and Smith Barney Inc.
4.9* First Supplemental Warrants Registration Rights Agreement dated November 21,
1995 by and between the Company and Smith Barney Inc.
4.10* Form of Warrant to purchase shares of Series BB Preferred Stock.
4.11* Warrant Agreement between the Company and Axonn Corporation dated August 12,
1992.
4.12* Form of Warrant Agreement between the Company and Diablo Research Corporation.
4.13* Form of Series E Warrant.
4.14 Stock Purchase Agreement dated September 6, 1996 between the Company and
Northern States Power Company..................................................
4.15 Stock Purchase Agreement dated September 4, 1996 between the Company and Union
Electric Development Corporation...............................................
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation...........
10.1* Form of Indemnification Agreement for directors and officers.
10.2(a)* 1992 Stock Option Plan and forms of agreements thereunder.
10.2(b)* 1994 Stock Plan and forms of agreements thereunder.
10.3* 1996 Employee Stock Purchase Plan.
10.4* Shareholders' Agreement between the Company and certain shareholders dated
August 15, 1994, as amended by Amendment No. 1 on December 22, 1994, Amendment
No. 2 on June 15, 1995 and Amendment No. 3 on November 21, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------- ---------
<C> <S> <C>
10.5* Lease between the Company and WDT Shoreway dated April 6, 1989 for the Company's
San Carlos headquarters.
10.6* Restricted Stock Purchase Agreement between the Company and John Seidl dated
December 27, 1994.
10.7* Restricted Stock Purchase Agreement between the Company and James Jennings dated
August 1, 1995.
10.8* Restricted Stock Purchase Agreement between the Company and Philip Mallory dated
July 21, 1995.
10.9* Restricted Stock Purchase Agreement between the Company and Larsh Johnson dated
August 1, 1995.
10.10+* License Agreement between the Company and Axonn Corporation dated August 21,
1992, as amended by an Addendum and a Second Addendum, each dated November 8,
1993.
10.11+* License Agreement between the Company and Axonn Corporation dated March 25,
1996.
10.12+* License Agreement between the Company and Life Point Systems Limited Partnership
dated August 12, 1994.
10.13* Agreement between the Company and James Jennings dated July 11, 1994.
10.14* Form of Employee Severance Agreement
10.15* Purchase Agreement between the Company and Smith Barney Inc. dated June 15,
1995.
10.16* Purchase Agreement between the Company and Smith Barney Inc. dated November 21,
1995.
10.17* Form of Promissory Note between the Company and certain officers of the Company
in connection with the purchase of restricted stock.
11.1 Statement regarding computation of per share earnings.
21.1* Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent and Report on Schedule............................
23.3 Consent of Counsel (included in Exhibit 5.1)....................................
24.1* Power of Attorney...............................................................
27.1 Financial Data Schedule.........................................................
</TABLE>
- ---------
* Filed previously.
** To be filed by amendment.
+ Confidential treatment requested as to a portion of this exhibit.
<PAGE>
STOCK PURCHASE AGREEMENT
BY AND AMONG
CELLNET DATA SYSTEMS, INC.
AND
NORTHERN STATES POWER COMPANY
DATED AS OF SEPTEMBER 6, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
SECTION 1. PURCHASE AND SALE OF SHARES. . . . . . . . . . . . . . . . . . . 1
1.1 Authorization of Shares. . . . . . . . . . . . . . . . . . . . . 1
1.2 Sale of the Shares . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 2. OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1 Restrictions on Transfer of Common Stock . . . . . . . . . . . . 4
2.2 Future Public Offerings. . . . . . . . . . . . . . . . . . . . . 5
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. . . . . . . . . . 5
3.1 Organization, Good Standing and Qualification. . . . . . . . . . 5
3.2 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.3 No Conflict. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.4 Governmental Consents. . . . . . . . . . . . . . . . . . . . . . 6
3.5 Final Prospectus . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. . . . . . . . . 6
4.1 Purchase of Securities . . . . . . . . . . . . . . . . . . . . . 6
4.2 Legends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.3 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.4 Investment Experience. . . . . . . . . . . . . . . . . . . . . . 7
4.5 Accredited Investor. . . . . . . . . . . . . . . . . . . . . . . 7
4.6 Restricted Securities; Rule 144. . . . . . . . . . . . . . . . . 7
4.7 Access to Data . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 5. CONDITIONS TO THE PURCHASER'S OBLIGATIONS. . . . . . . . . . . . 8
5.1 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . 8
5.2 Representations and Warranties . . . . . . . . . . . . . . . . . 8
5.3 Compliance with this Agreement . . . . . . . . . . . . . . . . . 8
5.4 Legal Investment . . . . . . . . . . . . . . . . . . . . . . . . 8
5.5 Securities Law Compliance. . . . . . . . . . . . . . . . . . . . 8
5.6 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
SECTION 6. CONDITIONS TO THE COMPANY'S OBLIGATIONS. . . . . . . . . . . . . 9
6.1 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . 9
6.2 Representations and Warranties . . . . . . . . . . . . . . . . . 9
6.3 Compliance with this Agreement . . . . . . . . . . . . . . . . . 9
6.4 Legal Investment . . . . . . . . . . . . . . . . . . . . . . . . 9
6.5 Securities Law Compliance. . . . . . . . . . . . . . . . . . . . 9
6.6 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 7. REGISTRATION RIGHTS. . . . . . . . . . . . . . . . . . . . . . .10
7.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . .10
7.2 Registration Procedures and Expenses . . . . . . . . . . . . . .10
7.3 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . .11
7.4 Information Available. . . . . . . . . . . . . . . . . . . . . .12
7.5 Rule 144 Reporting . . . . . . . . . . . . . . . . . . . . . . .12
7.6 Temporary Cessation of Offers and Sales by Purchaser . . . . . .13
7.7 Transfer of Shares After Registration. . . . . . . . . . . . . .13
7.8 Termination of Obligations . . . . . . . . . . . . . . . . . . .13
SECTION 8. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . .14
8.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
8.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . .14
8.3 Entire Agreement; Amendment. . . . . . . . . . . . . . . . . . .14
8.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . .15
8.5 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . .15
8.6 Survival of Representations and Warranties . . . . . . . . . . .15
8.7 Termination or Modification of Agreement . . . . . . . . . . . .15
-ii-
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "AGREEMENT") is made as of September
6, 1996, by and among CellNet Data Systems, Inc., a Delaware corporation
(the "COMPANY") and Northern States Power Company, a Minnesota corporation
(the "PURCHASER").
WHEREAS, the Company and Purchaser have entered into the CellNet MSP and
NSP Data Services Agreement dated as of August 30, 1996, providing for at least
1,000,000 meters (the "Data Services Agreement");
WHEREAS, the Company has determined that it is in the best interests of the
Company and its stockholders for the Purchaser to make the investment in the
Company provided for, and on the terms and conditions set forth, in this
Agreement; and
WHEREAS, the Purchaser desires to make such investment on such terms and
conditions.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions herein contained, the Company and the Purchaser hereby agree as
follows:
SECTION 1. PURCHASE AND SALE OF SHARES
1.1 AUTHORIZATION OF SHARES. The Company has authorized the issuance
of shares of its Common Stock, par value $.001 per share (the "SHARES")
sufficient to meet the purposes of Section 1.2.
1.2 SALE OF THE SHARES. Subject to the terms and conditions hereof,
the Company will issue and sell to the Purchaser, and the Purchaser will
purchase from the Company, at the Closing, a number of Shares pursuant to the
calculations and conditions listed in Section 1.2(b) below.
(a) DEFINITIONS.
(i) PURCHASE PRICE. The aggregate purchase price paid by the
Purchaser (the "Aggregate Purchase Price" or "APP") for the Shares shall be
equal to $15,000,000, provided the Aggregate Purchase Price shall be reduced
if, and only to the extent necessary, so that the number of shares (including
the Escrow Shares as defined below) purchased does not equal or exceed five
percent (5%) of the outstanding voting securities of the Company.
(ii) FORMULA. In Section 1.2(b) a formula is used to
determine the number of Shares sold to the Purchaser for the Aggregate
Purchase Price, and of these Shares, the number of Shares placed in escrow
(the "Escrow Shares"), and the number of Escrow Shares to be released from
escrow. The formula is: the number of Shares equals a quotient where the
numerator is
<PAGE>
the Aggregate Purchase Price and the denominator is the Offering
Price Per Share of the Company's Common Stock at the Initial Public Offering
(the "Offering Price" or "OP") multiplied by an Adjustment Factor ( the
"Adjustment Factor" or "AF")). Algebraically: number of Shares = APP/(OP*AF).
(iii) ESCROW SHARES. The escrow shares are the number of
Shares determined by Section 1.2(b)(i) that will be placed in escrow and held
by the Company as Escrow Agent. The Escrow Shares placed in escrow will be
governed by this Agreement and an Escrow Agreement (the "Escrow Agreement").
(iv) CONDITION (A). Condition (A) is satisfied if the
Purchaser provides to the Company by September 16, 1996, a letter of intent
signed with Wisconsin Electric Power Company ("WEPCO") or a Controlled
Corporation (as defined in Section 2.1(c) herein) of WEPCO to enter into a
services agreement for at least 750,000 meters with meter routes with an
average density of at least 250 meters per square mile. The Company has the
sole right exercisable in its sole discretion to extend the completion of
Condition (A) after September 16, 1996, through a written notice to the
Purchaser.
(v) CONDITION (B). Condition (B) is satisfied if the
Purchaser provides to the Company by December 31, 1997, a services agreement
signed with WEPCO for at least 750,000 meters with meter routes with an
average density of at least 250 meters per square mile.
(vi) OFFERING PRICE PER SHARE. The Offering Price Per Share
shall be the price at which the Company's Common Stock is sold to the public
in the Initial Public Offering.
(vii) INITIAL PUBLIC OFFERING means the sale of Common Stock
by the Company to the public in a firm commitment underwriting pursuant to an
effective registration statement filed with the Securities and Exchange
Commission (the "SEC").
(b) SHARES PURCHASED AND ESCROW OF SHARES.
(i) Purchaser will purchase from Company a number of Shares
equal to the number of Shares determined by the Formula where the AF equals
.80. The Company shall deliver to Purchaser at the Closing a stock
certificate for the number of Shares as so determined less the number of the
Escrow Shares. The number of Escrow Shares will equal the number of Shares
computed when using the Formula where AF equals .80, minus the number of
Shares computed when using the Formula where AF equals .90. The Company
shall deliver a stock certificate for the Escrow Shares to the Escrow Agent
at the Closing.
(ii) If Condition (A) is satisfied by September 16, 1996 (or
such later date as the Company permits), the number of Escrow Shares released
from escrow to the Purchaser will equal the number of Shares computed when
using the Formula where AF equals .85, minus the number of Shares computed
when using the Formula where AF equals .90.
-2-
<PAGE>
(iii) If Condition (A) is satisfied and Condition (B) is
satisfied by December 31, 1997, the remaining Escrow Shares shall be released
from escrow to the Purchaser.
(iv) If Condition (A) is not satisfied and Condition (B) is
satisfied by December 31, 1997, the number of Escrow Shares released from
escrow to the Purchaser will equal the number of Shares computed when using
the Formula where AF equals .85, minus the number of Shares computed when
using the Formula where AF equals .90.
(v) If Condition (A) is not satisfied by September 16, 1996
(or such later date as the Company permits), the number of Escrow Shares
released from escrow to the Company and cancelled will equal the number of
Shares computed when using the Formula where AF equals .80, minus the number
of Shares computed when using the Formula where AF equals .85.
(vi) If Condition (A) is not satisfied by September 16, 1996
(or such later date as the Company permits) and Condition (B) is not
satisfied by December 31, 1997 (or such later date as the Company permits),
all Escrow Shares shall be released from escrow to the Company and cancelled.
(vii) If Condition (A) is satisfied and Condition (B) is not
satisfied by December 31, 1997, (or such later date as the Company permits),
all remaining Escrow Shares shall be released from escrow to the Company and
cancelled.
(viii) The number of shares shall be rounded to the nearest
whole share as necessary.
1.3 CLOSING.
(a) The purchase and sale of the Shares shall take place at a
closing (the "CLOSING") to be held at the offices of Wilson, Sonsini,
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA 94304-1050, concurrent
with the closing of the Company's Initial Public Offering (the "CLOSING
DATE"), or at such other place as the Purchaser and the Company shall agree.
This Agreement shall terminate and be of no further force and effect if the
closing of the Initial Public Offering does not occur on or before June 30,
1997.
(b) On the Closing Date, subject to the conditions stated herein,
the Company will deliver to the Purchaser and the Escrow Agent stock
certificates representing the number of Shares to be purchased by such
Purchaser as provided in Section 1.2(b)(i) against payment to the Company by
certified check or wire transfer of the purchase price therefor in federal or
other immediately available funds.
-3-
<PAGE>
SECTION 2. OTHER AGREEMENTS
1.4 RESTRICTIONS ON TRANSFER OF COMMON STOCK.
(a) The Purchaser shall not, directly or indirectly, sell or
transfer any Common Stock purchased under this Agreement for a period of two
years after the Closing Date except as permitted by and in accordance with
Section 2.1(b)and Section 2.1(c).
(b) Notwithstanding Section 2.1(a), one year after the Closing Date
Agreement, Purchaser shall be able to, directly or indirectly, sell or transfer
one-half of the Common Stock received on the Closing Date, including one-half of
any Escrow Shares released to Purchaser.
(c) Notwithstanding Section 2.1(a), the Purchaser shall be able to
sell or transfer any Common Stock purchased under this Agreement at any time
(i) to the Company or any person or group approved by the Company (such
approval to be granted or withheld in its sole discretion); or (ii) to a
corporation of which the Purchaser owns not less than 80% of the voting power
entitled to be cast in the election of the Purchaser's directors or a
corporation which owns directly or indirectly not less than 80% of the voting
power entitled to be cast in the election of the Purchaser's directors or a
corporation which directly or indirectly is under common control with the
Purchaser through the ownership of not less then 80% of the voting power
entitled to be cast in the election of directors of the affiliated
corporation (any of such corporation being referred to as a "Controlled
Corporation"), so long as such Controlled Corporation agrees to hold such
Common Stock subject to all the provisions of this Agreement, and agrees to
transfer such Common Stock to the Purchaser or another Controlled Corporation
of the Purchaser if it ceases to be a Controlled Corporation of the
Purchaser; or (iii) in response to (1) an offer to purchase or exchange for
cash or other consideration any Common Stock (a) which is made by or on
behalf of the Company, or (b) which is made by another person or group and is
not opposed by the Board of Directors of the Company within the time such
Board is required, pursuant to regulations under the Securities Exchange Act
of 1934, to advise the Company's stockholders of such Board's position on
such offer, or (2) any other offer made by another person or group to
purchase or exchange for cash or other consideration any Common Stock which,
if successful, would result in such person or group owning or having the
right to acquire Common Stock representing more than 40% of the total Common
Stock of the Company then outstanding; or (iv) pursuant to a bona fide pledge
of such Common Stock to an institutional lender to secure a loan, guarantee
or other financial support, provided that such lender agrees to hold such
Common Stock subject to all provisions of this Agreement and any sale or
disposition by such lender of such pledged Common Stock shall be subject to
the limitations of this Section 2.1; or (v) in the event of a merger or
consolidation in which the holders of Common Stock of the Company prior to
the merger or consolidation cease to hold, directly or indirectly, at least
51% of the Common Stock of the surviving entity, or (vi) pursuant to a plan
of liquidation of the Company. Notwithstanding Section 2.1(a) and subject to
compliance with all securities laws applicable to restricted securities,
Purchaser shall be entitled to sell or transfer not more than one-half of the
-4-
<PAGE>
Common Stock received on the Closing Date, including one-half of the Escrow
Shares, to WEPCO or a Controlled Corporation (as defined above substituting
WEPCO for Purchaser in such definition) of WEPCO.
2.2 FUTURE PUBLIC OFFERINGS. Purchaser will have the right to
participate in future public offerings of newly issued Common Stock by the
Company within two years after the Closing Date. Purchaser shall be entitled
to purchase a percentage of the shares issued in the new offering determined
by dividing (A) the number of Shares of Common Stock acquired by Purchaser
pursuant to this Agreement and owned on the date of such public offering by
(B) the number of shares of Common Stock of the Company outstanding on such
date, before giving effect to the shares to be issued in such public
offering. Notwithstanding the foregoing, if Purchaser has acquired additional
shares of Common Stock of the Company not pursuant to this Agreement, then
Purchaser may not acquire shares of Common Stock from the Company in the new
offering to the extent the percentage ownership held by the Purchaser of the
Company's Common Stock outstanding after such new offering exceeds such
percentage ownership held by Purchaser immediately after the Initial Public
Offering (giving effect to any Escrow Shares released to Purchaser). Such
participation by the Purchaser will be on the same terms and conditions as
the public investors and the shares shall be purchased from the underwriters.
The Company shall notify Purchaser in writing promptly after any filing
with the SEC for any such offering and Purchaser will advise the Company
promptly in light of the proposed schedule of the offering of Purchaser's
election whether or not to participate.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser that:
3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite power and authority to carry on
its business as now conducted and as proposed to be conducted in the future.
The Company is duly qualified to transact business and is in good standing in
each jurisdiction in which the failure to so qualify would have a material
adverse effect on its business or properties.
3.2 AUTHORIZATION. The Company has all corporate right, power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. All corporate action on the part of the Company, its
officers, directors and stockholders necessary for (i) the authorization,
execution and delivery of this Agreement and the issuance of the Shares and (ii)
the performance of all obligations of the Company hereunder has been taken.
This Agreement has been duly executed and delivered by the Company and
constitutes the valid and legally binding obligation of the Company, enforceable
in accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally and rules of law governing specific performance, injunctive
relief and other equitable remedies and to
-5-
<PAGE>
limitations of public policy as they may apply to the indemnification
provisions set forth in Section 7.3 of this Agreement. Upon their issuance
and delivery pursuant to this Agreement, the Shares will be validly issued,
fully paid and nonassessable and will be free of any liens or encumbrances;
provided, however, that the Shares are subject to restrictions on transfer
under state and/or federal securities laws. The issuance and sale of the
Shares will not give rise to any preemptive right or right of first refusal
or right of participation on behalf of any person.
3.3 NO CONFLICT. The execution and delivery of this Agreement do not, and
the consummation of the transactions contemplated hereby will not, conflict
with, or result in any violation of, or default (with or without notice or lapse
of time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or to a loss of a material benefit, under, any
provision of the Restated Certificate of Incorporation or Bylaws of the Company
or any material mortgage, indenture, lease or other agreement or instrument,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company, its properties or
assets.
3.4 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with, any
federal, state, local or provincial governmental authority on the part of the
Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for any post-sale filings pursuant to
applicable state securities laws, which filings will be effected within the
applicable time periods. The offer and sale of the Shares pursuant to the terms
of this Agreement are exempt from the registration requirements of Section 5 of
the Securities Act of 1933, as amended (the "SECURITIES ACT").
3.5 FINAL PROSPECTUS. The Company's Prospectus for the Initial Public
Offering as filed with the Securities and Exchange Commission pursuant to
Rule 424 shall not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants that:
4.1 PURCHASE OF SECURITIES. The Purchaser is purchasing the Shares for
investment for its own account, not as nominee or agent, and not with a view to
the distribution or resale thereof, subject, nevertheless, to any requirement of
law that the disposition of its property shall be at all times within its
control. The Purchaser will not, in any event, make any sale or other
disposition of such securities in contravention of the Securities Act and the
rules and regulations of the Securities and Exchange Commission thereunder.
4.2 LEGENDS. The Purchaser understands that the certificates evidencing
the Shares shall bear legends in the following form:
-6-
<PAGE>
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED."
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH IN THE STOCK
PURCHASE AGREEMENT BETWEEN THE
ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE
OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER
RESTRICTIONS ARE BINDING ON TRANSFEREES OF THESE SHARES."
4.3 AUTHORIZATION. The Purchaser has all corporate right, power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. All corporate action on the part of the Purchaser, its
officers, directors and stockholders necessary for (i) the authorization,
execution and delivery of this Agreement and (ii) the performance of all
obligations of the Purchaser hereunder has been taken. This Agreement has been
duly executed and delivered by the Purchaser and constitutes the valid and
legally binding obligation of the Purchaser, enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors' rights and remedies generally and rules of
law governing specific performance, injunctive relief and other equitable
remedies and to limitations of public policy as they may apply to the
indemnification provisions set forth in Section 7.3 of this Agreement.
4.4 INVESTMENT EXPERIENCE. The Purchaser acknowledges that it can bear
the economic risk of its investment, including a complete loss of its
investment, and has such knowledge and experience in financial or business
matters that it is capable of evaluating the merits and risks of the investment
in the Shares. The Purchaser also represents that it has not been organized
solely for the purpose of acquiring the Shares. The Purchaser understands that
the Shares have not been registered under the Securities Act or under the
securities laws of any jurisdiction by reason of reliance upon certain
exemptions, and that the reliance of the Company on such exemptions is
predicated upon the accuracy of the Purchaser' representations and warranties in
this Section 4.
4.5 ACCREDITED INVESTOR. The Purchaser is an "accredited investor" as
defined in Rule 501 of Regulation D under the Securities Act.
4.6 RESTRICTED SECURITIES; RULE 144. The Purchaser understands that the
Shares and the Common Shares issuable upon conversion thereof are characterized
as "restricted securities" under the federal securities laws inasmuch as they
are being acquired from the Company in a transaction not involving a public
offering and that under such laws and applicable regulations the Shares may be
-7-
<PAGE>
resold without registration under the Securities Act only in certain limited
circumstances. The Purchaser acknowledges that the Shares must be held
indefinitely unless subsequently registered under the Securities Act or an
exemption from such registration is available. The Purchaser is aware of the
provisions of Rule 144 promulgated under the Securities Act which permit limited
resale of shares purchased in a private placement subject to the satisfaction of
certain conditions, including, among other things, the existence of a public
market for the shares, the availability of certain current public information
about the Company, the resale occurring not less than two (2) years after a
party has purchased and paid for the security to be sold, the sale being
effected through a "broker's transaction" or in transactions directly with a
"market maker" (as provided by Rule 144(f)) and the number of shares being sold
during any three (3) month period not exceeding specified limitations.
4.7 ACCESS TO DATA. The Purchaser has had an opportunity to discuss the
Company's business, management and financial affairs with the Company's
management and obtain all information regarding the Company which Purchaser has
required in determining to purchase the Shares.
SECTION 5. CONDITIONS TO THE PURCHASER'S OBLIGATIONS
The following conditions to the Purchaser' obligations must be satisfied on
the Closing Date:
5.1 OPINION OF COUNSEL. The Purchaser shall have received from Wilson
Sonsini Goodrich & Rosati, counsel for the Company, an opinion that (i) the
Shares purchased by such Purchaser have been duly authorized and upon payment of
the consideration as provided in this Agreement, will be validly issued, fully
paid and nonassessable, (ii) the Agreement has been duly authorized, executed
and delivered by the Company, and (iii) the issuance of the Shares pursuant to
the terms of the Agreement will not be required to be registered under the
Securities Act.
5.2 REPRESENTATIONS AND WARRANTIES. The representations and warranties
contained in Section 3 shall be true in all material respects on the Closing
Date with the same effect as though made on and as of that date.
5.3 COMPLIANCE WITH THIS AGREEMENT. The Company shall have performed and
complied with all agreements and conditions contained in this Agreement which
are required to be performed or complied with by the Company on or before the
Closing Date.
5.4 LEGAL INVESTMENT. On the Closing Date, the purchase of the Shares by
the Purchaser shall be legally permitted by all laws and regulations to which
the Company and the Purchaser are subject.
5.5 SECURITIES LAW COMPLIANCE. All actions and steps necessary to assure
compliance with applicable federal and state securities laws, including all
authorizations, approvals or permits, if any, of any governmental authority or
regulatory body in any states where the Shares are being sold
-8-
<PAGE>
that are required in connection with the lawful issuance and sale of the
Shares pursuant to this Agreement shall have been duly obtained and shall be
effective on the Closing Date except for any such filings as may under
applicable law be made subsequent to the Closing Date, which filings the
Company agrees it will make in a timely manner.
5.6 CONSENTS. All material consents, approvals and authorizations, and
all material filings with and notifications of governmental authorities and
regulatory agencies or other entities which regulate the business of the
Company, necessary on the part of the Company to the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby,
shall have been obtained or effected.
SECTION 6. CONDITIONS TO THE COMPANY'S OBLIGATIONS
The following conditions to the Company's obligations must be satisfied on
the Closing Date:
6.1 OPINION OF COUNSEL. The Company shall have received from counsel to
the Purchaser an opinion that the Agreement has been duly authorized, executed
and delivered by the Purchaser.
6.2 REPRESENTATIONS AND WARRANTIES. The representations and warranties
contained in Section 4 shall be true in all material respects on the Closing
Date with the same effect as though made on and as of that date.
6.3 COMPLIANCE WITH THIS AGREEMENT. The Purchaser shall have performed
and complied with all agreements and conditions contained in the Agreement which
are required to be performed or complied with by the Purchaser on or before the
Closing Date.
6.4 LEGAL INVESTMENT. On the Closing Date, the purchase of the Shares by
the Purchaser shall be legally permitted by all laws and regulations to which
the Company and the Purchaser are subject.
6.5 SECURITIES LAW COMPLIANCE. All actions and steps necessary to assure
compliance with applicable federal and state securities laws, including all
authorizations, approvals or permits, if any, of any governmental authority or
regulatory body in any states where the Shares are being sold that are required
in connection with the lawful issuance and sale of the Shares pursuant to this
Agreement shall have been duly obtained and shall be effective on the Closing
Date except for any such filings as may under applicable law be made subsequent
to the Closing Date, which filings the Company agrees it will make in a timely
manner.
6.6 CONSENTS. All material consents, approvals and authorizations, and
all material filings with and notifications of governmental authorities and
regulatory agencies or other entities which regulate the business of the
Company, necessary on the part of the Company to the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby,
shall have been obtained or effected.
-9-
<PAGE>
SECTION 7. REGISTRATION RIGHTS
7.1 DEFINITIONS. For the purpose of this Section 7:
(a) the term "Registration Statement" shall mean any registration
statement required to be filed by Section 7.2 below, and shall include any
preliminary prospectus, final prospectus, exhibit or amendment included in or
relating to such registration statement; and
(b) the term "untrue statement" shall include any untrue statement
or alleged untrue statement, or any omission or alleged omission to state in
the Registration Statement a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
7.2 REGISTRATION PROCEDURES AND EXPENSES. The Company shall:
(a) promptly upon written notice from Purchaser delivered to the
Company at any time after ten months from the Closing Date file with the SEC
a registration statement under the Securities Act on a form which is
appropriate to register the re-sale of one-half of the Shares purchased by
Purchaser hereunder;
(b) use its best efforts, subject to receipt of necessary
information from the Purchaser, to cause such Registration Statement to
become effective as promptly as practicable but not earlier than on the date
one year from the Closing Date;
(c) prepare and file with the SEC such amendments and supplements to
such Registration Statement and the prospectus used in connection therewith as
may be necessary to keep such Registration Statement effective until termination
of such obligation as provided in Section 7.8 below;
(d) furnish to the Purchaser with respect to the Shares registered on
the Registration Statement (and to each underwriter, if any, of such Shares)
such number of copies of prospectuses in conformity with the requirements of the
Securities Act as the Purchaser may reasonably request, in order to facilitate
the public sale or other disposition of the Shares by the Purchaser; provided,
however, that the obligation of the Company to deliver copies of prospectuses to
the Purchaser shall be subject to the receipt by the Company of reasonable
assurances from the Purchaser that the Purchaser will comply with the applicable
provisions of the Securities Act and of such other securities laws as may be
applicable in connection with any use of such prospectuses;
(e) file such documents as may be required of the Company for normal
securities law clearance for the resale of the Shares in such states of the
United States as may be reasonably requested by the Purchaser; provided,
however, that the Company shall not be required in connection with this
paragraph (e) to qualify as a foreign corporation or execute a general consent
to service of process in any jurisdiction; and
-10-
<PAGE>
(f) bear all expenses in connection with the procedures in
paragraphs (a) through (e) of this Section 7.2 and the registration of the
Shares on such Registration Statement and the satisfaction of the blue sky laws
of such states, excluding underwriting discounts and selling commissions, legal
or accounting expenses of Purchaser and expenses required by law to be borne by
Purchaser, all of which shall be borne by Purchaser.
7.3 INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless Purchaser (and
each of its officers, directors, partners or persons, if any, who controls
Purchaser within the meaning of Section 15 of the Securities Act) from and
against any losses, claims, damages or liabilities to which Purchaser (and each
of its officers, directors, partners or persons, if any, who controls Purchaser
within the meaning of Section 15 of the Securities Act) may become subject
(under the Securities Act or otherwise) insofar as such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) arise out of, or
are based upon, any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case on the effective date
thereof, or arise out of any failure by the Company to fulfill any undertaking
included in the Registration Statement, and the Company will, as incurred,
reimburse Purchaser (and each of its officers, directors, partners or persons,
if any, who controls Purchaser within the meaning of Section 15 of the
Securities Act) for any legal or other expenses reasonably incurred in
investigating, defending or preparing to defend any such action, proceeding or
claim; provided, however, that the Company shall not be liable in any such case
to the extent that such loss, claim, damage or liability arises out of, or is
based upon, an untrue statement or omission or alleged untrue statement or
omission made in such Registration Statement in reliance upon and in conformity
with written information furnished to the Company by or on behalf of Purchaser
specifically for use in preparation of the Registration Statement.
(b) Purchaser agrees to indemnify and hold harmless the Company
(and each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act, each officer of the Company who signs the
Registration Statement and each director of the Company), from and against
any losses, claims, damages or liabilities to which the Company (or any such
officer, director or controlling person) may become subject (under the
Securities Act or otherwise), insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of, or
are based upon, any untrue statement of a material fact contained in the
Registration Statement or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in each case, on the effective date
thereof, if such untrue statement was made in reasonable reliance upon and in
conformity with written information furnished by or on behalf of Purchaser
specifically for use in preparation of the Registration Statement, and
Purchaser will, as incurred, reimburse the Company (or such officer, director
or controlling person) for any legal or other expenses reasonably incurred in
investigating, defending or preparing to defend any such action, proceeding
or claim; provided,
-11-
<PAGE>
however, that Purchaser shall in no event be liable for an amount in excess
of the proceeds actually received by Purchaser upon any sale of Shares by
Purchaser pursuant to the Registration Statement.
(c) Promptly after receipt by any indemnified person of a notice of a
claim or the beginning of any action in respect of which indemnity is to be
sought against an indemnifying person pursuant to this Section 7.3, such
indemnified person shall notify the indemnifying person in writing of such claim
or of the commencement of such action, and, subject to the provisions
hereinafter stated, in case any such action shall be brought against an
indemnified person and such indemnifying person shall have been notified
thereof, such indemnifying person shall be entitled to participate therein, and,
to the extent that it shall wish, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified person. After notice from the
indemnifying person to such indemnified person of its election to assume the
defense thereof, such indemnifying person shall not be liable to such
indemnified person for any legal expenses subsequently incurred by such
indemnified person in connection with the defense thereof; provided, however,
that if there exists or shall exist a conflict of interest that would make it
inappropriate in the reasonable judgment of the indemnified person for the same
counsel to represent both the indemnified person and such indemnifying person or
any affiliate or associate thereof, the indemnified person shall be entitled to
retain its own counsel at the expense of such indemnifying person.
(d) If the indemnification provided for in this Section 7.3 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party in respect of any
losses, claims, damages or liabilities referred to above, then each applicable
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities in
such proportion as is appropriate to reflect the relative fault of the parties
in connection with the statements or failures which resulted in such losses,
claims, damages or liabilities; provided that Purchaser shall not be required to
contribute an amount in excess of the proceeds actually received by the
Purchaser upon any sale of Shares pursuant to the Registration Statement.
7.4 INFORMATION AVAILABLE. So long as any registration statement is
effective covering the resale of Shares, the Company will furnish to Purchaser
as soon as practicable after available and upon request of Purchaser, one copy
of (i) its Annual Report to Stockholders (which Annual Report shall contain
financial statements audited in accordance with generally accepted accounting
principles in the United States of America by a national firm of certified
public accountants), (ii) if not included in substance in the Annual Report to
Stockholders, its annual report on Form 10-K, (iii) each of its Quarterly
Reports to Stockholders, and its quarterly report on Form 10-Q, and (iv) a full
copy of the registration statement covering the Shares (the foregoing, in each
case, excluding exhibits).
7.5 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the SEC which may at any time permit the sale
of the Shares to the public without registration, the Company agrees to use its
best efforts to:
-12-
<PAGE>
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date on which the Company becomes subject to the reporting
requirements of the Securities Act or the Exchange Act; and
(b) Use its best efforts to file with the SEC in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Exchange Act.
7.6 TEMPORARY CESSATION OF OFFERS AND SALES BY PURCHASER. The Purchaser
acknowledges that there may occasionally be times when the Company may be
required to suspend the use of the prospectus forming part of the Registration
Statement until such time as an amendment to the Registration Statement has been
filed by the Company and declared effective by the Commission, until the
prospectus is supplemented or amended to comply with the Securities Act, or
until such time as the Company has filed an appropriate report with the
Commission pursuant to the Exchange Act. The Company agrees to file any
necessary amendments, supplements and reports as soon as practicable under the
circumstances. Purchaser hereby covenants that it will not sell any Shares
pursuant to said prospectus during a period of not more than 60 days commencing
at the time at which the Company gives the Purchaser notice of the suspension of
the use of said prospectus and ending at the time the Company gives the
Purchaser notice that the Purchaser may thereafter effect sales pursuant to said
prospectus, as the same may have been supplemented or amended provided the
Company may not suspend the use of such prospectus until at least 60 days has
elapsed since the previous suspension.
7.7 TRANSFER OF SHARES AFTER REGISTRATION. Purchaser hereby covenants
with the Company not to make any sale of the Shares except either (i) in
accordance with the Registration Statement, in which case Purchaser covenants to
comply with the requirement of delivering a current prospectus, or (ii) in
accordance with Rule 144, in which case Purchaser covenants to comply with Rule
144. Purchaser further acknowledges and agrees that such Shares are not
transferable on the books of the Company unless the certificate submitted to the
Company's transfer agent evidencing such Shares is accompanied by a certificate
executed by an officer of, or other person duly authorized by, Purchaser
certifying to such compliance.
7.8 TERMINATION OF OBLIGATIONS. The obligations of the Company pursuant
to Section 7.2 hereof shall cease and terminate upon the earlier to occur of (i)
such time as all of the Shares which have been registered have been resold or
(ii) such time as all of the Shares may be resold in any three-month period
pursuant to Rule 144 under the Securities Act or its successors. All
obligations of the Company in Section 7 shall cease and terminate upon the
earliest to occur of (i) such time as all of the Shares have been resold or
(ii) such time as all of the Shares may be resold under Rule 144(k) under the
Securities Act or its successor.
-13-
<PAGE>
SECTION 8. MISCELLANEOUS
8.1 NOTICES. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by certified or registered
mail, postage prepaid, delivered either by hand or by messenger, or transmitted
by electronic telecopy (fax) addressed:
(i) If to the Company, at:
CellNet Data Systems, Inc.
Attn: Paul Manca
125 Shoreway Road
San Carlos, California 94070
Fax: 415/
with a copy to:
Wilson Sonsini Goodrich & Rosati
Attn: Barry E. Taylor, Esq.
Trevor J. Chaplick, Esq.
650 Page Mill Road
Palo Alto, California 94304
Fax: 415/493-6811
(ii) If to Northern States Power Company:
Northern States Power Company
Attn: Chief Financial Officer
414 Nicollett Mall
Minneapolis, Minnesota 55401
Tel.: 612/330-7712
Fax: 612/330-7558
or at such other address as a party shall have furnished to the other parties in
writing. All such notices and other written communications shall be effective
(i) if mailed, seven days after mailing, (ii) if delivered, upon delivery, or
(iii) if faxed, one business day after transmission with telephone or fax
confirmation of receipt.
8.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, this Agreement shall inure to the benefit of and be binding upon the
successors, assigns, heirs, executors and administrators of each of the parties
hereto.
8.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with
-14-
<PAGE>
regard to the subjects hereof and thereof. Neither this Agreement nor any
term hereof may be amended, waived, discharged or terminated other than by a
written instrument signed by the Company and the Purchaser. Purchaser has no
obligation to invest in the Company other than the obligations contained in
this Agreement.
8.4 COUNTERPARTS. This Agreement may be executed by the several parties on
separate counterparts which, when taken together with counterparts signed by all
the other parties, shall
constitute a single fully executed Agreement which shall be as fully binding and
effective as a counterpart which has been executed by all parties.
8.5 GOVERNING LAW. This Agreement shall be deemed a contract made under
the laws of the State of California and together with the rights and obligations
of the parties hereunder, shall be construed under and governed by the laws of
the State of California.
8.6 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
representations and warranties set forth in Sections 3 and 4 shall survive the
execution and delivery of this Agreement and the issuance of the Shares.
8.7 TERMINATION OR MODIFICATION OF AGREEMENT.
(a) Notwithstanding anything contained herein this Agreement shall
be terminated and cancelled or modified as provided in Section 8.7(b) (i) if
the Company and the Purchaser do not enter into the PrimeNet License and
Services Agreement (the "PrimeNet Agreement") on or before November 15, 1996;
(ii) if the PrimeNet Agreement after being entered into is terminated or
cancelled for any reason; or (iii) if the Data Services Agreement is
terminated or cancelled for any reason.
(b) If any of the events in Section 8.7(a) occur, then as of the date
of such event, (i) if Purchaser has not purchased any Shares then all provisions
of this Agreement shall be immediately terminated and cancelled, (ii) if
Purchaser has purchased Shares and the event in Section 8.7(a) occurs prior to
release to Purchaser or the Company of all Escrow Shares under Section 1.2(b),
then all remaining Escrow Shares shall be released to the Company
notwithstanding the Purchaser's future satisfaction of Condition (A) and/or
Condition (B) and the provisions of Section 2.2 of this Agreement shall be
immediately terminated and cancelled, and (iii) if the event in
Section 8.7(a) occurs after release to Purchaser or the Company of all Escrow
Shares under Section 1.2(b), then the provisions of Section 2.2 of this
Agreement shall be immediately terminated and cancelled. Except as provided in
the preceding sentence, the remaining provisions of this Agreement shall
continue in full force and effect.
-15-
<PAGE>
IN WITNESS WHEREOF, the Company and the Purchaser have caused this
Agreement to be executed by their duly authorized officers as the date first
above written.
CELLNET DATA SYSTEMS, INC.
/s/ PAUL MANCA
------------------------------------
SIGNATURE
/s/ PAUL MANCA, VP & CFO
------------------------------------
NAME AND TITLE OF SIGNATORY
NORTHERN STATES POWER COMPANY
/s/ E. J. MCINTYRE
------------------------------------
SIGNATURE
E. J. MCINTYRE, VICE PRESIDENT & CFO
------------------------------------
NAME AND TITLE OF SIGNATORY
<PAGE>
STOCK PURCHASE AGREEMENT
BY AND AMONG
CELLNET DATA SYSTEMS, INC.
AND
UNION ELECTRIC DEVELOPMENT CORPORATION
A WHOLLY OWNED SUBSIDIARY OF
UNION ELECTRIC COMPANY
DATED AS OF SEPTEMBER 4, 1996
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "AGREEMENT") is made as of September
4, 1996, by and among CellNet Data Systems, Inc., a Delaware corporation (the
"COMPANY") and Union Electric Development Corporation (the "PURCHASER"), a
Missouri corporation and a wholly owned subsidiary of Union Electric Company
("PARENT"), a Missouri corporation.
WHEREAS, the Company has determined that it is in the best interests of the
Company and its stockholders for the Purchaser to make the investment in the
Company provided for, and on the terms and conditions set forth, in this
Agreement; and
WHEREAS, the Purchaser desires to make such investment on such terms and
conditions.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions herein contained, the Company and the Purchaser hereby agree as
follows:
SECTION 1. PURCHASE AND SALE OF SHARES
1.1 AUTHORIZATION OF SHARES. The Company has authorized the issuance of
shares of its Common Stock, par value $.001 per share (the "SHARES") sufficient
to meet the purposes of Section 1.2.
1.2 SALE OF THE SHARES. Subject to the terms and conditions hereof, the
Company will issue and sell to the Purchaser, and the Purchaser will purchase
from the Company, at the Closing, a number of Shares equal to ten million
dollars ($10,000,000) divided by the price at which the Company's Common Stock
will be sold to the public, less the underwriting discount, in the firm
commitment underwriting (the "INITIAL PUBLIC OFFERING") pursuant to a
registration statement filed on August 2, 1996 with the Securities and Exchange
Commission (the "SEC"). The number of Shares shall be rounded to the nearest
whole share as necessary.
1.3 CLOSING.
(a) The purchase and sale of the Shares shall take place at a closing
(the "CLOSING") to be held at the offices of Wilson, Sonsini, Goodrich & Rosati,
650 Page Mill Road, Palo Alto, CA 94304-1050, concurrent with the closing date
of the Company's Initial Public Offering (the "CLOSING DATE"). This Agreement
shall terminate and be of no further force and effect if the closing of the
Initial Public Offering does not occur on or before December 31, 1996.
(b) On the Closing Date, subject to the conditions stated herein, the
Company will deliver to the Purchaser stock certificates representing the number
of Shares to be purchased by such Purchaser as provided in Section 1.2 against
payment to the Company by certified check or wire transfer of the purchase price
therefor in federal or other immediately available funds.
<PAGE>
SECTION 2. OTHER AGREEMENTS
2.1 RESTRICTIONS ON TRANSFER OF COMMON STOCK.
(a) The Purchaser shall not, directly or indirectly, sell or
transfer any Common Stock purchased under this Agreement for a period of two
years after the Closing Date except as permitted by and in accordance with
Section 2.1(b)and Section 2.1(c).
(b) Notwithstanding Section 2.1(a), one year after the Closing
Date, Purchaser shall be able to, directly or indirectly, sell or transfer
one-half of the Common Stock received on the Closing Date subject to
applicable United States federal and state securities laws.
(c) Notwithstanding Section 2.1(a), the Purchaser shall be able to
sell or transfer any Common Stock purchased under this Agreement at any time (i)
to the Company or any person or group approved by the Company (such approval to
be granted or withheld in its sole discretion); or (ii) to a corporation of
which the Purchaser owns not less than 80% of the voting power entitled to be
cast in the election of directors (a "CONTROLLED CORPORATION"), so long as such
Controlled Corporation agrees to hold such Common Stock subject to all the
provisions of this Agreement, and agrees to transfer such Common Stock to the
Purchaser or another Controlled Corporation of the Purchaser if it ceases to be
a Controlled Corporation of the Purchaser; or (iii) in response to (1) an offer
to purchase or exchange for cash or other consideration any Common Stock
(a) which is made by or on behalf of the Company, or (b) which is made by
another person or group and is not opposed by the Board of Directors of the
Company within the time such Board is required, pursuant to regulations under
the Securities Exchange Act of 1934, to advise the Company's stockholders of
such Board's position on such offer, or (2) any other offer made by another
person or group to purchase or exchange for cash or other consideration any
Common Stock which, if successful, would result in such person or group owning
or having the right to acquire Common Stock representing more than 40% of the
total Common Stock of the Company then outstanding; or (iv) pursuant to a bona
fide pledge of such Common Stock to an institutional lender to secure a loan,
guarantee or other financial support, provided that such lender agrees to hold
such Common Stock subject to all provisions of this Agreement and any sale or
disposition by such lender of such pledged Common Stock shall be subject to the
limitations of this Section 2.1; or (v) in the event of a merger or
consolidation in which the holders of Common Stock of the Company prior to the
merger or consolidation cease to hold, directly or indirectly, at least 51% of
the Common Stock of the surviving entity, or (vi) pursuant to a plan of
liquidation of the Company.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser that:
3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has
-2-
<PAGE>
all requisite power and authority to carry on its business as now conducted and
as proposed to be conducted in the future. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on its business or
properties.
3.2 AUTHORIZATION. The Company has all corporate right, power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. All corporate action on the part of the Company, its
officers, directors and stockholders necessary for (i) the authorization,
execution and delivery of this Agreement and the issuance of the Shares and (ii)
the performance of all obligations of the Company hereunder has been taken.
This Agreement has been duly executed and delivered by the Company and
constitutes the valid and legally binding obligation of the Company, enforceable
in accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally and rules of law governing specific performance, injunctive
relief and other equitable remedies and to limitations of public policy as they
may apply to the indemnification provisions set forth in Section 7.3 of this
Agreement. Upon their issuance and delivery pursuant to this Agreement, the
Shares will be validly issued, fully paid and nonassessable and will be free of
any liens or encumbrances; provided, however, that the Shares are subject to
restrictions on transfer under state and/or federal securities laws. The
issuance and sale of the Shares will not give rise to any preemptive right or
right of first refusal or right of participation on behalf of any person.
3.3 NO CONFLICT. The execution and delivery of this Agreement do not, and
the consummation of the transactions contemplated hereby will not, conflict
with, or result in any violation of, or default (with or without notice or lapse
of time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or to a loss of a material benefit, under any
provision of the Restated Certificate of Incorporation or Bylaws of the Company
or any material mortgage, indenture, lease or other agreement or instrument,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company, its properties or
assets.
3.4 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with, any
federal, state, local or provincial governmental authority on the part of the
Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for any post-sale filings pursuant to
applicable state securities laws, which filings will be effected within the
applicable time periods. The offer and sale of the Shares pursuant to the terms
of this Agreement are exempt from the registration requirements of Section 5 of
the Securities Act of 1933, as amended (the "SECURITIES ACT").
3.5 FINAL PROSPECTUS. The Company's Prospectus for the Initial Public
Offering as filed with the Securities and Exchange Commission pursuant to
Rule 424 shall not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading.
-3-
<PAGE>
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants that:
4.1. PURCHASE OF SECURITIES. The Purchaser is purchasing the Shares for
investment for its own account, not as nominee or agent, and not with a view
to the distribution or resale thereof, subject, nevertheless, to any
requirement of law that the disposition of its property shall be at all times
within its control. The Purchaser will not, in any event, make any sale or
other disposition of such securities in contravention of the Securities Act
and the rules and regulations of the Securities and Exchange Commission
thereunder.
4.2 LEGENDS. The Purchaser understands that the certificates
evidencing the Shares shall bear legends in the following form:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED."
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH IN THE STOCK
PURCHASE AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF
THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL
OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS ARE BINDING ON
TRANSFEREES OF THESE SHARES."
4.3 AUTHORIZATION. The Purchaser has all corporate right, power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. All corporate action on the part of the Purchaser, its
officers, directors and stockholders necessary for (i) the authorization,
execution and delivery of this Agreement and (ii) the performance of all
obligations of the Purchaser hereunder has been taken. This Agreement has been
duly executed and delivered by the Purchaser and constitutes the valid and
legally binding obligation of the Purchaser, enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors' rights and remedies generally and rules of
law governing specific performance, injunctive relief and other equitable
remedies and to limitations of public policy as they may apply to the
indemnification provisions set forth in Section 7.3 of this Agreement.
4.4 INVESTMENT EXPERIENCE. The Purchaser acknowledges that it can bear
the economic risk of its investment, including a complete loss of its
investment, and has such knowledge and
-4-
<PAGE>
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Shares. The Purchaser also represents
that it has not been organized solely for the purpose of acquiring the Shares.
The Purchaser understands that the Shares have not been registered under the
Securities Act or under the securities laws of any jurisdiction by reason of
reliance upon certain exemptions, and that the reliance of the Company on such
exemptions is predicated upon the accuracy of the Purchaser' representations and
warranties in this Section 4.
4.5 ACCREDITED INVESTOR. The Parent of the Purchaser is an "accredited
investor" as defined in Rule 501 of Regulation D under the Securities Act and
Purchaser is a wholly owned subsidiary of Parent.
4.6 RESTRICTED SECURITIES; RULE 144. The Purchaser understands that the
Shares and the Common Shares issuable upon conversion thereof are characterized
as "restricted securities" under the federal securities laws inasmuch as they
are being acquired from the Company in a transaction not involving a public
offering and that under such laws and applicable regulations the Shares may be
resold without registration under the Securities Act only in certain limited
circumstances. The Purchaser acknowledges that the Shares must be held
indefinitely unless subsequently registered under the Securities Act or an
exemption from such registration is available. The Purchaser is aware of the
provisions of Rule 144 promulgated under the Securities Act which permit limited
resale of shares purchased in a private placement subject to the satisfaction of
certain conditions, including, among other things, the existence of a public
market for the shares, the availability of certain current public information
about the Company, the resale occurring not less than two (2) years after a
party has purchased and paid for the security to be sold, the sale being
effected through a "broker's transaction" or in transactions directly with a
"market maker" (as provided by Rule 144(f)) and the number of shares being sold
during any three (3) month period not exceeding specified limitations.
4.7 ACCESS TO DATA. The Purchaser has had an opportunity to discuss the
Company's business, management and financial affairs with the Company's
management and obtain all information regarding the Company which Purchaser has
required in determining to purchase the Shares.
SECTION 5. CONDITIONS TO THE PURCHASER'S OBLIGATIONS
The following conditions to the Purchaser's obligations must be
satisfied on the Closing Date:
5.1 OPINION OF COUNSEL. The Purchaser shall have received from Wilson
Sonsini Goodrich & Rosati, counsel for the Company, an opinion that (i) the
Shares purchased by such Purchaser have been duly authorized and upon payment of
the consideration as provided in this Agreement, will be validly issued, fully
paid and nonassessable, (ii) the Agreement has been duly authorized, executed
and delivered by the Company, and (iii) the issuance of the Shares pursuant to
the terms of the Agreement will not be required to be registered under the
Securities Act.
-5-
<PAGE>
5.2 REPRESENTATIONS AND WARRANTIES. The representations and warranties
contained in Section 3 shall be true in all material respects on the Closing
Date with the same effect as though made on and as of that date.
5.3 COMPLIANCE WITH THIS AGREEMENT. The Company shall have performed and
complied with all agreements and conditions contained in this Agreement which
are required to be performed or complied with by the Company on or before the
Closing Date.
5.4 LEGAL INVESTMENT. On the Closing Date, the purchase of the Shares by
the Purchaser shall be legally permitted by all laws and regulations to which
the Company and the Purchaser are subject.
5.5 SECURITIES LAW COMPLIANCE. All actions and steps necessary to assure
compliance with applicable federal and state securities laws, including all
authorizations, approvals or permits, if any, of any governmental authority or
regulatory body in any states where the Shares are being sold that are required
in connection with the lawful issuance and sale of the Shares pursuant to this
Agreement shall have been duly obtained and shall be effective on the Closing
Date except for any such filings as may under applicable law be made subsequent
to the Closing Date, which filings the Company agrees it will make in a timely
manner.
5.6 CONSENTS. All material consents, approvals and authorizations, and
all material filings with and notifications of governmental authorities and
regulatory agencies or other entities which regulate the business of the
Company, necessary on the part of the Company to the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby,
shall have been obtained or effected.
SECTION 6. CONDITIONS TO THE COMPANY'S OBLIGATIONS
The following conditions to the Company's obligations must be satisfied on
the Closing Date:
6.1 OPINION OF COUNSEL. The Company shall have received from counsel to
the Purchaser an opinion that the Agreement has been duly authorized, executed
and delivered by the Purchaser.
6.2 REPRESENTATIONS AND WARRANTIES. The representations and warranties
contained in Section 4 shall be true in all material respects on the Closing
Date with the same effect as though made on and as of that date.
6.3 COMPLIANCE WITH THIS AGREEMENT. The Purchaser shall have performed
and complied with all agreements and conditions contained in the Agreement which
are required to be performed or complied with by the Purchaser on or before the
Closing Date.
-6-
<PAGE>
6.4 LEGAL INVESTMENT. On the Closing Date, the purchase of the Shares by
the Purchaser shall be legally permitted by all laws and regulations to which
the Company and the Purchaser are subject.
6.5 SECURITIES LAW COMPLIANCE. All actions and steps necessary to assure
compliance with applicable federal and state securities laws, including all
authorizations, approvals or permits, if any, of any governmental authority or
regulatory body in any states where the Shares are being sold that are required
in connection with the lawful issuance and sale of the Shares pursuant to this
Agreement shall have been duly obtained and shall be effective on the Closing
Date except for any such filings as may under applicable law be made subsequent
to the Closing Date, which filings the Company agrees it will make in a timely
manner.
6.6 CONSENTS. All material consents, approvals and authorizations, and all
material filings with and notifications of governmental authorities and
regulatory agencies or other entities which regulate the business of the
Company, necessary on the part of the Company to the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby,
shall have been obtained or effected.
SECTION 7. REGISTRATION RIGHTS
7.1 DEFINITIONS. For the purpose of this Section 7:
(a) the term "Registration Statement" shall mean any registration
statement required to be filed by Section 7.2 below, and shall include any
preliminary prospectus, final prospectus, exhibit or amendment included in or
relating to such registration statement; and
(b) the term "untrue statement" shall include any untrue statement or
alleged untrue statement, or any omission or alleged omission to state in the
Registration Statement a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
7.2 REGISTRATION PROCEDURES AND EXPENSES. The Company shall:
(a) promptly upon written notice from Purchaser delivered to the
Company at any time after ten months from the Closing Date, file with
the SEC a registration statement (the "REGISTRATION STATEMENT") under the
Securities Act on a form which is appropriate to register the re-sale of one-
half of the Shares purchased by Purchaser hereunder;
(b) use its best efforts, subject to receipt of necessary information
from the Purchaser, to cause such Registration Statement to become effective as
promptly as practicable but not earlier than on the date one year from the
Closing Date;
-7-
<PAGE>
(c) prepare and file with the SEC such amendments and supplements to
such Registration Statement and the prospectus used in connection therewith as
may be necessary to keep such Registration Statement effective until termination
of such obligation as provided in Section 7.8 below;
(d) furnish to the Purchaser with respect to the Shares registered on
the Registration Statement (and to each underwriter, if any, of such Shares)
such number of copies of prospectuses in conformity with the requirements of the
Securities Act as the Purchaser may reasonably request, in order to facilitate
the public sale or other disposition of the Shares by the Purchaser; provided,
however, that the obligation of the Company to deliver copies of prospectuses to
the Purchaser shall be subject to the receipt by the Company of reasonable
assurances from the Purchaser that the Purchaser will comply with the applicable
provisions of the Securities Act and of such other securities laws as may be
applicable in connection with any use of such prospectuses;
(e) file such documents as may be required of the Company for normal
securities law clearance for the resale of the Shares in such states of the
United States as may be reasonably requested by the Purchaser; provided,
however, that the Company shall not be required in connection with this
paragraph (e) to qualify as a foreign corporation or execute a general consent
to service of process in any jurisdiction; and
(f) bear all expenses in connection with the procedures in
paragraphs (a) through (e) of this Section 7.2 and the registration of the
Shares on such Registration Statement and the satisfaction of the blue sky laws
of such states, excluding underwriting discounts and selling commissions, legal
or accounting expenses of Purchaser and expenses required by law to be borne by
Purchaser, all of which shall be borne by Purchaser.
7.3 INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless Purchaser (and
each of its officers, directors, partners or persons, if any, who controls
Purchaser within the meaning of Section 15 of the Securities Act) from and
against any losses, claims, damages or liabilities to which Purchaser (and each
of its officers, directors, partners or persons, if any, who controls Purchaser
within the meaning of Section 15 of the Securities Act) may become subject
(under the Securities Act or otherwise) insofar as such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) arise out of, or
are based upon, any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case on the effective date
thereof, or arise out of any failure by the Company to fulfill any undertaking
included in the Registration Statement, and the Company will, as incurred,
reimburse Purchaser (and each of its officers, directors, partners or persons,
if any, who controls Purchaser within the meaning of Section 15 of the
Securities Act) for any legal or other expenses reasonably incurred in
investigating, defending or preparing to defend any such action, proceeding or
claim; provided, however, that the Company shall not be liable in any such case
to the extent that
-8-
<PAGE>
such loss, claim, damage or liability arises out of, or is based upon, an untrue
statement or omission or alleged untrue statement or omission made in such
Registration Statement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of Purchaser specifically
for use in preparation of the Registration Statement.
(b) Purchaser agrees to indemnify and hold harmless the Company (and
each person, if any, who controls the Company within the meaning of Section 15
of the Securities Act, each officer of the Company who signs the Registration
Statement and each director of the Company), from and against any losses,
claims, damages or liabilities to which the Company (or any such officer,
director or controlling person) may become subject (under the Securities Act or
otherwise), insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of, or are based upon, any untrue
statement of a material fact contained in the Registration Statement or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in
each case, on the effective date thereof, if such untrue statement was made in
reliance upon and in conformity with written information furnished by or on
behalf of Purchaser specifically for use in preparation of the Registration
Statement, and Purchaser will, as incurred, reimburse the Company (or such
officer, director or controlling person) for any legal or other expenses
reasonably incurred in investigating, defending or preparing to defend any such
action, proceeding or claim; provided, however, that Purchaser shall in no event
be liable for an amount in excess of the proceeds actually received by Purchaser
upon any sale of Shares pursuant to the Registration Statement.
(c) Promptly after receipt by any indemnified person of a notice of a
claim or the beginning of any action in respect of which indemnity is to be
sought against an indemnifying person pursuant to this Section 7.3, such
indemnified person shall notify the indemnifying person in writing of such claim
or of the commencement of such action, and, subject to the provisions
hereinafter stated, in case any such action shall be brought against an
indemnified person and such indemnifying person shall have been notified
thereof, such indemnifying person shall be entitled to participate therein, and,
to the extent that it shall wish, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified person. After notice from the
indemnifying person to such indemnified person of its election to assume the
defense thereof, such indemnifying person shall not be liable to such
indemnified person for any legal expenses subsequently incurred by such
indemnified person in connection with the defense thereof; provided, however,
that if there exists or shall exist a conflict of interest that would make it
inappropriate in the reasonable judgment of the indemnified person for the same
counsel to represent both the indemnified person and such indemnifying person or
any affiliate or associate thereof, the indemnified person shall be entitled to
retain its own counsel at the expense of such indemnifying person.
(d) If the indemnification provided for in this Section 7.3 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party in respect of any
losses, claims, damages or liabilities referred to above, then each applicable
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities in
such proportion as is appropriate to reflect
-9-
<PAGE>
the relative fault of the parties in connection with the statements or failures
which resulted in such losses, claims, damages or liabilities; provided that
Purchaser shall not be required to contribute an amount in excess of the
proceeds actually received by the Purchaser upon any sale of Shares pursuant to
the Registration Statement.
7.4 INFORMATION AVAILABLE. So long as any registration statement is
effective covering the resale of Shares, the Company will furnish to Purchaser
as soon as practicable after available, one copy of (i) its Annual Report to
Stockholders (which Annual Report shall contain financial statements audited in
accordance with generally accepted accounting principles in the United States of
America by a national firm of certified public accountants), (ii) if not
included in substance in the Annual Report to Stockholders, its annual report on
Form 10-K, (iii) each of its Quarterly Reports to Stockholders, and its
quarterly report on Form 10-Q, and (iv) a full copy of the registration
statement covering the Shares (the foregoing, in each case, excluding exhibits).
7.5 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the SEC which may at any time permit the sale
of the Shares to the public without registration, the Company agrees to use its
best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date on which the Company becomes subject to the reporting
requirements of the Securities Act or the Exchange Act; and
(b) Use its best efforts to file with the SEC in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Exchange Act.
7.6 TEMPORARY CESSATION OF OFFERS AND SALES BY PURCHASER. The Purchaser
acknowledges that there may occasionally be times when the Company may be
required to suspend the use of the prospectus forming part of the Registration
Statement until such time as an amendment to the Registration Statement has been
filed by the Company and declared effective by the Commission, until the
prospectus is supplemented or amended to comply with the Securities Act, or
until such time as the Company has filed an appropriate report with the
Commission pursuant to the Exchange Act. The Company agrees to file any
necessary amendments, supplements and reports as soon as practicable under the
circumstances. Purchaser hereby covenants that it will not sell any Shares
pursuant to said prospectus during a period of not more than 60 days commencing
at the time at which the Company gives the Purchaser notice of the suspension of
the use of said prospectus and ending at the time the Company gives the
Purchaser notice that the Purchaser may thereafter effect sales pursuant to said
prospectus, as the same may have been supplemented or amended provided the
Company may not suspend the use of such prospectus until at least 60 days has
elapsed since the previous suspension.
7.7 TRANSFER OF SHARES AFTER REGISTRATION. Purchaser hereby covenants
with the Company not to make any sale of the Shares except either (i) in
accordance with the Registration
-10-
<PAGE>
Statement, in which case Purchaser covenants to comply with the requirement of
delivering a current prospectus, or (ii) in accordance with Rule 144, in which
case Purchaser covenants to comply with Rule 144. Purchaser further
acknowledges and agrees that such Shares are not transferable on the books of
the Company unless the certificate submitted to the Company's transfer agent
evidencing such Shares is accompanied by a certificate executed by an officer
of, or other person duly authorized by, Purchaser certifying to such compliance.
7.8 TERMINATION OF OBLIGATIONS. The obligations of the Company pursuant
to Section 7.2 hereof shall cease and terminate upon the earlier to occur of (i)
such time as all of the Shares which have been registered have been resold or
(ii) such time as all of the Shares may be resold in any three-month period
pursuant to Rule 144 under the Securities Act or its successors. All
obligations of the Company in Section 7 shall cease and terminate upon the
earliest to occur of (i) such time as all of the Shares have been resold or
(ii) such time as all of the Shares may be resold under Rule 144(k) under the
Securities Act or its successor.
SECTION 8. MISCELLANEOUS
8.1 NOTICES. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by certified or registered
mail, postage prepaid, delivered either by hand or by messenger, or transmitted
by electronic telecopy (fax) addressed:
(i) If to the Company, at:
CellNet Data Systems, Inc.
Attn: Paul Manca
125 Shoreway Road
San Carlos, CA 94070
Fax: 415/508-6000
with a copy to:
Wilson Sonsini Goodrich & Rosati
Attn: Barry E. Taylor, Esq.
Trevor J. Chaplick, Esq.
650 Page Mill Road
Palo Alto, CA 94304
Fax: 415/493-6811
-11-
<PAGE>
(ii) If to Union Electric Development Corporation:
Union Electric Development Corporation
Attn: Mr. Donald E. Brandt
1901 Chouteau Avenue
St. Louis, Missouri 63103
Tel.: 314/554-2473
Fax: 314/554-3066
or at such other address as a party shall have furnished to the other parties in
writing. All such notices and other written communications shall be effective
(i) if mailed, seven days after mailing, (ii) if delivered, upon delivery, or
(iii) if faxed, one business day after transmission with telephone or fax
confirmation of receipt.
8.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, this Agreement shall inure to the benefit of and be binding upon the
successors, assigns, heirs, executors and administrators of each of the parties
hereto.
8.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
Neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the Company and the
Purchaser.
8.4 COUNTERPARTS. This Agreement may be executed by the several parties on
separate counterparts which, when taken together with counterparts signed by all
the other parties, shall constitute a single fully executed Agreement which
shall be as fully binding and effective as a counterpart which has been executed
by all parties.
8.5 GOVERNING LAW. This Agreement shall be deemed a contract made under
the laws of the State of California and together with the rights and obligations
of the parties hereunder, shall be construed under and governed by the laws of
the State of California.
8.6 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
representations and warranties set forth in Sections 3 and 4 shall survive the
execution and delivery of this Agreement and the issuance of the Shares.
-12-
<PAGE>
IN WITNESS WHEREOF, the Company and the Purchaser have caused this
Agreement to be executed by their duly authorized officers as of the date
first above written.
CELLNET DATA SYSTEMS, INC.
/s/ PAUL MANCA
-----------------------------------------------
SIGNATURE
PAUL MANCA, VP & CFO
-----------------------------------------------
NAME AND TITLE OF SIGNATORY
UNION ELECTRIC DEVELOPMENT CORPORATION
/s/ DONALD E. BRANDT
-----------------------------------------------
SIGNATURE
DONALD E. BRANDT, VICE PRESIDENT AND CONTROLLER
-----------------------------------------------
NAME AND TITLE OF SIGNATORY
<PAGE>
EXHIBIT 5.1
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
September 9, 1996
CellNet Data Systems, Inc.
125 Shoreway Road
San Carlos, CA 94070
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 to be filed by
you with the Securities and Exchange Commission on or about September 9, 1996
(as such may thereafter be amended or supplemented, the "Registration
Statement"), in connection with the registration under the Securities Act of
1933, as amended, of up to 5,750,000 shares of your Common Stock, $.001
par value (the "Shares"). We understand that the Shares are to be sold to
the underwriters of the offering for resale to the public as described in the
Registration Statement. As your legal counsel, we have examined the
proceedings taken, and are familiar with the proceedings proposed to be
taken, by you in connection with the sale and issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of
the Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares, when issued and sold in the manner described in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of CellNet Data Systems, Inc., will be legally and validly
issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in
the Registration Statement, including the Prospectus constituting a part
thereof, and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE>
EXHIBIT 11.1
CELLNET DATA SYSTEMS, INC.
COMPUTATION OF PRO FORMA NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED ----------------------
DECEMBER 31, JUNE 30, JUNE 30,
1995 1995 1996
------------ ---------- ----------
<S> <C> <C> <C>
Net loss.................................................................... $ (40,956) $ (12,121) $ (32,313)
------------ ---------- ----------
------------ ---------- ----------
Weighted average common shares outstanding.................................. 4,115 3,435 5,101
Convertible preferred stock (using the "if converted method")............... 24,706 24,706 24,706
Warrants (using the "if converted method").................................. 3,950 3,950 3,950
Common Stock options included pursuant to the Securities and Exchange
Commission's Staff Accounting Bulletin No. 83.............................. 726 726 726
------------ ---------- ----------
Shares used in computing pro forma net loss per share....................... 33,497 32,817 34,483
------------ ---------- ----------
------------ ---------- ----------
Pro forma net loss per share................................................ $ (1.22) $ (0.37) $ (0.94)
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Registration Statement of CellNet Data
Systems, Inc. on Form S-1 of our report dated 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), appearing in the Prospectus, which is part of this Registration
Statement and to the reference to us under the heading "Experts" in such
Prospectus.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the consolidated financial statement
schedule of CellNet Data Systems, Inc., listed in Item 16(b). The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
September 5, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations
found on pages F-3 and F-4 of the Company's Registration Statement on Form
S-1 and is qualified in its entirety by reference to such consolidated
financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 48018 70730
<SECURITIES> 95779 32237
<RECEIVABLES> 2118 1904
<ALLOWANCES> (25) (25)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 7539 9129
<DEPRECIATION> (3561) (5590)
<TOTAL-ASSETS> 184306 162653
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
(29486) (29486)
(27195) (27196)
<COMMON> (27608) (27636)
<OTHER-SE> (2118) (2118)
<TOTAL-LIABILITY-AND-EQUITY> (184306) (162653)
<SALES> 1663 127
<TOTAL-REVENUES> 2126 420
<CGS> (1294) (109)
<TOTAL-COSTS> (5129) (3483)
<OTHER-EXPENSES> (33386) (21345)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (4564) (7903)
<INCOME-PRETAX> (40953) (32311)
<INCOME-TAX> (3) (2)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (40956) (32313)
<EPS-PRIMARY> (1.22) (0.94)
<EPS-DILUTED> 0 0
</TABLE>
