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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(Mark [X] Annual Report pursuant to Section 13 or 15(d) of the Securities
One) Exchange
Act of 1934 [Fee Required] for the fiscal year ended December 31, 1996
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
to
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Commission File Number 0-21409
CELLNET DATA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2951096
(State or other jurisdiction incorporation or organization) (I.R.S. Employer
Identification Number)
125 Shoreway Road, San Carlos, California 94070 (address of principal executive
offices)
Registrant's telephone number, including area code: (415) 528-6000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001
par value (Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 3, 1997 was approximately $361,837,932 based upon the
last sales price reported for such date on the Nasdaq National Market. For
purposes of this disclosure, shares of Common Stock held by persons who hold
more than 5% of the outstanding shares of Common Stock and shares held by
officers and directors of the registrant, have been excluded in that such
persons may be deemed to be affiliates. This determination is not necessarily
conclusive.
At March 3, 1997 registrant had outstanding 39,653,472 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of this Form 10-K is incorporated by
reference to the definitive proxy statement for the annual meeting of
stockholders of the Company which will be filed no later than 120 days after
December 31, 1996.
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PAGE
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PART I
Item 1. Business 3
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 25
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 26
Item 6. Selected Consolidated Financial Data 26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 28
Item 8. Financial Statements and Supplementary Data 46
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 62
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PART III
Item 10. Directors and Executive Officers of the Registrant 63
Item 11. Executive Compensation 63
Item 12. Security Ownership of Certain Beneficial Owners and Management 63
Item 13. Certain Relationships and Related Transactions. 63
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 64
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SIGNATURES
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2 CELLNET
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PART I
ITEM 1. BUSINESS
THIS ITEM CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS SET FORTH IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" UNDER "RISK FACTORS THAT MAY AFFECT FUTURE
OPERATING PERFORMANCE" AND ELSEWHERE IN THIS REPORT.
GENERAL
CellNet Data Systems, Inc. (the "Company" or "CellNet") designs, builds, owns
and operates innovative wireless data communications networks capable of
providing high-volume 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 had
2,235,000 meters under long-term contracts, of which a total of 363,140 meters
were in revenue service (being billed) under these contracts as of December 31,
1996. The Company has completed the installation of a network to provide NMR
services to Kansas City Power & Light Company ("KCPL") and had installed
approximately 365,000 meters on the network as of December 31, 1996. The Company
expects to add an additional 50,000 meters to the KCPL network in 1997 and 1998.
The Company is currently building a network for Union Electric Company ("UE") in
St. Louis covering a total of approximately 800,000 meters, of which
approximately 130,000 were installed on the network as of December 31, 1996. In
addition, the Company has entered into separate services agreements with
Northern States Power Company ("NSP") in Minneapolis, Pacific Gas & Electric
Company ("PG&E") in San Francisco and Puget Sound Energy, Inc. (formed through
the merger of Puget Sound Power & Light Company and Washington Energy Company)
("Puget") in Washington State, pursuant to which it has contracted to build
wireless networks to provide NMR services covering an aggregate of approximately
1,115,000 additional meters, including 1,000,000 meters under the NSP Services
Agreement, 100,000 meters under the PG&E 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, established in 1984, developed and sold non-communicating electronic
meter registers with embedded memory capabilities. In 1991, the Company began to
phase out such activities and focus on the development of NMR services and
related networks.
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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 a primarily 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 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 prompted utilities
in the United States to undertake increased measures to improve their efficiency
and service levels. See "Risk Factors That May Affect Future Operating
Performance -- Dependence on and Uncertainty of Utility Market Acceptance."
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 $947,000 for license fees and related acquisition expenses
attributable to spectrum acquisition costs as of December 31, 1996 and has
acquired 56 spectrum licenses in 46 of the top 60 MSAs. The Company believes
that it will be able to obtain additional spectrum if required, but does not
know whether it will be able to continue to do so at low cost, particularly if
such spectrum becomes subject to auction. The Company has focused its spectrum
acquisition strategy on these top 60 markets. See "Risk Factors That May Affect
Future Operating Performance -- 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
Energy Connections, an Ameritech/Wisconsin Energy joint venture, Hewlett
Packard, Honeywell, Inc., Real Time Data, Inc., Interactive Technologies, Inc.
and Process Systems (PSI), Siemens Energy and Automation, Inc.
/ Siemens Measurements Ltd. to develop such applications. The Company believes
that its utility networks will
4 CELLNET
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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 and comparable opportunities for non-utility applications. The
Company's strategy is to pursue international markets through a proposed joint
venture with Bechtel Enterprises, Inc. ("BEn"). The joint venture, BCN Data
Systems L.L.C., is expected to concentrate its initial efforts in the United
Kingdom and Southeast Asia.
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 and state 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. In recent
months, several major electric utilities have entered into merger agreements and
other consolidation transactions in connection with this restructuring. The
restructuring has also 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 April
1996 FERC issued its final rules that 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 among those states implementing retail wheeling, and pursuant to
the California Public Utility Commission's plan, utilities will be required to
offer some or all customers (depending upon the Commission's decision on a
phase-in of the plan) the ability to choose their electricity supplier in 1998,
with all customers having this ability by 2003. California is one of four
states, including Pennsylvania, Rhode Island and New Hampshire, where
legislation is in place to mandate retail wheeling. Regulators in New York,
Massachusetts, Michigan, New Hampshire, Vermont and other states have ordered
utilities to file restructuring plans which would address, among other
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.
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The trend toward 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. Power plant expansions are costly and investments in such
capacity may 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,
leading 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.
ENHANCE INFORMATION SYSTEMS. To implement time-of-use pricing and other
sophisticated pricing plans, retail wheeling, real-time power outage detection
and the other services described above, electric utilities will require
extremely accurate and timely data regarding energy consumption by customers.
However, adequate automated systems have not been available. Some utilities have
simplified and automated the manual meter reading process to a limited degree
through the use of hand-held and drive-by meter reading equipment, commonly
referred to as automated meter reading ("AMR"). An AMR device polls meters on a
meter reading route, usually on a monthly basis, and the consumption data is
then transmitted to the utility's information system. Periodic meter readings,
even when "automated" by such equipment, do not provide the necessary data to
implement these regulatory and competitive initiatives.
THE CELLNET SOLUTION
CellNet has designed, developed and is now commercially deploying in scale the
first wireless data communications network designed to provide high-volume
real-time status and event monitoring of up to several million endpoints. Since
the primary application of the network is to provide NMR services to utilities,
the network has been designed to meet the utility industry's cost requirements,
information needs and rigorous design specifications. CellNet's network uses
radio transmitters fitted to existing meters to read and report data from each
meter every few minutes. CellNet uses inexpensive radio devices and proprietary
software in its networks, deploys certain network components primarily on
utility power poles, and requires minimal frequency spectrum to operate its
system. As a result, the Company believes that for large scale installations it
will be able to provide basic NMR services at a cost to the utility of less than
$1 per month per meter.
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CellNet's system enables utilities to better serve their customers by offering
enhanced services such as:
- time-of-use and demand energy rates;
- real-time response to billing inquiries;
- real-time power outage detection, location and notification;
- remote verification of "power on" and outage restoration;
- on-demand meter reads;
- customer-selected billing dates and consolidated, multi-location billing;
- automatic move in/move out meter reading;
- distribution automation; and
- access for utility customers to consumption, rate and billing information
via the Internet.
In addition, CellNet's system allows utilities to respond effectively to
regulatory changes, reduce costs, defer capital spending and enhance their
operating efficiencies, thereby deriving benefits in the following areas:
RESPOND EFFECTIVELY TO REGULATORY INITIATIVES. If retail wheeling is adopted,
consumers will contract to buy electricity from specific power providers, but
all such power providers will supply electricity to the local electrical
network, which will then distribute power to all consumers. Monthly meter
reading allows power providers to determine aggregate usage, but not to
determine time of use, a critical requirement to implement retail wheeling. By
providing real-time data on each consumer's power usage, CellNet enables
utilities to effectively implement retail wheeling and avoid the installation
across their territories of individual time-of-use meters, which could cost more
than $150-$200 at each service endpoint.
REDUCE CAPITAL INVESTMENTS. CellNet's NMR services will enable utilities to
adopt time-of-use billing plans, which can be used to motivate consumers to
shift discretionary consumption to off-peak periods. Reducing peak demand may
enable utilities to defer or avoid costly plant construction. In addition, by
allowing 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.
7 CELLNET
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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 and to earn recurring revenues by providing NMR services
to utilities and/or other clients by using the network to support a variety of
non-utility applications. 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.
In a number of states (Arizona, California, New Jersey and Massachusetts), the
public utility commissions that regulate electric utilities have provisionally
ruled that the "unbundling" of metering, billing, and collection services is a
necessary condition to developing a competitive market in electric and energy
services. Unbundling implies that a third party, such as a power marketer, would
be free to own the electric meter that measures usage and attaches to a
commercial, industrial or residential customer's premise. The traditional owner
of the meter has been the electric utility which has had a monopoly in providing
metering, billing, and collection services. Unbundling, therefore, will likely
subdivide the Company's market in the future. As such, the Company may contract
in the future not only with utilities but also with other third parties such as
power marketers that wish to enter the metering business. The subdivision of the
Company's market may also require other adaptations of the Company's traditional
business model including (i) joint ventures or alliances with utilities to form
and own metering companies, (ii) contracts of shorter duration than those the
Company has previously entered into, (iii) deployments with utilities aimed at
high-value commercial and industrial customers, with other customers to be added
over time, and (iv) contracts and deployments with non-regulated third party
entities that desire to enter the metering business. Although unbundling may
force the Company to adapt its business strategy and to accept a measure of
increased financial risk in certain cases in order to meet changing market
circumstances, unbundling also will require the application of the Company's
meter reading technology (or comparable technology) in order to implement it.
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 the
capacity, after serving all of a utility's NMR and distribution automation
requirements, to support non-utility services that would benefit from the
availability of a low-cost wireless network. 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;
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- 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 monitoring 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. A preliminary
field trial is presently being conducted. 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 have a commercial field trial currently underway.
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.
ENERGY CONNECTIONS, AN AMERITECH / WISCONSIN ENERGY JOINT VENTURE. 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 theft analysis, power quality
measurement, and equipment and status monitoring. This nonexclusive
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.
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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.
PROCESS SYSTEMS (PSI), SIEMENS ENERGY AND AUTOMATION, INC. / SIEMENS
MEASUREMENTS LTD. The Company is working with PSI, a Siemens business unit, to
integrate PSI's Energy Analyzer Plus software for collecting data over the
public switched telephone network (PSTN) from a variety of high-end electric and
gas meters with the CellNet system, so as to enable the Company to offer
multi-technology NMR services. A subsidiary of the Company is also working with
Siemens Measurements in the United Kingdom to license CellNet's radio technology
for integration with Siemens' electric and gas metering products, allowing them
to communicate over CellNet's networks.
METRETEK, INC./MARCUM NATURAL GAS SERVICES, INC. The Company is also working
with Metretek, Inc., a subsidiary of Marcum Natural Gas Services, Inc. in order
to offer a combination of wireless and telephone-based services to the gas
utility industry. Metretek's telephone-based data collection and management
software is intended to be integrated into the Company's wireless data
communications system, enabling the Company to provide multi-technology NMR
services, allowing utilities to reach a larger percentage of their customers.
Additionally, the Company's wireless data communications technology is intended
to be incorporated into Metretek's new and existing products, enabling data
collected from industrial, commercial and residential gas meters, volume
correctors and other Metretek products to be communicated over CellNet's
wireless networks.
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.
In September 1996, the Company entered into a letter of intent ("Letter of
Intent") with BEn to form an international joint venture (the "Joint Venture")
that would have the exclusive right to deploy and operate the Company's wireless
data communications system in countries outside of the United States. The Joint
Venture would be 50% owned by each party and would be operated independently.
The Company would license its technology to the Joint Venture and the Joint
Venture would sublicense that technology to individual local operating project
entities in which the Joint Venture would invest and generally maintain
operating control. The managing board of the Joint Venture would be composed of
an equal number of representatives from each party and would review and approve
all major business decisions. Formation of the Joint Venture remains subject to
the negotiation and execution of definitive agreements between the parties upon
mutually acceptable terms. The parties have formed BCN Data Systems L.L.C. for
this purpose and have commenced operations. The parties are in the process of
negotiating the definitive agreements but have not yet concluded such
agreements. Although the Company expects that the parties will conclude such
agreements in the near term, no assurance can be given that they will be able to
do so on acceptable terms, or at all.
In considering international expansion opportunities for the CellNet system, the
Joint Venture intends to target markets characterized by (i) a well-developed
utility infrastructure, (ii) demand for low-cost monitoring, (iii) a progressive
regulatory climate favoring increased efficiency, customer service and
competitive access, and (iv) well-capitalized, established and reliable local
partners.
The Joint Venture is expected to concentrate its initial efforts in the United
Kingdom and Southeast Asia.
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OUTSOURCE SUBSTANTIAL MANUFACTURING AND INSTALLATION ACTIVITIES
The Company outsources a substantial portion of its manufacturing and
installation activities. As a result, CellNet leverages the size and
capabilities of key suppliers to take advantage of manufacturing economies of
scale, reduce component pricing through bulk purchasing, and have access to
manufacturing capacity and resources to meet highly variable production
requirements. The Company will retain overall network construction
responsibility, but intends to rely on local subcontractors for installation,
primarily those who have long working relationships with CellNet's utility
customers. The Company believes that outsourcing installation activities will
reduce the start-up time and the Company's investment risk for each project.
WIRELESS COMMUNICATIONS INDUSTRY OVERVIEW
CellNet operates within the wireless communications industry, which includes
personal communications services ("PCS"), specialized mobile radio ("SMR"),
microwave, cellular (including cellular digital packet data ("CDPD") ), paging
and multiple address radio system ("MAS") segments, among others. The two
principal categories of commercial wireless applications are voice and data
transmission. Within those broad categories, service requirements for specific
applications vary substantially in terms of quality, speed, capacity, mobility,
two-way capability, geographical coverage and cost. In general, products which
provide for greater mobility and capacity are more expensive. As a consequence,
the market for wireless services is segmented, matching specific service
requirements with the most suitable wireless technology.
CellNet's system is designed to utilize small amounts of spectrum and to provide
low-cost, high-volume, real-time monitoring of fixed endpoints. The Company
believes other telecommunications applications or market segments are not as
well suited for use in NMR and similar applications except in limited cases such
as high-use industrial metering, where the increased equipment and service costs
might be justified by high rates of power consumption, or in certain rural
applications, where the cost of installing and operating a fixed network on a
per meter basis might be higher. Competing service applications are therefore
expected to develop largely within the segment of the wireless communications
market in which CellNet now operates.
CellNet's network architecture and the nature of the markets that it serves
differ significantly from traditional cellular companies, thereby resulting in
potential advantages for CellNet in providing NMR services which include:
POTENTIAL FOR LOWER MARKET ADOPTION RISK. To date, the Company has constructed
its large scale commercial networks after entering into a long-term relationship
with a utility or other client. In such circumstances, the Company 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.
11 CELLNET
<PAGE>
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 (as defined
below) typically take two hours to install and its CellMasters (as defined
below) less than a week 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 even if any additional frequency it might
require were subject to auction.
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;
- 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.
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
12 CELLNET
<PAGE>
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 began introducing its
commercial endpoint devices for gas meters in 1996 and expects to complete the
development of and to introduce additional models in 1997. The Company is
continuing its development of endpoint devices for water meters, which it
expects to introduce by year end 1997, and two-way radio devices for advanced
NMR applications, some of which it expects to introduce early next year. The
Company is also working with industry leaders to develop endpoint devices for
non-utility applications. See "-- Business Strategy -- Form Strategic
Alliances."
MICROCELL CONTROLLERS. An MCC is a device which is mounted on a utility pole or
other fixed location in the center of a microcell and which routes data from all
of the endpoints in the microcell to the CellMaster via the WAN. The number of
endpoint devices in each microcell depends on a number of factors, including
topography and population density. In addition to functioning as a router, the
MCC is an intelligent node in the distributed control system and has a powerful
microprocessor which enables it to perform data storage, packet routing and
voltage and power outage monitoring for endpoint devices in its microcell area.
Each MCC also has extensive network management capabilities which permit new
endpoint devices to be added automatically without interfering with the handling
of data from existing endpoints. This architecture allows CellNet to
significantly reduce the cost of the endpoint device itself and increases the
potential data throughput of an entire network, as most of the intelligence is
provided at the MCC level. The MCC communicates with the endpoint devices in its
microcell in the 902-928 mHz band, which is an unlicensed portion of spectrum.
CELLMASTERS. A CellMaster generally communicates with anywhere from 50 to 200
MCCs and RTUs (as defined below) over an area typically covering approximately
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 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
testing 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.
13 CELLNET
<PAGE>
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 ff
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.
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 redesigning 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 250 staff-years in the design,
development and testing of its system.
14 CELLNET
<PAGE>
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 56 spectrum licenses in 46 of the top
60 MSAs and believes that it will be able to obtain additional spectrum as
required, although it may not be able to do so at low cost, particularly if such
spectrum becomes subject to auction.
MANUFACTURING AND OPERATIONS
The Company currently outsources the manufacture and assembly of its high
volume, low cost equipment such as endpoint radio devices. CellNet's supply
strategy is to leverage the size and production capabilities of 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
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. 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
San Carlos, California and 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. In
addition, certain electric meter manufacturers are installing CellNet meter
radios on new meters as a part of their meter manufacturing process.
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 That
May Affect Future Operating Performance -- 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.
15 CELLNET
<PAGE>
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.
Endpoint radio devices are installed on gas meters without interruption in
service by affixing the device (containing a radio, a long-life battery and new
register dials) at the meter register. The MCCs take typically two hours each to
install and the CellMasters less than a week to install, providing a network
which can be deployed swiftly and efficiently. The system is also scalable
because of its cellular design, 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 number from twenty to fifty people, depending on the size and
anticipated speed of each deployment. Meter changeout and system equipment
installations are generally carried out by subcontractors and certain other
system deployment tasks may be subcontracted from time to time as well.
Following system deployment, a system management team of typically ten to twenty
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 retrofitted and installed and
monthly service fees based on the number of meters and RTUs in service being
used to bill customers. The KCPL Services Agreement presently covers
approximately 420,000 meters within KCPL's service territory, of which
approximately 365,000 are installed and approximately 50,000 are expected to be
added to the network in 1997 and 1998. The Company is in the process of
reviewing with KCPL the remaining meters (approximately 5,000) under contract
with KCPL in order to determine which of those meters should be automated or
read manually. CellNet is obligated to provide certain NMR services, including
basic meter reading, time-of-use, demand, connect/disconnect (move in/move out),
load profile and real-time reading, as well as outage and tampering notification
and certain other distribution automation services. CellNet retains ownership of
its network system and all related equipment. KCPL retains ownership of its
meters, RTUs and all metering and other data collected from KCPL's equipment.
Upon the third anniversary following complete deployment of the system, KCPL
will have the option to purchase from CellNet the radio transmitters and
transceivers
16 CELLNET
<PAGE>
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.
17 CELLNET
<PAGE>
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 and RTUs in service then being used to bill customers. The NSP Services
Agreement covers approximately 1.0 million gas and electric meters within NSP's
service territory located in the Minneapolis-St. Paul metropolitan area. CellNet
is obligated to provide certain automated meter reading services, including
basic meter reading, time-of-use, demand, connect/disconnect (move in/move out),
load profile and real-time reading, as well as outage and tampering notification
and certain other distribution automation services. CellNet retains ownership of
its network system and all related equipment. NSP retains ownership of its RTUs,
meters and all metering and other data collected from NSP's equipment.
The term of the NSP Services Agreement is 15 years, with a five year option to
extend, exercisable by NSP. The NSP Services Agreement provides NSP with certain
rights to terminate the NSP Services Agreement prior to commercial operation of
the network and system (i.e. full deployment) if certain specific conditions are
not met, such as approval of the NSP Services Agreement by governmental
authorities to the extent such approval is required. In addition, either party
has the right to terminate the NSP Services Agreement upon the occurrence of
continuing events of default or if a governmental authority causes the NSP
Services Agreement to be rescinded. In addition, upon the failure of either
party to meet certain obligations, such as delays in installation or integration
schedules thereunder, such party must pay penalty fees to the other party.
CellNet is entitled to install and operate its network equipment on NSP's
property, so long as it pays to NSP market-based rates for such rights. CellNet
bears the cost of obtaining any necessary third party installation sites.
PACIFIC GAS & ELECTRIC COMPANY. In October 1996, the Company entered into a
Master Agreement for Automated Meter Reading with PG&E and a Contract Work
Authorization issued thereunder (collectively, the "PG&E Services Agreement")
for the provision of electric and gas meter reading services covering
approximately 100,000 PG&E meters in the San Francisco Bay Area. Under the PG&E
Services Agreement, the Company, using PG&E frequencies, will provide basic
electric and gas consumption meter reading services as well as demand,
time-of-use and load profile electric meter reading services for a period of 10
years, with an option on PG&E's part to extend it for two additional periods of
five years each. In return, CellNet will receive monthly service fees based upon
the services provided. CellNet retains ownership of its network system and all
of its related equipment. PG&E retains ownership of its meters and all metering
data collected. PG&E is responsible for retrofitting all electric and gas
meters, with the option to require CellNet to retrofit electric meters for an
agreed fee.
CellNet is entitled to install its network equipment on PG&E's property, subject
to the payment of certain agreed fees. The network is intended for PG&E's
exclusive use and may not be used for the provision of services to third parties
without PG&E's consent. PG&E has the right to terminate the PG&E Services
Agreement at any time subject to the making of specified termination payments
intended to allow CellNet to recover its then unamortized network equipment
costs based upon agreed prices for such equipment. PG&E also has the right to
terminate the PG&E Services Agreement for cause, including a failure of the
Company to meet specified network installation schedules and agreed system
acceptance, economic and performance criteria, and under certain other limited
circumstances, without making any termination payments.
PUGET SOUND ENERGY, INC. 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 services over a network to be operated by
CellNet. The Puget Letter of Intent
18 CELLNET
<PAGE>
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. The Company seeks a long term services
agreement for additional electric and gas meters within its service territory.
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 using
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 or more and involve the solicitation, consultation and approval of
decision makers across key divisions within each potential utility customer. See
"Risk Factors That May Affect Future Operating Performance -- Dependence on and
Uncertainty of Utility Market Acceptance." The Company has a sales and marketing
organization of 40 persons, including six dedicated sales and customer service
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 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 local joint venture partners to pursue international markets
through the Joint Venture with BEn.
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 has shown sustained
commitment to utilities by entering into long-term performance-based contracts,
typically exceeding ten years. While the sales cycle for utilities is lengthy,
it generally has to date resulted 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 may also provide NMR services pursuant to (i)
joint ventures or alliances with utilities to form and own metering companies,
(ii) contracts of shorter duration than those the Company has previously entered
into, (iii) deployments with utilities aimed at high-value
19 CELLNET
<PAGE>
commercial and industrial customers, with other customers to be added over time,
and (iv) contracts and deployments with non-regulated third party entities that
desire to enter the metering business.
The Company intends to concentrate its marketing efforts for non-utility
applications on industry-leading providers of products and services that would
benefit from the Company's low-cost wireless network. The Company is working
with leading manufacturers and applications developers to promote and develop
products and services that utilize the Company's networks. See "-- Business
Strategy -- Promote Development of Non-Utility Applications." The Company
expects that the manufacturers and developers of such products and services
would market such products and services to end users.
PROPRIETARY RIGHTS
CellNet relies on a combination of trade secret protection, copyrights, patents,
trademarks and confidentiality and licensing agreements to establish and protect
its proprietary rights.
CellNet's WAN radio system has been developed using advanced digital signal
processing techniques and an RF system architecture that enables CellNet to
create a complete digital cellular system in approximately a single 25 kHz voice
channel. This technology is based on narrowband modulation and compression of
many subchannels into a single channel. Extremely stable frequency control is
required to preserve system performance. CellNet's system of frequency control
is the subject of several issued and pending patents claims. In addition, the
efficiency of the frequency protocol utilized by the CellMaster is determined in
part by its ability to recover short burst transmissions from an RTU or MCC. The
CellMaster's burst data recovery process is also the subject of several issued
and pending patents claims.
The spread spectrum radio technology utilized in the CellNet LAN has been
licensed to CellNet by Axonn Corporation and an affiliate of Axonn (together,
"Axonn"). The Axonn spread spectrum technology is a patented, low-cost radio
system which offers the price/performance relationships that the Company
believes are required for a commercially-feasible telemetry network. Under its
licenses from Axonn, CellNet has acquired an exclusive right to use Axonn spread
spectrum technology in the utility distribution and service market and an
exclusive right to provide services for other applications outside the utility
market through the CellNet system architecture. CellNet's right to provide fire
and security applications based upon Axonn's technology is not exclusive under
these licenses. The Axonn licenses do not expire by their terms until the last
to expire of any of the patent rights underlying such licenses which will occur
not earlier than March 21, 2014. Up to that time, as each patent licensed under
the Axonn licenses expires, the technology underlying such patent will become
freely available in the public domain.
CellNet has developed a proprietary, patent-pending approach to transmitting
metering information which allows the LAN to accumulate time of use, demand and
load profile data. CellNet's protocols and data transmission methods are
incorporated in its proprietary firmware. During the development and test
deployments of the CellNet WAN and LAN radio systems, the Company has
accumulated substantial information regarding cellular and microcellular radio
systems. This information is being used to develop modeling and planning tools
which assist CellNet in the deployment and operation of complex RF systems.
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 That May Affect Future Operating Performance -- Uncertainty of
Protection of Copyrights, Patents and Proprietary Rights."
20 CELLNET
<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 $9.1
million, $20.9 million and $25.4 million for research and development in 1994,
1995 and 1996, respectively. The Company presently employs more than 100
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 continued development of the
radio hardware, spread spectrum radio protocols, 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
That May Affect Future Operating Performance -- 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
for non-utility applications 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. Whisper Communications Inc. (formerly, a part of Diablo Research
Company) has recently announced the introduction of its Whisper-TM- fixed-base
communications technology for automated meter reading and other services and
indicated that it had several trials currently underway. 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.
21 CELLNET
<PAGE>
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 competitors may emerge and
rapidly gain significant market share. In addition, if the Company achieves
significant success it could draw additional competitors into the market.
Traditional providers of wireless services may in the future choose to enter the
Company's markets. However, such telecommunications applications are not well
suited for use in NMR or similar applications given certain technical challenges
and economic costs such as high embedded spectrum costs. Such existing and
future competition could materially adversely affect the pricing for the
Company's services and the Company's ability to sign long-term contracts and
maintain existing agreements with utilities. Competition for services relating
to non-utility applications may be more intense than competition for utility NMR
services, and additional competitors may emerge as the Company continues to
develop non-utility applications. 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. 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. 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 current 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 return certain licenses to the FCC in certain areas.
22 CELLNET
<PAGE>
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 completed a
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 exist. The Company's systems will operate within those
specified parameters. The FCC retains the right to modify those rules or to
allow for other uses of this spectrum that might create interference to the
Company's systems, in either case with a material adverse impact on the
Company's business or operations in these frequency bands.
While the Company intends to offer non-utility services as a private carrier and
in accordance with FCC Rules, each such service offering would need to be
reviewed relative to these rules. The FCC's rules currently prohibit the use of
the MAS frequencies on which the Company is operating its systems for the
provision of common carrier service offerings. In the event that it is
determined that a particular service offering does not comply with the rules,
the Company may be required to restructure such offering or to access other
frequencies for the purpose of providing such service. There can be no
assurances that the Company will gain access to such other frequencies. Future
interpretation of regulations by the FCC or changes in the regulation of the
Company's industry by the FCC or other regulatory bodies or legislation by
Congress could have a material adverse effect on the Company's operations.
In February 1997, the FCC published for public comment a Notice of Proposed Rule
Making regarding Multiple Address Systems. The FCC's proposed rules would, if
adopted in the form proposed, among other things (i) provide for the award of
new MAS licenses through competitive bidding at auction, (ii) limit the use by
holders of new MAS licensed frequency in the 928/952/956 MHz bands (where the
Company now operates) exclusively for private internal purposes and not for
subscriber-based services, (iii) in respect of new MAS licenses, replace the
FCC's existing local area, site-based MAS licensing policy with a broader, as
yet undetermined, service or geographical area MAS licensing policy for those
frequency bands designated for subscriber-based services (and possibly also for
private internal purposes), (iv) afford interference protection to incumbent
licensees who would be allowed to continue operating under their current
authorizations within designated protected service areas as long as the
incumbent licensee does not encroach on the co-channel operations of the
geographic area licensee or otherwise expand its service area signal beyond its
designated, protected service area, (v) grant incumbent and new MAS licensees
greater technical and operational flexibility in certain respects, and (vi) in
respect of new MAS licenses, allow geographic area licensees longer periods of
time within which to satisfy the construction and service requirements necessary
for maintaining a license but impose more burdensome construction and service
requirements as of the end of such periods than at present. The Company is
unable to predict whether the proposed rules will be adopted in the form
proposed, in another form, or at all. If the proposed rules are adopted in the
form proposed and the Company is determined to be offering subscriber-based
services, as that term may ultimately be defined, the Company could be required
to obtain any new MAS licenses it requires in MAS frequency bands other than
those in which it now operates. In addition, the Company could be subject to
regulation as a common carrier which could increase both administrative and
marketing burdens on the Company. Although the Company believes that additional
licensed frequency will be generally available to it as required, the cost
associated with acquiring such licensed frequency as well as the Company's
operating costs could increase, perhaps substantially, if the proposed rules are
adopted. The adoption of new rules, depending upon the form in which such rules
are adopted,
23 CELLNET
<PAGE>
could have a material adverse effect upon the Company's business, operating
results, financial condition and cash flow.
In connection with the foregoing, the FCC has temporarily suspended acceptance
of MAS applications for new licenses, amendments, or modifications for the
928/959 MHz bands and applications to provide subscriber-based services in the
928/952/956 MHz bands. The temporary suspension does not affect applications for
MAS licenses for private internal purposes in the 928/952/956 MHz bands or
applications for assignment of licenses or transfer of control. Subject to
certain limitations, pending applications at the time of the suspension will
continue to be processed. The Company had certain applications pending at the
time of the suspension that the Company expects will be processed in due course,
although some or all of these may be delayed. Should the Company be determined
by the FCC to be offering subscriber-based services, the Company could be
precluded from applying for new MAS licenses during the suspension period. This
may adversely affect the Company's ability to service areas where it has not yet
acquired adequate frequency.
EMPLOYEES
As of December 31, 1996, CellNet had 543 employees, including 104 in product
development, 291 in materials and manufacturing, 40 in sales and marketing, 73
in field service and support, and 35 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.
ITEM 2. PROPERTIES
The Company's administrative, sales and marketing, product development and
production facilities are located in San Carlos, California, where the Company
leases approximately 104,000 square feet in three buildings under lease and
sublease agreements expiring as to portions of the space at various times
commencing February 1998 through December 2000. 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.
ITEM 3. LEGAL PROCEEDINGS
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 That May Affect Future
Operating Performance -- Uncertainty of Protection of Copyrights, Patents and
Proprietary Rights."
In October 1996 Itron, Inc., one of the Company's competitors, filed a complaint
against the Company in the Federal District Court in Minnesota alleging that the
Company infringes an Itron patent which was issued in September 1996. Itron is
seeking a judgment for damages, attorneys fees and injunctive relief. The
Company believes, based on its current information, that the Company's products
do not infringe any valid claim in the Itron patent, and in the Company's
opinion, the ultimate outcome of the lawsuit is not expected to have a material
adverse effect on its results of operations or financial condition.
24 CELLNET
<PAGE>
On October 31, 1996, a complaint SETTLE V. SEIDL, ET AL. No. 398464, was filed
in the Superior Court of California for the County of San Mateo against the
Company, certain of its officers and directors and underwriters of the Company's
Initial Public Offering. The complaint, which is a purported class action filed
on behalf of the Company's stockholders which purchased shares in the Company's
initial public offering, seeks unspecified damages and rescission for alleged
liability under various provisions of the federal securities laws and California
state law. Plaintiff alleges that the Prospectus and Registration Statement
dated September 26, 1996, pursuant to which the Company issued 5,000,000 shares
of Common Stock to the public, contained materially misleading statements and/or
omissions in that defendants were obligated to disclose, but failed to disclose,
that a patent conflict with Itron, Inc. was likely to ensue. On November 8 and
13, 1996, two additional complaints, KAREN ZULLY V. CELLNET DATA SYSTEMS, INC.
ET AL. No. 398551 and HOWARD FIENMAN AND GERALD SLAPSOWITZ V. CELLNET DATA
SYSTEMS, INC. ET AL. No. 398560, were filed in the Superior Court of California
for the County of San Mateo. These cases are essentially similar in nature to
the SETTLE case. The Court has ordered consolidation of the SETTLE and ZULLY
actions. The Company expects that the FIENMAN action will be consolidated with
the SETTLE and ZULLY actions before trial. The Company believes that the
allegations in these complaints are without merit and intends to defend these
actions vigorously. In the Company's opinion, the ultimate outcome of these
lawsuits is not expected to have a material adverse effect on its results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
25 CELLNET
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "CNDS". The following table sets forth, for the periods indicated, the
range of the low and high sales prices for the Company's Common Stock as
reported on the Nasdaq National Market beginning in the third quarter of fiscal
year 1996.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
HIGH LOW
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Fiscal 1996
Third Quarter $ 21 3/8 $ 15 1/2
Fourth Quarter 18 1/2 11 1/2
- ------------------------------------------------------------------------------------------
Fiscal 1997
First Quarter (through March 5, 1997) 14 7/8 8
- ------------------------------------------------------------------------------------------
</TABLE>
As of March 3, 1997, there were approximately 508 holders of record of the
Company's Common Stock. On March 5, 1997, the last reported sale price on the
Nasdaq National Market for the Common Stock was $9.125. The market for the
Company's Common Stock is highly volatile. See "Risk Factors That May Affect
Future Operating Performance -- Volatility of Stock Price."
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.
ITEM 6. 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 herein. The consolidated statement of operations data for
the years ended December 31, 1994, 1995 and 1996, and the consolidated balance
sheet data at December 31, 1995 and 1996 are derived from, and are qualified by
reference to, the audited consolidated financial statements included herein. The
consolidated statement of operations data for the years ended December 31, 1992
and the consolidated balance sheet data at December 31, 1993 and 1994 are
derived from audited consolidated financial statements not included herein.
26 CELLNET
<PAGE>
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
- ----------------------------------------------------------------------------------------------------------------------
Revenues $ 1,669 $ 2,126 $ 1,651 $ 1,757 $ 3,148
Costs and expenses:
Cost of revenues 8,429 4,965 1,109 1,741 2,401
Research & development 25,394 20,883 9,091 4,979 6,604
Marketing and sales 6,021 4,114 3,179 1,408 1,466
General and administrative 12,036 6,258 2,353 1,206 585
Depreciation 6,123 2,295 992 665 657
- ----------------------------------------------------------------------------------------------------------------------
Total costs and expenses 58,003 38,515 16,724 9,999 11,713
- ----------------------------------------------------------------------------------------------------------------------
Loss from operations (56,334) (36,389) (15,073) (8,242) (8,565)
Other income (expense) (16,355) (4,564) 441 (148) (378)
- ----------------------------------------------------------------------------------------------------------------------
Loss before income taxes (72,689) (40,953) (14,632) (8,390) (8,943)
Provision for income taxes 5 3 2 1 --
- ----------------------------------------------------------------------------------------------------------------------
Net loss ($72,694) ($40,956) ($14,634) ($8,391) ($8,943)
- ----------------------------------------------------------------------------------------------------------------------
Pro forma net loss per share(1) ($ 2.19) ($ 1.22)
- ----------------------------------------------------------------------------------------------------------------------
Shares used in computing pro forma net loss per share(1) 33,179 33,497
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
- ----------------------------------------------------------------------------------------------------------------------
Cash, cash equivalents and short-term investments $178,875 $143,797 $ 24,508 $ 8,884 $ 2,236
Total assets 259,551 184,306 31,809 11,510 4,123
Long-term obligations, including current portion 207,852 183,348 546 825 1,734
Series CC redeemable convertible preferred stock -- 29,486 29,486 -- --
Total stockholders' equity (deficit) 40,245 (38,103) (1,564) 8,011 (235)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
27 CELLNET
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS ITEM CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS SET FORTH IN "RISK FACTORS THAT MAY AFFECT FUTURE OPERATING
PERFORMANCE" HEREUNDER AND ELSEWHERE IN THIS REPORT.
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 may also provide NMR services pursuant to (i) joint
ventures or alliances with utilities to form and own metering companies, (ii)
contracts of shorter duration than those the Company has previously entered
into, (iii) deployments with utilities aimed at high-value commercial and
industrial customers, with other customers to be added over time, and (iv)
contracts and deployments with non-regulated third party entities that desire to
enter the metering business. 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 prior to 1991 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, PG&E 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 and other arrangements. 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 That May Affect Future Operating Performance --
Uncertainty of Future Revenues; Increasing Installation Costs; Need for
Additional Services Contracts; and Fluctuating Operating Results."
UNCERTAINTY OF UTILITY MARKET ACCEPTANCE. The Company's future revenues will
depend on the number of utility companies signing long-term services contracts
with CellNet. During 1996, approximately 90% of the Company's revenues were
derived from contracts with KCPL and UE. The utility industry is generally
characterized by long purchasing cycles and cautious decision making, and
purchases of the Company's services are, to a substantial extent, deferrable in
the event that utilities seek to reduce capital expenditures. Only a limited
number of utilities have made a commitment to purchase the Company's services to
date. The Company believes that it will enter into additional services contracts
with other utilities; however, if the Company's services do not gain widespread
industry acceptance, its revenues would not increase significantly after
services contracts for existing network systems have been fully installed.
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 expects that its receipt of network service revenue will lag
the signing of the
28 CELLNET
<PAGE>
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. As of December 31, 1996, the Company had
2,235,000 meters under long-term contracts, of which 363,140 meters were in
revenue service. 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 has completed the installation of its NMR network for KCPL and had
installed approximately 365,000 meters on the network by the end of 1996. The
Company expects to add an additional 50,000 meters to the KCPL network in 1997
and 1998 which would be added to the total number of meters in revenue service
upon acceptance by KCPL for billing purposes. The Company is in the process of
reviewing with KCPL the remaining meters (approximately 5,000) under contract
with KCPL in order to determine the number which should be automated and/or read
manually. The Company expects substantially to complete 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 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 December 31, 1996, had an accumulated deficit of
$167.7 million. The Company does not expect significant revenues relative to
anticipated operating costs during 1997 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 That May Affect Future Operating
Performance -- 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 its initial public offering in October 1996 (the "Initial
Public Offering") and certain direct placements of the Company's Common Stock.
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, in related
selling and marketing activities and for general and administrative purposes. As
such funds are expended, interest income is expected to decrease.
29 CELLNET
<PAGE>
RESULTS OF OPERATIONS
REVENUES
Revenues for the three years ended December 31, 1994, 1995 and 1996 were $1.7
million, $2.1 million and $1.7 million, respectively. Revenues prior to 1996
were attributable primarily to product sales and development and other contract
revenues unrelated to the Company's current focus of providing NMR services that
were largely non-recurring and that are expected to decline and remain at
relatively insignificant levels over the next few years. During 1994, NSP,
Georgia Power Company 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. During 1996, KCPL and UE accounted for 69%
and 21% of the Company's revenues, respectively. Revenues for 1996 declined
$457,000 from 1995, primarily as a result of the transition from product sales
to network service revenues. The Company's NMR service revenues for the years
ended December 31, 1995 and 1996 were $35,000 and $1.2 million, 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 purchase of $15.0 million of restricted Common Stock by NSP
concurrent with the Company's Initial Public Offering, the Company placed shares
in escrow ("Escrow Shares") which will be released upon entering into an NMR
services agreement with Wisconsin Electric Power Company ("WEPC") by December
1997. The fair value of these Escrow Shares will be expensed as a sales discount
over the term of the WEPC services agreement if such services agreement is
entered into.
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, 1994, 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 years ended December 31, 1995 and 1996, cost of revenues primarily consisted
of network operations costs. Cost of revenues were $1.1 million, $5.0 million
and $8.4 million for the years ended December 31, 1994, 1995 and 1996,
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 attributable 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.
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OPERATING EXPENSES
Operating expenses, consisting of research and development, marketing and sales,
general and administrative costs and depreciation and amortization expenses,
were $15.6 million, $33.6 million and $49.6 million for the years ended December
31, 1994, 1995 and 1996, 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 is established and/or development of
the related network hardware is complete. Research and development expenses were
$9.1 million, $20.9 million and $25.4 million for the years ended December 31,
1994, 1995 and 1996, 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 network. The Company expects that research and development expenses will
increase in the near term for additional investments in research and development
projects and in connection with the establishment of 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 $3.2 million, $4.1 million and $6.0 million for the years ended
December 31, 1994, 1995 and 1996, respectively. These expenses have increased
due to the Company's accelerated efforts to sign new services agreements. 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 $2.4 million, $6.3 million and $12.0 million for the years ended December
31, 1994, 1995 and 1996, 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 will need to increase administrative
expenditures in the longer term to expand domestic and establish international
operations.
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<PAGE>
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 the
Company's 13% Senior Discount Notes due 2005 (the "Senior Discount Notes") and
warrants (the "Note Warrants") for proceeds, net of issuance costs, of $169.9
million. On October 2, 1996, the Company completed its Initial Public Offering
in which it sold 5,000,000 shares of its Common Stock at an offering price of
$20 per share for net proceeds of $92.2 million after deducting underwriting
discounts and commissions and offering expenses payable by the Company. In
connection with the Initial Public Offering, the Company also received $1.2
million in proceeds from the cash exercise of warrants (the "Warrant Exercise")
to purchase securities converted into 495,918 shares of its Common Stock. In
addition, on October 2, 1996, the Company completed certain direct placements
(the "Direct Placements") in which it sold 1,579,404 shares of its Common Stock
for proceeds of $28.0 million. Accordingly, the Company has earned interest
income on the invested proceeds from the Senior Discount Notes, Note Warrants,
the Initial Public Offering, Warrant Exercise and Direct Placements. The Company
has also incurred significant interest expense from the amortization of the
original issue discount on the Senior Discount Notes.
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. 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, 1994, 1995
and 1996 was $555,000, $4.6 million and $7.4 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 $101,000,
$9.3 million and $23.8 million for the years ended December 31, 1994, 1995 and
1996, 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.
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.
In 1994, 1995, 1996, net cash used in the Company's operating activities totaled
$14.6 million, $34.5 million and $40.7 million, respectively. Net cash used in
operating activities resulted primarily from cash used to fund net operating
losses.
32 CELLNET
<PAGE>
In 1994, 1995 and 1996, net cash provided by the Company's financing activities
totaled $34.0 million, $170.9 million and $120.7 million, respectively,
including cash provided by the private sale of the Company's equity securities
of $34.1 million and $1.2 million in 1994 and 1995, respectively. In June and
November 1995, the Company received an aggregate of $175.8 million of gross
proceeds ($169.9 million in net proceeds) from the private sale of the Senior
Discount Notes and Note Warrants. During 1996, the Company financed its
operations primarily from the proceeds of the offering of the Senior Discount
Notes and Note Warrants, together with interest income of $7.4 million. On
October 2, 1996, the Company completed its Initial Public Offering in which it
sold 5,000,000 shares of its Common Stock at an offering price of $20 per share
for net proceeds of $92.2 million after deducting underwriting discounts and
commissions and offering expenses payable by the Company. In addition, on
October 2, 1996, the Company completed the Direct Placements in which it sold
1,579,404 shares of its Common Stock for proceeds of $28.0 million. As of
December 31, 1996, the Company had cash, cash equivalents and short-term
investments totaling $178.9 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 1994, 1995 and 1996, net cash used for investing activities totaled $12.8
million, $100.8 million and $3.8 million, respectively. 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
$3.8 million of net cash provided by investing activities in 1996 was largely
attributable to proceeds from the sale 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 may be offered on the CellNet system. 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 or enters into other arrangements
for the installation of its networks, and that the Company will require
significant amounts of additional capital from external sources. Sources of
additional capital for the Company and its subsidiaries 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. This facility is expected to
require the Company's St. Louis operations to meet certain revenue requirements
and to limit the capital expenditures and indebtedness of such operations. The
Company expects that a substantial portion of its future financing will be at
the subsidiary level on a project basis. The Company expects to obtain third
party financing for the construction of wireless networks, based on the
projected cash flow expected to be generated from such projects. The Company
expects that the recurring revenue stream from long-term services contracts and
33 CELLNET
<PAGE>
other arrangements will support the amortization of debt raised for the project
involved. The Company does not anticipate deriving any significant cash from
such operations for several years.
The Company believes that 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 using management's best estimates.
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 Indenture or that may be contained in
any additional financing arrangements. The Indenture governing the Senior
Discount Notes 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 That May Affect Future
Operating Performance -- Substantial Leverage and Ability to Service Debt;
Substantial Future Capital Needs."
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT; SUBSTANTIAL FUTURE CAPITAL
NEEDS
The Company has substantial outstanding indebtedness and must begin paying cash
interest on the aggregate accreted amount of $325 million of the Senior Discount
Notes on December 15, 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 indebt edness.
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
34 CELLNET
<PAGE>
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 December 31, 1996, the Company had $178.9 million in
cash, cash equivalents and short-term investments. The Company believes that 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 based on management's best
estimates. 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, which may be foreign 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. In addition, the
Company intends to pursue its international business through a proposed joint
venture with Bechtel Enterprises, Inc., and additional risks may arise from the
joint venture subsidiary structure. Any default in the payment of its debt
obligations could seriously impair the value of the Common Stock.
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."
HISTORY AND CONTINUATION OF OPERATING LOSSES
The Company has incurred substantial and increasing operating losses since
inception. As of December 31, 1996, the Company had an accumulated deficit of
$167.7 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 relative to anticipated
operating costs during 1997 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
35 CELLNET
<PAGE>
networks. The Company expects that its receipt of network service revenues 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. 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 material
number of utility or other companies sign long-term services contracts with
CellNet or enter into other arrangements which allow CellNet to install its NMR
networks. During 1996, approximately 90% of the Company's revenues were derived
from contracts with KCPL and UE. 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. Only a limited number of
utilities 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.
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 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.
UNCERTAINTY OF FUTURE REVENUES; 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
36 CELLNET
<PAGE>
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 a limited number of utilities. 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 current utility 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.
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 supplier to the utility industry. 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.
37 CELLNET
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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. Whisper Communications
Inc. (formerly, a part of Diablo Research Company) has recently announced the
introduction of its Whisper-TM- fixed-base communications technology for
automated meter reading and other services and indicated that it had several
trials currently underway. 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, and additional
competitors may emerge as the Company continues to develop non-utility
applications. 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.
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. 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.
38 CELLNET
<PAGE>
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.
The Company's necessary development efforts will require it to make continued
substantial investments. The Company has encountered product development delays
in the past affecting both software and hardware components of its system.
ACCESS TO RADIO FREQUENCY ("RF") SPECTRUM; REGULATION BY THE FEDERAL
COMMUNICATIONS COMMISSION ("FCC")
The Company will attempt to obtain exclusive usage of licensed bandwidth and/or
secure its own licenses. CellNet licenses radio spectrum for its wireless
networks in the top 60 MSAs in the U.S. sufficient to support its projected
utility and non-utility applications with a margin for future growth. Enough
frequency spectrum may not be available to fully enable the delivery of all or a
part of the Company's wireless data communications services or the Company may
be required to find alternative frequencies. The cost of obtaining such spectrum
is currently difficult to estimate and may involve time delays and/or increased
cost to the Company. The Company could also be unable to obtain frequency in
certain areas. Any of these circumstances could have a material adverse impact
on the Company's future ability to provide its network services and on the
Company's business, operating results, financial condition and cash flow.
The Company's network equipment uses radio spectrum and, as such, is subject to
regulation by the FCC. 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 to obtain a waiver of various sections of the FCC's
rules. 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
current 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 network 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 return certain licenses to the FCC in certain areas.
39 CELLNET
<PAGE>
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 completed a
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."
In February 1997, the FCC published for public comment a Notice of Proposed Rule
Making regarding Multiple Address Systems. The FCC's proposed rules would, if
adopted in the form proposed, among other things (i) provide for the award of
new MAS licenses through competitive bidding at auction, (ii) limit the use by
holders of new MAS licensed frequency in the 928/952/956 MHz bands (where the
Company now operates) exclusively for private internal purposes and not for
subscriber-based services, (iii) in respect of new MAS licenses, replace the
FCC's existing local area, site-based MAS licensing policy with a broader, as
yet undetermined, service or geographical area MAS licensing policy for those
frequency bands designated for subscriber-based services (and possibly also for
private internal purposes), (iv) afford interference protection to incumbent
licensees who would be allowed to continue operating under their current
authorizations within designated protected service areas as long as the
incumbent licensee does not encroach on the co-channel operations of the
geographic area licensee or otherwise expand its service area signal beyond its
designated, protected service area, (v) grant incumbent and new MAS licensees
greater technical and operational flexibility in certain respects, and (vi) in
respect of new MAS licenses, allow geographic area licensees longer periods of
time within which to satisfy the construction and service requirements necessary
for maintaining a license but impose more burdensome construction and service
requirements as of the end of such periods than at present. The Company is
unable to predict whether the proposed rules will be adopted in the form
proposed, in another form, or at all. If the proposed rules are adopted in the
form proposed and the Company is determined to be offering subscriber-based
services, as that term may ultimately be defined, the Company could be required
to obtain any new MAS licenses it requires in MAS frequency bands other than
those in which it now operates. In addition, the Company could be subject to
regulation as a common carrier which could increase both administrative and
marketing burdens on the Company. Although the Company believes that additional
licensed frequency will be generally available to it as required, the cost
associated with acquiring such licensed frequency as well as the Company's
operating costs could increase, perhaps substantially, if the
40 CELLNET
<PAGE>
proposed rules are adopted. The adoption of new rules, depending upon the form
in which such rules are adopted, could have a material adverse effect upon the
Company's business, operating results, financial condition and cash flow.
In connection with the foregoing, the FCC has temporarily suspended acceptance
of MAS applications for new licenses, amendments, or modifications for the
928/959 MHz bands and applications to provide subscriber-based services in the
928/952/956 MHz bands. The temporary suspension does not affect applications for
MAS licenses for private internal purposes in the 928/952/956 MHz bands or
applications for assignment of licenses or transfer of control. Subject to
certain limitations, pending applications at the time of the suspension will
continue to be processed. The Company had certain applications pending at the
time of the suspension that the Company expects will be processed in due course,
although some or all of these may be delayed. Should the Company be determined
by the FCC to be offering subscriber-based services, the Company could be
precluded from applying for new MAS licenses during the suspension period. This
may adversely affect the Company's ability to service areas where it has not yet
acquired adequate frequency.
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, 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
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.
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.
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.
41 CELLNET
<PAGE>
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 as possible for their products and processes. There is a
substantial backlog of patents at the U.S. 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.
In October 1996, Itron, one of the Company's competitors, filed a complaint
against the Company in the Federal District Court in Minnesota, alleging that
the Company infringes an Itron patent which was issued in September 1996. Itron
is seeking a judgment for damages, attorneys' fees and injunctive relief. The
Company believes, based on information currently known, that the Company's
products do not infringe any valid claim in the Itron patent, and in the
Company's opinion, the ultimate outcome of the lawsuit is not expected to have a
material adverse effect on its results of operations or financial condition.
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
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.
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
42 CELLNET
<PAGE>
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.
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.
Electric utilities in the United States are currently experiencing relatively
long lead times, of between 14 and 32 weeks from date of order, for the delivery
of new electric meters from domestic meter manufacturers. A significant number
of new meters are required to initiate meter retrofit and replacement in
connection with each network deployment and to replace existing meters in the
field which are found to be obsolete, worn out or otherwise unsuitable for
retrofit and redeployment. Any increase in the number of deployments would
result in an increase in the number of new meters ordered by utilities over and
above those ordered on account of normal growth and replacement within their
service areas. To the extent that electric meter manufacturers are unable or
unwilling to increase production in line with such increase in demand,
temporarily or over a longer term, deployments may be delayed or postponed, with
the result that revenues from such deployments will be likewise delayed or
postponed.
DEPENDENCE ON BUSINESSES 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.
43 CELLNET
<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.
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 for at least the next 12 months. The Company
anticipates that it will incur significant expenses in connection with the
establishment of international operations. 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.
The Company's strategy is to pursue international markets through a proposed
joint venture with Bechtel Enterprises, Inc. which could involve additional
partners in a local operating project entity in a particular country. The
Company may not have a majority interest or control of the board of directors of
any such local operating project entity. The risk is present in any such joint
venture in which the Company may determine to participate, that the other joint
venture partner may at any time have economic, business or legal interests or
goals that are inconsistent with those of the joint venture or the Company. The
risk is also present that a joint venture partner may be unable to meet its
economic or other obligations and that the Company may be required to fulfill
those obligations. In addition, in any joint venture in which the Company does
not have a majority interest, the Company may not have control over the
operations or assets of such joint venture.
44 CELLNET
<PAGE>
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been highly volatile at
relatively low trading volumes since the Company's Initial Public Offering and
has been and is likely to continue to be subject to wide fluctuations in
response to a variety of factors, including quarterly variations in operating
results, the signing of services contracts, new customers, consolidations in the
industry, technological innovations or new products by the Company or its
competitors, developments in patents or other intellectual property rights,
general conditions in the NMR services industry, revised earnings estimates,
comments or recommendations issued by analysts who follow the Company, its
competitors or the NMR services industry and general economic and market
conditions. In addition, it is possible that in some future period the Company's
operating results may be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock could be
materially adversely affected. Additionally, the stock market in general, and
the market for technology stocks in particular, have experienced extreme price
volatility in recent years. Volatility in price and volume has had a substantial
effect on the market prices of many technology companies for reasons unrelated
or disproportionate to the operating performance of such companies. These broad
market fluctuations could have a significant impact on the market price of the
Common 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.
45 CELLNET
<PAGE>
[LOGO]
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1995 and 1996,
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, 1996. 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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
February 3, 1997
46 CELLNET
<PAGE>
CONSOLIDATED
BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $124,232 $ 48,018
Short-term investments 54,643 95,779
Accounts receivable -- trade 850 1,160
Accounts receivable -- other 1,264 958
Prepaid expenses and other 1,124 940
- ------------------------------------------------------------------------------------------
Total current assets 182,113 146,855
Network components and inventory 11,211 11,664
Networks in progress -- net 48,426 12,602
Property -- net 12,236 7,539
Debt issuance costs and other -- net 5,565 5,646
- ------------------------------------------------------------------------------------------
Total assets $259,551 $184,306
- ------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 8,133 $ 7,241
Accrued compensation and related benefits 2,371 1,353
Accrued liabilities 950 981
Current portion of capital lease obligations 308 280
- ------------------------------------------------------------------------------------------
Total current liabilities 11,762 9,855
- ------------------------------------------------------------------------------------------
Senior discount notes -- 13% 207,178 182,528
Capital lease obligations 366 540
Commitments and contingencies (Notes 8 and 9)
Series CC redeemable convertible preferred stock -- $.001 par value;
3,215,768 shares designated and outstanding in 1995; none in 1996 -- 29,486
Stockholders' equity (deficit):
Convertible preferred stock - $.001 par value; 15,000,000 shares
authorized; shares outstanding, 1995: 9,136,675; 1996: none -- 27,195
Common stock - $.001 par value; 100,000,000 shares authorized;
shares outstanding: 1995, 5,034,262; 1996, 38,537,517 205,793 27,608
Notes receivable from sale of common stock (814) (866)
Warrants 2,984 2,984
Accumulated deficit (167,715) (95,021)
Net unrealized loss on short-term investments (3) (3)
- ------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) 40,245 (38,103)
- ------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $259,551 $184,306
- ------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
47 CELLNET
<PAGE>
CONSOLIDATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Network service revenues $ 1,210 $ 35 $ --
Product sales 368 1,663 1,447
Other 91 428 204
- ----------------------------------------------------------------------------------------------------
Total Revenues 1,669 2,126 1,651
- ----------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of network operations 8,100 3,671 --
Cost of product sales 329 1,294 1,109
Research and development 25,394 20,883 9,091
Marketing and sales 6,021 4,114 3,179
General and administrative 12,036 6,258 2,353
Depreciation and amortization 6,123 2,295 992
- ----------------------------------------------------------------------------------------------------
Total costs and expenses 58,003 38,515 16,724
- ----------------------------------------------------------------------------------------------------
Loss from operations (56,334) (36,389) (15,073)
Other income (expense):
Interest income 7,372 4,590 555
Interest expense (23,823) (9,320) (101)
Other - net 96 166 (13)
- ----------------------------------------------------------------------------------------------------
Total other income (expense) (16,355) (4,564) 441
- ----------------------------------------------------------------------------------------------------
Net loss before income taxes (72,689) (40,953) (14,632)
Provision for income taxes 5 3 2
- ----------------------------------------------------------------------------------------------------
Net loss ($72,694) ($40,956) ($14,634)
- ----------------------------------------------------------------------------------------------------
NET LOSS PER SHARE ($ 2.19) ($ 1.22)
- ----------------------------------------------------------------------------------------------------
SHARES USED IN COMPUTING NET LOSS PER SHARE 33,179 33,497
- ----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
48 CELLNET
<PAGE>
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT
SHARE DATA)
- ----------------------------------------------------------------------------------------------------------------------------------
NOTES NET
CONVERTIBLE PREFERRED RECEIVABLE UNREALIZED
STOCK COMMON STOCK FROM SALE LOSS ON
--------------------- -------------------- OF COMMON ACCUMULATED SHORT-TERM
SHARES AMOUNT SHARES AMOUNT STOCK WARRANTS DEFICIT INVESTMENTS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1,
1994 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)
Sale of common stock
in public offering
(net of issuance
costs of $7,841) -- -- 5,000,000 92,159 -- -- -- -- 92,159
Exercise of Series BB
warrants 1,410,600 1,179 -- -- -- -- -- -- 1,179
Conversion of Series
CC redeemable
preferred stock upon
public offering -- -- 6,431,536 29,486 -- -- -- -- 29,486
Conversion of Series
AA, BB, and DD
preferred stock upon
public offering (10,547,275) (28,374) 19,683,950 28,374 -- -- -- -- --
Exercise of stock
options and
restricted stock
purchases -- -- 866,775 186 -- -- -- -- 186
Sale of common stock
in private placement -- -- 1,579,404 28,000 -- -- -- -- 28,000
Repurchase of common
stock -- -- (58,410) (20) -- -- -- -- (20)
Collection of notes
receivable -- -- -- -- 52 -- -- -- 52
Net loss -- -- -- -- -- -- (72,694) -- (72,694)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES, December 31,
1996 -- $ -- 38,537,517 $205,793 ($814) $2,984 ($167,715) ($)3 ($40,245)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
49 CELLNET
<PAGE>
CONSOLIDATED STATEMENTS OF
CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 72,694) ($ 40,956) ($14,634)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization 6,123 2,295 992
Accretion on 13% senior discount notes 23,113 9,207 --
Amortization of debt issuance costs 600 256 --
Loss (gain) on disposition of property (1) 57 2
Changes in:
Accounts receivable -- trade 310 (457) (282)
Accounts receivable -- other (306) (958) --
Prepaid expenses and other (184) (692) (126)
Network components and inventory 453 (9,518) (1,260)
Accounts payable 892 5,191 1,389
Accrued compensation and related benefits 1,018 951 --
Accrued liabilities (31) 92 (719)
- ------------------------------------------------------------------------------------------------------
Net cash used for operating activities (40,707) (34,532) (14,638)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property (9,012) (6,222) (2,436)
Proceeds from sale of property 11 -- --
Networks in progress (35,944) (10,811) (1,333)
Purchase of short-term investments (329,674) (285,802) (12,548)
Proceeds from sales and maturities of short-term investments 370,810 202,030 3,500
- ------------------------------------------------------------------------------------------------------
Net cash used for investing activities (3,809) (100,805) (12,817)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of senior discount notes and related stock warrants -- 175,837 --
Cash paid for debt issuance costs (210) (5,902) --
Other assets (309) -- --
Subordinated debt borrowings -- -- 350
Repayment of capital lease obligations (307) (524) (426)
Repayment of long-term obligations -- -- (85)
Proceeds from sale of preferred stock and warrants 1,179 1,205 34,122
Proceeds from sale of common stock, net of repurchases 120,325 190 9
Collection of note receivable from sale of common stock 52 46 66
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 120,730 170,852 34,036
- ------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 76,214 35,515 6,581
CASH AND CASH EQUIVALENTS, Beginning of period 48,018 12,503 5,922
- ------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, End of period $ 124,232 $ 48,018 $ 12,503
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of subordinated debt and accrued interest into preferred
stock $ -- $ -- $ 353
Acquisition of property under capital leases $ 161 $ 798 $ 232
Sale of common stock for notes receivable $ -- $ 628 $ 100
Conversion of preferred stock into common stock $ 57,860 $ -- $ --
Capitalized interest on networks in progress $ 1,537 $ 458 $ --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 110 $ 113 $ 101
Cash paid for income taxes $ 5 $ 3 $ 2
- ------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
50 CELLNET
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. Since 1993, CellNet Data Systems, Inc. and
subsidiaries (the Company) has focused all of its resources and efforts on
the development and deployment of its 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, provision of wireless data communication services, and raising
the financing required to support the development and deployment of its
CellNet wireless data communication system. In August 1996, the Company was
reincorporated in the State of Delaware.
The Company provides its services to utility companies pursuant to long-term
contracts. The contracts vary in length from 10 to 20 years. Utilities have
up to two 5-year renewal options in certain instances on substantially
similar terms. Utilities also have the option in certain instances to
terminate their contracts early at various times during the initial term,
commencing as early as the seventh contract year, upon payment of specified
amounts which are intended to allow the Company to recover its then
unamortized network endpoint costs based upon agreed prices for such
equipment. No assurance can be given that any such renewal and/or early
termination options will or will not be exercised.
The Company completed the installation of a network to provide network meter
reading and other services to Kansas City Power & Light Company in 1996 and
expects to install additional meters on the network in 1997 and 1998. The
Company is currently building a similar network for Union Electric Company.
The Company has entered into separate services agreements with Northern
States Power Company, Pacific Gas & Electric Company and Puget Sound Energy,
Inc. for the construction of networks for those utilities as well.
The Company does not expect to receive significant revenues relative to
anticipated operating costs during 1997. Management plans to significantly
increase operations through the installation of additional networks for other
utility companies and other nonutility clients and intends to fund these
operations through additional debt and equity financing.
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 inventory reserves for obsolete, slow moving
or nonsalable network components and inventory, evaluation of network assets
for impairment, accrued liabilities and a valuation allowance against net
deferred tax assets. Actual results could differ from those estimates.
51 CELLNET
<PAGE>
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 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' equity (deficit) until such gains or losses are
realized. Gains or losses on the sale of securities are computed using the
specific identification method.
STOCK-BASED COMPENSATION. The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject
the Company to credit risk consist principally of cash and cash equivalents,
short-term investments and accounts receivable. The Company sells its
products and services and installs its networks primarily to 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. Two customers accounted for 69% and 11% of
trade accounts receivable at December 31, 1995 and two customers accounted
for 64% and 29% of revenues for the year ended December 31, 1995. Two
customers accounted for 33% and 22% of trade accounts receivable at December
31, 1996 and two customers accounted for 69% and 21% of revenues for the year
ended December 31, 1996.
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, by policy, limits the amount of credit exposure
with any one financial instrument or commercial issuer. All such instruments
are rated by Standard & Poor's 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, 1996, network components and inventories consist 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.
NETWORKS IN PROGRESS, NET. 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 at which each network begins
generating revenue. (Accordingly, $458,000 and $1,537,000 of interest was
capitalized during 1995 and 1996, respectively.) Depreciation is computed on
a straight-line basis over the shorter of the estimated useful lives of the
network assets or the contract's life from initial revenue generation until
contract termination. Depreciation commences when the network begins
generating significant revenue, typically when network installation is
approximately 50% complete. At December 31, 1996, accumulated depreciation
was $1,657,000.
PROPERTY. Property and leasehold improvements are 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.
52 CELLNET
<PAGE>
DEBT ISSUANCE COSTS AND OTHER. includes debt issue costs associated with the
senior discount notes (see Note 5) and a prepaid royalty amount paid to one
of the Company's vendors. The debt issuance costs are capitalized and
amortized using the effective interest method over the lives of the related
debt.
RECENTLY ISSUED ACCOUNTING STANDARD. In March 1995, the FASB issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of,"
which became effective January 1, 1996. This statement requires the Company
to review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recovered. Implementation did not have a material impact on the Company's
financial statements.
REVENUE RECOGNITION. Network service revenue, associated with installed
networks, is recognized in the period of service. Product revenue is
recognized upon product shipment.
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 and
$224,250,000 at December 31, 1995 and 1996, respectively. 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.
NET LOSS PER SHARE. Net loss per share is computed using the weighted
average number of common and common equivalent shares outstanding for 1996.
For 1995, 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 antidilutive,
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 prior to the
initial filing date. In addition, all outstanding preferred stock and
warrants that were converted in the initial public offering are included in
the computation as common equivalent shares even when the effect is
anti-dilutive.
Effective September 26, 1996, the Board of Directors of the Company approved
a two-for-one split of all outstanding shares of common stock. All shares and
per-share amounts have been adjusted to reflect this split.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1994 and
1995 amounts to conform to the 1996 presentation.
2. SHORT-TERM INVESTMENTS
The fair value and the amortized cost of short-term investments at December
31, 1995 and 1996 are presented below. 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
53 CELLNET
<PAGE>
as needed for operations. The tables present the unrealized holding gains and
losses related to each category of investment security (in thousands).
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED LOSS ON GAIN ON MARKET
DECEMBER 31, 1995 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>
- -------------------------------------------------------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED LOSS ON GAIN ON MARKET
DECEMBER 31, 1996 COST INVESTMENT INVESTMENT VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Certificates of deposit $ 2,002 $-- $-- $ 2,002
Auction-rate preferred stock 33,550 -- -- 33,550
Corporate debt securities 141,107 (4) 1 141,104
- -------------------------------------------------------------------------------------------
Total 176,659 (4) 1 176,656
Less amounts included in cash and equivalents (122,013) -- -- (122,013)
- -------------------------------------------------------------------------------------------
$ 54,646 ($ 4) $ 1 $ 54,643
- -------------------------------------------------------------------------------------------
</TABLE>
54 CELLNET
<PAGE>
The final maturity periods of short-term investments at December 31, 1996 are
as follows (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET VALUE OF MATURITIES
------------------------------------------
FIVE TO GREATER
WITHIN TEN THAN
ONE YEAR YEARS 10 YEARS TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Certificates of deposit $ 2,002 $ -- $ -- $ 2,002
Auction-rate preferred stock -- 10,600 22,950 33,550
Corporate debt securities 139,104 -- 2,000 141,104
- --------------------------------------------------------------------------------------
Total 141,106 10,600 24,950 176,656
Less amounts included in cash and cash
equivalents (122,013) -- -- (122,013)
- --------------------------------------------------------------------------------------
$ 19,093 $ 10,600 $ 24,950 $ 54,643
- --------------------------------------------------------------------------------------
</TABLE>
All short-term investments with final maturities 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. 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, 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Manufacturing equipment and tools $ 8,065 $ 4,870
Office furniture and equipment 9,129 4,111
Engineering equipment 2,942 2,119
Vehicles 204 --
- ---------------------------------------------------------------------------------------
Total 20,340 11,100
Accumulated depreciation and amortization (8,104) (3,561)
- ---------------------------------------------------------------------------------------
Total $ 12,236 $ 7,539
- ---------------------------------------------------------------------------------------
</TABLE>
55 CELLNET
<PAGE>
4. ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued contractual obligations $ 277 $ 273
Professional services 276 232
Deferred revenue 150 190
Other 247 286
- --------------------------------------------------------------------------------------------
Total $ 950 $ 981
- --------------------------------------------------------------------------------------------
</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 have been 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 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, or engage in transactions with affiliates, or effect
certain transactions by its restricted subsidiaries (as defined). The Company
was in compliance with the financial covenants of the Indenture at December
31, 1996.
6. STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE PREFERRED STOCK. In conjunction with the initial public offering
of the Company's common stock, all outstanding shares of convertible
preferred stock were converted into common stock upon the closing of the
offering.
56 CELLNET
<PAGE>
COMMON STOCK. At December 31, 1996, the Company had reserved shares of
common stock for issuance as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------
Issuance under employee stock purchase plan 1,200,000
Issuance upon exercise of common stock warrants 2,650,000
Issuance under stock option plans 4,394,855
- --------------------------------------------------------------------------------------
Total 8,244,855
- --------------------------------------------------------------------------------------
</TABLE>
RESTRICTED STOCK. Certain officers, employees and consultants exercised
stock options with cash or full recourse notes. The related shares of common
stock continue to vest in accordance with the terms of the 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, 1996, 1,275,841 outstanding shares of
such stock were subject to repurchase.
1996 EMPLOYEE STOCK PURCHASE PLAN. In 1996, the Company adopted an Employee
Stock Purchase Plan (the Plan). A total of 1,200,000 shares of common stock
are reserved for issuance under the Plan. Under the Plan, the Company will
withhold a specified percentage of each salary payment to participating
employees over certain offering periods. 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 commenced on September 26, 1996 and will end on April 30,
1997. The price at which common stock may be purchased under the 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. No shares had
been purchased under the Plan as of December 31, 1996.
WARRANTS. At December 31, 1996, the following warrants to purchase stock
were outstanding:
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 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 System), (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 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) 90 days after a change of control of the Company (as
defined), and (b) June 30, 1997.
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, 1996 generally
become exercisable 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, 1996, there were 971,299 shares available
for future grant under the Plans.
57 CELLNET
<PAGE>
A summary of stock option activity under the Plans on a combined basis is as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
OUTSTANDING OPTIONS
----------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
- -----------------------------------------------------------------------------------
<S> <C> <C>
Balances, January 1, 1994 1,618,434 $0.146
Granted 4,447,850 0.698
Exercised (533,656) 0.409
Cancelled (292,000) 0.402
- -----------------------------------------------------------------------------------
Balances, December 31, 1994 5,240,628 0.574
Granted (weighted average fair value $.129 per share) 514,600 1.182
Exercised (2,318,096) 0.706
Cancelled (163,498) 0.784
- -----------------------------------------------------------------------------------
Balances, December 31, 1995 3,273,634 0.565
Granted (weighted average fair value $1.486 per share) 889,910 3.827
Exercised (866,775) 0.214
Cancelled (109,679) 0.683
- -----------------------------------------------------------------------------------
Balances, December 31, 1996 3,187,090 $1.278
- -----------------------------------------------------------------------------------
</TABLE>
Additional information regarding options outstanding as of December 31, 1996
is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING
-------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.05 - $ 0.50 2,279,389 7.10 $ 0.294 1,123,528 $0.237
$1.00 - $ 2.00 723,176 9.15 $ 1.887 105,539 $1.843
$3.00 - $13.625 184,525 9.73 $ 11.038 5,370 $4.187
- -------------------------------------------------------------------------------------------
</TABLE>
58 CELLNET
<PAGE>
ADDITIONAL STOCK PLAN INFORMATION
The Company accounts for its stock-based awards using the intrinsic value
method in accordance with Accounting Principles Board No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements.
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, (SFAS 123) requires the disclosure of pro forma net
loss and loss per share had the Company adopted the fair value method as of
the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models,
even though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models
also require subjective assumptions, including future stock price volatility
and estimated term. These calculations were made using the minimum value
method prior to the Company's public offering and the Black-Scholes option
pricing model with the following weighted average assumptions: expected life,
21.3 months following vesting; stock volatility, 60% in 1996, subsequent to
the Company's initial filing for their IPO; risk free interest rates, 6% in
1995 and 1996; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
1995 and 1996 awards had been amortized to expense over the vesting period of
the awards, pro forma net loss would have been $40,986,376 ($1.22 per share)
in 1995 and $73,314,109 ($2.21 per share) in 1996. However, the impact of
outstanding nonvested stock options granted prior to 1995 has been excluded
from the pro forma calculation; accordingly, the 1995 and 1996 pro forma
adjustments are not indicative of future period pro forma adjustments, when
the calculation will apply to all applicable stock options.
7. INCOME TAXES
No federal income taxes were provided in 1994, 1995 or 1996 due to the
Company's net losses. The provisions for income taxes for these periods
represent various state minimum income and franchise taxes. The provision for
income taxes differs from the amount computed by applying the federal
statutory income tax rate to income before taxes as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Taxes computed at federal statutory rate ($ 25,441) ($ 14,334) ($ 5,121)
State income taxes, net of federal effect (2,544) (1,843) (658)
Research tax credits 3,760 (399) (447)
Change in valuation allowance 23,349 18,120 5,522
Other 881 (1,541) 706
- ---------------------------------------------------------------------------------------
Total provision $ 5 $ 3 $ 2
- ---------------------------------------------------------------------------------------
</TABLE>
59 CELLNET
<PAGE>
The tax effects of temporary differences that give rise to deferred taxes
were as follows (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Tax net operating loss and credit carryforwards $ 48,778 $ 30,910
Senior note original issue discount 13,263 3,817
Research and development expenses capitalized for tax purposes 1,138 3,645
Expenses not currently deductible for tax purposes 724 2,182
- --------------------------------------------------------------------------------------
Total deferred tax assets 63,903 40,554
Valuation allowance on deferred tax assets (63,903) (40,554)
Net deferred income taxes $ -- $ --
- --------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $127,900,000 and $71,900,000 available to offset future federal
and state 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 2011. Such state
carryforwards expire in 1997 through 2011. Equity issuances in April 1991 and
the initial public offering in 1996 triggered such limitations on loss
carryforwards. As of December 31, 1996, approximately $108,000,000 of net
operating losses remain limited to an annual usage of approximately
$36,400,000 for federal income tax purposes.
The Company has capitalized approximately $82,200,000 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 California during the subject amortization periods.
Research and development tax credit carryforwards of approximately $1,800,000
and $1,300,000 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.
8. COMMITMENTS AND LEASES
At December 31, 1995 and 1996, equipment with a net book value of $854,000
and $878,000 (net of accumulated amortization of $372,000 and $708,000,
respectively), has been leased under capital leases.
The Company leases its principal manufacturing and office facilities under
noncancelable operating lease and sublease agreements expiring as to portions
of the space at various times commencing February 1996 through December 2000.
60 CELLNET
<PAGE>
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>
1997 $ 374 $1,662
1998 201 1,618
1999 121 1,283
2000 88 1,205
2001 10 194
Thereafter -- 1,287
- -------------------------------------------------------------------------------------------
Total minimum lease payments 794 $7,249
Amount representing interest (120)
- -------------------------------------------------------------------------------------------
Present value of minimum lease payments 674
Current portion 308
- -------------------------------------------------------------------------------------------
Long-term lease obligations $ 366
- -------------------------------------------------------------------------------------------
</TABLE>
Facilities rent expense was $421,000, $901,000, and $1,301,000 for 1994, 1995
and 1996, respectively. Rent expense is net of sublease income of $175,000 in
1994.
9. LITIGATION
The industry in which the Company operates is characterized by frequent
litigation regarding patent and other intellectual property rights. The
Company is party to one such claim of this nature.
Although the ultimate outcome of this matter is not presently determinable,
management believes that the resolution will not have a material effect on
the Company's financial position or results of operations. 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. 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.
In October 1996, Itron, Inc., one of the Company's competitors, filed a
complaint against the Company in the Federal District Court in Minnesota
alleging that the Company infringes an Itron patent which was issued in
September 1996. Itron is seeking a judgment for damages, attorneys fees and
injunctive relief. The Company believes, based on its current information,
that the Company's products do not infringe any valid claim in the Itron
patent, and in the Company's opinion, the ultimate outcome of the lawsuit is
not expected to have a material adverse effect on its results of operations
or financial condition.
61 CELLNET
<PAGE>
On October 31, 1996, a complaint SETTLE V. SEIDL, ET AL. No. 398464, was
filed in the Superior Court of California for the County of San Mateo against
the Company, certain of its officers and directors and underwriters of the
Company's Initial Public Offering. The complaint, which is a purported class
action filed on behalf of the Company's stockholders who purchased shares in
the Company's initial public offering, seeks unspecified damages and
rescission for alleged liability under various provisions of the federal
securities laws and California state law. Plaintiff alleges that the
Prospectus and Registration Statement dated September 26, 1996, pursuant to
which the Company issued 5,000,000 shares of Common Stock to the public,
contained materially misleading statements and/or omissions in that
defendants were obligated to disclose, but failed to disclose, that a patent
conflict with Itron, Inc. was likely to ensue. On November 8 and 13, 1996,
two additional complaints, KAREN ZULLY V. CELLNET DATA SYSTEMS, INC. ET AL.
No. 398551 and HOWARD FIENMAN AND GERALD SLAPSOWITZ V. CELLNET DATA SYSTEMS,
INC. ET AL. No. 398560, were filed in the Superior Court of California for
the County of San Mateo. These cases are essentially similar in nature to the
SETTLE case. The Court has ordered consolidation of the SETTLE and ZULLY
actions. The Company expects that the FIENMAN action will be consolidated
with the SETTLE and ZULLY actions before trial. The Company believes that the
allegations in these complaints are without merit and intends to defend these
actions vigorously. In the Company's opinion, the ultimate outcome of these
lawsuits is not expected to have a material adverse effect on its results of
operations or financial condition.
* * * * *
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
62 CELLNET
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in that the
registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
registrant's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
registrant's Proxy Statement.
63 CELLNET
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules. The financial statements as set forth
under Item 8 of this report on Form 10-K are included.
Financial Statement Schedules have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the consolidated financial statements or notes thereto.
(b) Reports on Form 8-K. Not applicable.
(c) Exhibits.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
<C> <S>
EXHIBIT DESCRIPTION
- ------------------------------------------------------------------------------------
3.1(1) Amended and Restated Certificate of Incorporation filed on September
26, 1996.
3.2(1) Bylaws.
4.1(1) Specimen Common Stock Certificate.
4.2(1) Indenture between the Registrant and The Bank of New York date June
15, 1995, including the form of Senior Discount Note.
4.3(1) Warrant Agreement between the Registrant and The Bank of New York
dated June 15, 1995, including form Warrant.
4.4(1) Notes Registration Rights Agreement dated June 15, 1995 by and between
the Registrant and Smith Barney Inc.
4.5(1) Warrants Registration Rights Agreement dated June 15, 1995 by and
between the Registrant and Smith Barney Inc.
4.6(1) First Supplemental Indenture between the Registrant and The Bank of
New York dated November 21, 1995.
4.7(1) First Supplemental Warrant Agreement between the Registrant and The
Bank of New York dated November 21, 1995.
4.8(1) First Supplemental Notes Registration Rights Agreement dated November
21, 1995 by and between the Registrant and Smith Barney Inc.
4.9(1) First Supplemental Warrants Registration Rights Agreement dated
November 21, 1995 by and between the Registrant and Smith Barney
Inc.
4.10(1) Warrant Agreement between the Registrant and Axonn Corporation dated
August 12, 1992.
4.11(1) Form of Warrant Agreement between the Registrant and Diablo Research
Corporation.
4.12(1) Stock Purchase Agreement dated September 6, 1996 between the
Registrant and Northern States Power Company.
4.13(1) Stock Purchase Agreement dated September 4, 1996 between the
Registrant and Union Electric Development Corporation.
4.14(1) Stock Purchase Agreement dated September 16, 1996 between the
Registrant and Bechtel Enterprises, Inc.
4.15(2) Second Supplemental Indenture by and between the Registrant and The
Bank of New York dated as of August 30, 1996.
4.16(2) Specimen 13% Senior Discount Note Due 2005, Series B.
10.1(1) Form of current Indemnification Agreement for directors and officers.
</TABLE>
64 CELLNET
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
EXHIBIT DESCRIPTION
<C> <S>
- ------------------------------------------------------------------------------------
10.2A(1) 1992 Stock Option Plan and forms of agreements thereunder.
10.2B(1) 1994 Stock Plan and forms of agreements thereunder.
10.3(1) 1996 Employee Stock Purchase Plan.
10.4(1) Shareholder's Agreement between the Registrant 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(1) Lease between the Registrant and WDT Shoreway dated April 6, 1989 for
the Registrant's San Carlos headquarters.
10.6(1) Restricted Stock Purchase Agreement between the Registrant and John
Seidl dated December 27, 1994.
10.7(1) Restricted Stock Purchase Agreement between the Registrant and James
Jennings dated August 1, 1995.
10.8(1) Restricted Stock Purchase Agreement between the Registrant and Philip
Mallory dated July 21, 1995.
10.9(1) Restricted Stock Purchase Agreement between the Registrant and Larsh
Johnson dated August 1, 1995.
10.10+(1) License Agreement between the Registrant and Axonn Corporation dated
August 21, 1992, as amended by an Addendum and a Second Addendum,
each dated November 8, 1993.
10.11+(1) License Agreement between the Registrant and Axonn Corporation dated
March 25, 1996.
10.12+(1) License Agreement between the Registrant and Life Point Systems
Limited Partnership dated August 12, 1994.
10.13(1) Agreement between the Registrant and James Jennings dated July 11,
1994.
10.14(1) Form of Employee Severance Agreement.
10.15(1) Form of Promissory Note between the Registrant and certain officers of
the Registrant in connection with the purchase of restricted stock.
10.16 Restricted Stock Purchase Agreement between the Registrant and David
L. Perry dated June 29, 1995.
10.17 Restricted Stock Purchase Agreement between the Registrant and David
L. Perry dated June 29, 1995.
10.18 Restricted Stock Purchase Agreement between the Registrant and Paul G.
Manca dated July 31, 1995.
10.19 Amendment dated February 5, 1997 to License Agreement between the
Registrant and Axonn Corporation dated August 21, 1992, as amended.
21.1(1) Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule.
- ------------------------------------------------------------------------------------
</TABLE>
+ Confidential Treatment granted.
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (File No. 333-09537) filed on September 24, 1996.
(2) Incorporated by reference to the Registrant's Registration Statement on Form
S-4 (File No. 333-15395) filed on November 1, 1996.
65 CELLNET
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in San Carlos, State of
California, on the 7th day of March, 1997.
CELLNET DATA SYSTEMS, INC.
By: /s/ JOHN M. SEIDL
-------------------------------------
John M. Seidl
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John M. Seidl and Paul G. Manca, and each of
them, his attorneys-in-fact, and agents, each with the power of substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Report on Form 10-K, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and conforming all that said
attorneys-in-fact and agents of any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
- -------------------------------------------------------------------------------
SIGNATURE TITLE DATE
- -------------------------------------------------------------------------------
President, Chief Executive
/s/ JOHN M. SEIDL Officer and Director
- ------------------------------ (Principal Executive March 7, 1997
John M. Seidl Officer)
Vice President and Chief
/s/ PAUL G. MANCA Financial Officer
- ------------------------------ (Principal Financial and March 7, 1997
(Paul G. Manca) Accounting Officer)
/s/ PAUL M. COOK
- ------------------------------ Chairman of the Board, March 7, 1997
(Paul M. Cook) Director
66 CELLNET
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SIGNATURE TITLE DATE
- -------------------------------------------------------------------------------
<C> <S> <C>
/s/ NEAL M. DOUGLAS
- ------------------------------ Director March 7, 1997
(Neal M. Douglas)
/s/ WILLIAM C. EDWARDS
- ------------------------------ Director March 7, 1997
(William C. Edwards)
/s/ WILLIAM HART
- ------------------------------ Director March 7, 1997
(William Hart)
/s/ NANCY E. PFUND
- ------------------------------ Director March 7, 1997
(Nancy E. Pfund)
/s/ BRIAN KWAIT
- ------------------------------ Director March 7, 1997
(Brian Kwait)
/s/ HENRY B. SARGENT
- ------------------------------ Director March 7, 1997
(Henry B. Sargent))
</TABLE>
67 CELLNET
<PAGE>
CELLNET DATA SYSTEMS, INC.
1992 STOCK PLAN
NOTICE OF GRANT OF STOCK PURCHASE RIGHT
Unless otherwise defined herein, the terms defined in the 1992 Stock Plan
(the "Plan") shall have the same defined meanings in this Notice of Grant.
David L. Perry
1901 California Street #3
San Francisco, CA 94109
You have been granted the right to purchase Common Stock of the Company
pursuant to an Incentive Stock Option Agreement or Agreements which the Company
has amended to accelerate your ability to exercise, subject to the Company's
repurchase option and your ongoing Continuous Status as an Employee or
Consultant (as described in the Plan and the attached Restricted Stock Purchase
Agreement), as follows:
Date of Prior Grant November 1, 1994
Price Per Share $1.00
Total Number of Shares
Subject to Option
which are subject to
Accelerated Exercise 42,500
By your signature and the signature of the Company's representative below,
you and the Company agree that this Stock Purchase Right is granted under and
governed by the terms and conditions of the Plan, the Incentive Stock Option
Agreement (the "Option Agreement") and the Restricted Stock Purchase Agreement
attached hereto as Exhibit A-1, each of which is hereby incorporated herein by
reference. You further agree to execute the Restricted Stock Purchase Agreement
as a condition to purchasing any shares under this Stock Purchase Right.
GRANTEE: CELLNET DATA SYSTEMS, INC.
/s/DAVID L. PERRY By: /s/PAUL G. MANCA
- ------------------------- ---------------------------------
Signature
David L. Perry Title: Vice President, Chief Financial Officer
- -------------------------
Print Name
<PAGE>
EXHIBIT A-1
CELLNET DATA SYSTEMS, INC.
1992 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Restricted Stock Purchase Agreement.
THIS AGREEMENT is made as of June 29, 1995, at San Carlos, California,
between CellNet Data Systems, Inc., a California corporation (the "Company"),
and David L. Perry (the "Purchaser").
WHEREAS the Purchaser named in the Notice of Grant, (the "Purchaser") is an
employee or consultant of the Company, and the Purchaser's continued
participation is considered by the Company to be important for the Company's
continued growth; and
WHEREAS in order to give the Purchaser an opportunity to acquire an equity
interest in the Company as an incentive for the Purchaser to participate in the
affairs of the Company, the Administrator has granted to the Purchaser stock
purchase rights subject to the terms and conditions of the Plan and the Notice
of Grant, which are incorporated herein by reference, and pursuant to this
Restricted Stock Purchase Agreement (the "Agreement").
THEREFORE, the parties agree as follows:
I. SALE OF STOCK. The Company hereby agrees to sell to the Purchaser and
the Purchaser hereby agrees to purchase shares of the Company's Common Stock
(the "Shares"), at the per share purchase price and as otherwise described in
the Notice of Grant.
II. PAYMENT OF PURCHASE PRICE. The purchase price for the Shares may be
paid by delivery to the Company at the time of execution of this Agreement of
cash, a check or promissory note in the form of Exhibit D to the Option
Agreement.
III. REPURCHASE OPTION.
(a) In the event the Purchaser's Continuous Status as an Employee or
Consultant terminates for any or no reason (including death or disability)
before all of the Shares are released from the Company's repurchase option (see
Section IV), but not in the event of Purchaser's change in status from Employee
to Consultant or Consultant to Employee, the Company shall, upon the date of
such termination (as reasonably fixed and determined by the Company) have an
irrevocable, exclusive option for a period of ninety (90) days from such date to
repurchase up to that number of shares which constitute the Unreleased Shares
(as defined in Section IV) at the original purchase price per share (the
"Repurchase Price"). Said option shall be exercised by the Company by
delivering written notice to the Purchaser or the Purchaser's executor (with a
copy to the Escrow Holder (as defined in Section VI)) and, at the Company's
option, (i) by delivering to the Purchaser or the Purchaser's
<PAGE>
executor a check in the amount of the aggregate Repurchase Price, or (ii) by
the Company canceling an amount of the Purchaser's indebtedness to the
Company equal to the aggregate Repurchase Price, or (iii) by a combination of
(i) and (ii) so that the combined payment and cancellation of indebtedness
equals such aggregate Repurchase Price. Upon delivery of such notice and the
payment of the aggregate Repurchase Price in any of the ways described above,
the Company shall become the legal and beneficial owner of the Shares being
repurchased and all rights and interests therein or relating thereto, and the
Company shall have the right to retain and transfer to its own name the
number of Shares being repurchased by the Company.
(b) Whenever the Company shall have the right to repurchase Shares
hereunder, the Company may designate and assign one or more employees, officers,
directors or shareholders of the Company or other persons or organizations to
exercise all or a part of the Company's purchase rights under this Agreement and
purchase all or a part of such Shares.
IV. RELEASE OF SHARES FROM REPURCHASE OPTION.
(a) 4,250 of the Shares shall be immediately fully vested and not
subject to the Company's repurchase option and 2,125 of the Shares shall be
released from the Company's repurchase option every three months thereafter
(beginning May 1, 1995), provided that the Purchaser's Continuous Status as an
Employee or Consultant has not terminated prior to the date of any such release.
(b) Any of the Shares which have not yet been released from the
Company's repurchase option are referred to herein as "Unreleased Shares."
(c) The Shares which have been released from the Company's repurchase
option are referred to herein as the "Released Shares." The Released Shares
shall be delivered to the Purchaser at the Purchaser's request (see Section VI).
V. RESTRICTION ON TRANSFER. Except for the escrow described in
Section VI or transfer of the Shares to the Company or its assignees
contemplated by this Agreement, none of the Shares or any beneficial interest
therein shall be transferred, encumbered or otherwise disposed of in any way
until the release of such Shares from the Company's repurchase option in
accordance with the provisions of this Agreement, other than by will or the laws
of descent and distribution.
VI. ESCROW OF SHARES.
(a) To ensure the availability for delivery of the Purchaser's
Unreleased Shares upon repurchase by the Company pursuant to the Company's
repurchase option under Section III above, the Purchaser shall, upon execution
of this Agreement, deliver and deposit with an escrow holder designated by the
Company (the "Escrow Holder") the share certificates representing the Unreleased
Shares, together with the stock assignment duly endorsed in blank, attached
hereto as Exhibit A-2. The Unreleased Shares and stock assignment shall be held
by the Escrow Holder,
-2-
<PAGE>
pursuant to the Joint Escrow Instructions of the Company and Purchaser
attached as Exhibit A-3 hereto, until such time as the Company's repurchase
option expires. As a further condition to the Company's obligations under
this Agreement, the spouse of Purchaser, if any, shall execute and deliver to
the Company the Consent of Spouse attached hereto as Exhibit A-4.
(b) The Escrow Holder shall not be liable for any act it may do or
omit to do with respect to holding the Unreleased Shares in escrow and while
acting in good faith and in the exercise of its judgment.
(c) If the Company or any assignee exercises its repurchase option
hereunder, the Escrow Holder, upon receipt of written notice of such option
exercise from the proposed transferee, shall take all steps necessary to
accomplish such transfer.
(d) When the repurchase option has been exercised or expires
unexercised or a portion of the Shares has been released from such repurchase
option, upon Purchaser's request the Escrow Holder shall promptly cause a new
certificate to be issued for such released Shares and shall deliver such
certificate to the Company or the Purchaser, as the case may be.
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a shareholder with respect to such Shares while they are held in
escrow, including without limitation, the right to vote the Shares and receive
any cash dividends declared thereon. If, from time to time during the term of
the Company's repurchase option, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of the Purchaser's ownership of the Shares shall be immediately subject
to this escrow, deposited with the Escrow Holder and included thereafter as
"Shares" for purposes of this Agreement and the Company's repurchase option.
VII. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Released Shares that are
held by Purchaser or any transferee (either being sometimes referred to herein
as the "Holder") may be sold or otherwise transferred (including transfer by
gift or operation of law), the Company or its assignee(s) shall have a right of
first refusal to purchase such shares (the "Offered Shares") on the terms and
conditions set forth in this Section (the "Right of First Refusal").
(a) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Offered Shares; (ii) the
name of each proposed purchaser or other transferee ("Proposed Transferee");
(iii) the number of Offered Shares to be transferred to each Proposed
Transferee; and (iv) the bona fide cash price or other consideration for which
the Holder proposes to transfer the Offered Shares (the "Offered Price"), and
the Holder shall offer the Offered Shares at the Offered Price to the Company or
its assignee(s).
-3-
<PAGE>
(b) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Offered Shares proposed to be transferred to any one or more of the
Proposed Transferees, at the purchase price determined in accordance with
subsection (c) below.
(c) PURCHASE PRICE. The purchase price ("Purchase Price") for the
Offered Shares purchased by the Company or its assignee(s) under this Section
shall be the Offered Price. If the Offered Price includes consideration other
than cash, the cash equivalent value of the non-cash consideration shall be
determined by the Board of Directors of the Company in good faith.
(d) PAYMENT. Payment of the Purchase Price shall be made, at the
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within thirty (30) days after receipt of the Notice or in
the manner and at the times set forth in the Notice.
(e) HOLDER'S RIGHT TO TRANSFER. If all of the Offered Shares
proposed in the Notice to be transferred to a given Proposed Transferee are not
purchased by the Company and/or its assignee(s) as provided in this Section,
then the Holder may sell or otherwise transfer such Offered Shares to that
Proposed Transferee at the Offered Price or at a higher price, provided that
such sale or other transfer is consummated within one hundred twenty (120) days
after the date of the Notice and provided further that any such sale or other
transfer is effected in accordance with any applicable securities laws and the
Proposed Transferee agrees in writing that the provisions of this Section shall
continue to apply to the Offered Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Offered Shares held by the Holder may be sold or
otherwise transferred.
(f) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the contrary
contained in this Section notwithstanding, the transfer of any or all of the
Offered Shares during the Purchaser's lifetime or on the Purchaser's death by
will or intestacy to the Purchaser's immediate family or a trust for the benefit
of the Purchaser's immediate family shall be exempt from the provisions of this
Section, provided that the Purchaser notifies the Company in writing within
thirty (30) days of said transfer. "Immediate Family" as used herein shall mean
spouse, lineal descendant or antecedent, father, mother, brother or sister. In
such case, the transferee or other recipient shall receive and hold the Offered
Shares so transferred subject to the provisions of this Agreement, including but
not limited to this Section and Section III, and there shall be no further
transfer of such Offered Shares except in accordance with the terms of this
Section.
(g) TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First
Refusal shall terminate as to any Offered Shares at the time of the first sale
of Common Stock of the Company to
-4-
<PAGE>
the general public pursuant to a registration statement filed with and
declared effective by the Securities and Exchange Commission under the
Securities Act of 1933 (the "1933 Act").
VIII. LEGENDS.
(a) Purchaser understands and agrees that the Company shall cause the
legends set forth below or legends substantially equivalent thereto, to be
placed upon any certificate(s) evidencing ownership of the Shares together with
any other legends that may be required by the Company or by applicable state or
federal securities laws:
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 EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN AGREEMENTS, COVENANTS AND RESTRICTIONS IN REGARD TO
THE TRANSFER OF SUCH SHARES, AS PROVIDED IN THE PROVISIONS
OF A SHAREHOLDERS' AGREEMENT, A COPY OF WHICH IS ON FILE IN
THE OFFICE OF THE SECRETARY OF THE CORPORATION.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
180 DAY LOCK-UP FOLLOWING THE CORPORATION'S INITIAL PUBLIC
OFFERING. A COPY OF THE LOCK-UP IS ON FILE AT THE PRINCIPAL
OFFICE OF THE CORPORATION.
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
Purchaser understands that transfer of the Shares may be restricted by
Section 260.141.11 of the Rules of the California Corporations Commissioner, a
copy of which is attached hereto as Attachment 1.
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<PAGE>
(b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to ensure
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required (i) to
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
IX. ADJUSTMENT FOR STOCK SPLIT. All references to the number of Shares
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
X. TAX CONSEQUENCES. The Purchaser has reviewed with the Purchaser's own
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. The Purchaser
is relying solely on such advisors and not on any statements or representations
of the Company or any of its agents. The Purchaser understands that the
Purchaser (and not the Company) shall be responsible for the Purchaser's own tax
liability that may arise as a result of this investment or the transactions
contemplated by this Agreement. The Purchaser understands that Section 83 of
the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary
income the difference between the purchase price for the Shares and the Fair
Market Value of the Shares as of the date any restrictions on the Shares lapse.
In this context, "restriction" includes the right of the Company to buy back the
Shares pursuant to its repurchase option. The Purchaser understands that the
Purchaser may elect to be taxed at the time the Shares are purchased rather than
when and as the Company's repurchase option expires by filing an election under
Section 83(b) of the Code with the I.R.S. within thirty (30) days from the date
of purchase. The form for making this election is attached as Exhibit A-5
hereto.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER
SECTION 83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES
TO MAKE THIS FILING ON THE PURCHASER'S BEHALF.
XI. LOCKUP AGREEMENT. In consideration for the sale of the Shares by the
Company, the Purchaser agrees that in connection with the first registration of
the Company's securities whether for its own account or otherwise, not to sell,
make any short sale of, loan, grant any option for the purchase of, grant an
interest in, or otherwise dispose of any Shares or any other securities of the
Company (other than those included in the registration, if any) without the
prior written consent of the Company or underwriters managing the offering, as
the case may be, for such period of time (not to exceed 180 days or such shorter
time as the officers and directors have agreed to) from the date of the initial
public offering, pursuant to an effective registration statement, as the Company
or the
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<PAGE>
underwriters may specify; provided, however, that such Purchaser shall be
relieved of its obligations under this provision unless all executive
officers, directors and five percent (5%) or more shareholders of the Company
enter into similar agreements.
XII. GENERAL PROVISIONS.
(a) This Agreement shall be governed by the laws of the State of
California. This Agreement, subject to the terms and conditions of the Plan,
the Incentive Stock Option Agreement and the Notice of Grant, represents the
entire agreement between the parties with respect to the purchase of Common
Stock by the Purchaser. Subject to Section 13(c) of the Plan, in the event of a
conflict between the terms and conditions of the Plan and the terms and
conditions of this Agreement, the terms and conditions of the Plan shall
prevail. Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Agreement.
(b) Any notice, demand or request required or permitted to be given
by either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or
deposited in the U.S. mail, First Class with postage prepaid, and addressed to
the parties at the addresses of the parties set forth at the end of this
Agreement or such other address as a party may request by notifying the other in
writing.
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party not sending the notice.
(c) The rights and benefits of the Company under this Agreement shall
be transferable to any one or more persons or entities, and all covenants and
agreements hereunder shall inure to the benefit of, and be enforceable by the
Company's successors and assigns. The rights and obligations of the Purchaser
under this Agreement may only be assigned with the prior written consent of the
Company.
(d) Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, nor prevent that party from thereafter enforcing each
and every other provision of this Agreement. The rights granted both parties
herein are cumulative and shall not constitute a waiver of either party's right
to assert all other legal remedies available to it under the circumstances.
(e) The Purchaser agrees upon request to execute any further
documents or instruments necessary or desirable to carry out the purposes or
intent of this Agreement.
(f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE RELEASE OF SHARES FROM
THE REPURCHASE OPTION OF THE COMPANY PURSUANT TO SECTION IV HEREOF IS EARNED
ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE
COMPANY (NOT THROUGH THE ACT OF BEING HIRED OR PURCHASING SHARES HEREUNDER).
PURCHASER FURTHER
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<PAGE>
ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED
HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN
EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE OR
CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT
INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
PURCHASER'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR
WITHOUT CAUSE.
By Purchaser's signature below, Purchaser represents that he or she is
familiar with the terms and provisions of the Plan, the Incentive Stock Option
Agreement and hereby accepts this Agreement subject to all of the terms and
provisions thereof. Purchaser has reviewed the Plan, the Incentive Stock Option
Agreement and this Agreement in their entirety, has had an opportunity to obtain
the advice of counsel prior to executing this Agreement and fully understands
all provisions of this Agreement. Purchaser agrees to accept as binding,
conclusive and final all decisions or interpretations of the Administrator upon
any questions arising under the Plan, the Incentive Stock Option Agreement or
this Agreement. Purchaser further agrees to notify the Company upon any change
in the residence indicated in the Notice of Grant.
PURCHASER: CELLNET DATA SYSTEMS, INC.
/s/DAVID L. PERRY By: /s/PAUL G. MANCA
- ---------------------------- --------------------------------------
Signature
David L. Perry Title: Vice President, Chief Financial Officer
- ----------------------------
Print Name
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<PAGE>
EXHIBIT A-2
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign
and transfer unto__________________________________________(__________)
shares of the Common Stock of CellNet Data Systems, Inc. standing in my name
of the books of said corporation represented by Certificate No. _____
herewith and do hereby irrevocably constitute and appoint______________________
to transfer the said stock on the books of the within named corporation with
full power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between CellNet Data Systems, Inc. and the undersigned
dated June 29, 1995.
Dated: _______________, 19__
Signature: /s/DAVID L. PERRY
-----------------------------------
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>
EXHIBIT A-3
JOINT ESCROW INSTRUCTIONS
June 30, 1995
David L. Perry, Esq.
Corporate Secretary
CellNet Data Systems, Inc.
125 Shoreway Road
San Carlos, CA 94070
Dear Mr. Perry:
As Escrow Agent for both CellNet Data Systems, Inc., a California
corporation (the "Company"), and the undersigned purchaser of stock of the
Company (the "Purchaser"), you are hereby authorized and directed to hold the
documents delivered to you pursuant to the terms of that certain Restricted
Stock Purchase Agreement ("Agreement") between the Company and the undersigned,
in accordance with the following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of stock to
be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's repurchase option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a shareholder of the Company while the
stock is held by you.
<PAGE>
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option.
Within ninety (90) days after cessation of Purchaser's continuous employment by
or services to the Company, or any parent or subsidiary of the Company, you will
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's repurchase
option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in
good faith, and any act done or omitted by you pursuant to the advice of your
own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree, you shall
not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
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<PAGE>
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be Secretary of the Company or if you shall resign by written
notice to each party. In the event of any such termination, the new Secretary
of this Company shall be automatically appointed the successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
(10) days' advance written notice to each of the other parties hereto.
COMPANY: CellNet Data Systems, Inc.
125 Shoreway Road
San Carlos, CA 94070
PURCHASER: David L. Perry
1901 California Street #3
San Francisco, CA 94109
ESCROW AGENT: Corporate Secretary
CellNet Data Systems, Inc.
125 Shoreway Road
San Carlos, CA 94070
16. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
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<PAGE>
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the laws of the State of California.
Very truly yours,
CELLNET DATA SYSTEMS, INC.
By: /s/PAUL G. MANCA
--------------------------------------------------------
Title: Vice President, Chief Financial Officer
-----------------------------------------------------
PURCHASER:
/s/DAVID L. PERRY
-----------------------------------------------------------
(Signature)
David L. Perry
-----------------------------------------------------------
(Typed or Printed Name)
ESCROW AGENT:
/s/DAVID L. PERRY
-----------------------------------------------------------
Corporate Secretary
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<PAGE>
EXHIBIT A-4
CONSENT OF SPOUSE
I, ____________________, spouse of ___________________, have read and
approve the foregoing Agreement. In consideration of granting of the right to
my spouse to purchase shares of CellNet Data Systems, Inc., as set forth in the
Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the
exercise of any rights under the Agreement and agree to be bound by the
provisions of the Agreement insofar as I may have any rights in said Agreement
or any shares issued pursuant thereto under the community property laws or
similar laws relating to marital property in effect in the state of our
residence as of the date of the signing of the foregoing Agreement.
Dated: _______________, 19__
______________________________
<PAGE>
EXHIBIT A-5
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal
Tax Code, to include in taxpayer's gross income for the current taxable year,
the amount of any compensation taxable to taxpayer in connection with his
receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER: David L. Perry SPOUSE: N/A
ADDRESS: 1901 California St., #3, San Francisco, CA 94109
IDENTIFICATION NO.: TAXPAYER: ###-##-#### SPOUSE:
TAXABLE YEAR: 1995
2. The property with respect to which the election is made is described as
follows: 42,500 shares (the "Shares") of the Common Stock of CellNet Data
Systems, Inc. (the "Company").
3. The date on which the property was transferred is: June 30, 1995
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, on certain
events. This right lapses with regard to a portion of the Shares as
follows: Does not apply to 4,250 shares; beginning May 1, 1995 right
lapses every 3 months thereafter; as to 2,125 shares until all shares are
vested.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is:
$42,500.00
6. The amount (if any) paid for such property is:
$42,500.00
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
THE UNDERSIGNED UNDERSTANDS THAT THE FOREGOING ELECTION MAY NOT BE REVOKED
EXCEPT WITH THE CONSENT OF THE COMMISSIONER.
Dated: June 30, 1995 /s/DAVID L. PERRY
------------------------------
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: N/A
------------------------------
Spouse of Taxpayer
<PAGE>
ATTACHMENT 1
STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE
Title 10. Investment - Chapter 3. Commissioner of Corporations
260.141.11: RESTRICTION ON TRANSFER. (a) The issuer of any security upon
which a restriction on transfer has been imposed pursuant to Sections 260.102.6,
260.141.10 or 260.534 shall cause a copy of this section to be delivered to each
issuee or transferee of such security at the time the certificate evidencing the
security is delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of
the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or
custodian for the account of the transferee or the transferee's ancestors,
descendants or spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign state, territory
or country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign state,
territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the security for which
the Commissioner's written consent is obtained or under this rule not
required;
(10) by way of a sale qualified under Sections 25111, 25112, 25113 or
25121 of the Code, of the securities to be transferred, provided that no
order under Section 25140 or subdivision (a) of Section 25143 is in effect
with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
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<PAGE>
(12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code, provided that no order under Section 25140 or
subdivision (a) of Section 25143 is in effect with respect to such
qualification;
(13) between residents of foreign states, territories or countries who
are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or
to the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or
by the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the
sale that transfer of the securities is restricted under this rule, (ii)
delivers to each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of
Section 25110 of the Code but exempt from that qualification requirement by
subdivision (f) of Section 25102; provided that any such transfer is on the
condition that any certificate evidencing the security issued to such
transferee shall contain the legend required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR
ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR,
WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS
OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S
RULES."
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<PAGE>
Grant No. 000713
CELLNET DATA SYSTEMS, INC.
INCENTIVE STOCK OPTION AGREEMENT
THE NUMBER OF SHARES OF COMMON STOCK OF THIS OPTION RECOGNIZE THE
COMPANY'S ONE FOR TEN REVERSE STOCK SPLIT ON JANUARY 17, 1992,
AND ONE FOR ONE HUNDRED REVERSE STOCK SPLIT ON SEPTEMBER 17, 1992.
CELLNET DATA SYSTEMS, INC., a California corporation (the "Company"), has
granted to David L. Perry, (the "Optionee") an option (the "Option") to purchase
a total of 42500 shares of Common Stock (the "Shares"), at the price determined
as provided herein, and in all respects subject to the terms, definitions and
provisions of the 1992 Stock Option Plan (the "Plan") adopted by the Company
which is incorporated herein by reference. Unless otherwise defined herein, the
terms defined in the Plan shall have the same defined meanings herein.
1. NATURE OF THE OPTION. This Option is intended to qualify as an
Incentive Stock Option as defined in Section 422A of the Internal Revenue Code
of 1986 (the "Code").
2. EXERCISE PRICE. The exercise price is $1.00 for each share of Common
Stock, which price is not less than the fair market value per share of the
Common Stock on the date of grant.
3. EXERCISE OF OPTION. This Option shall be exercisable during its term,
in accordance with the provisions of Section 8 of the Plan and subject to
Section 6 hereof, as follows:
(i) RIGHT TO EXERCISE.
(a) Subject to subsections 3(i) (b) and (c), below, this Option
shall commence vesting from the date of grant or the employee's date of hire,
whichever is later, such that 1/10th of the Shares subject to the Option shall
be vested after six (6) months have expired from the employee's date of hire,
11/01/94, then vesting shall continue at the rate of 1/20th of the Shares
subject to the Option every three (3) months thereafter, such that all Shares
shall be vested five years from the date of hire, based on continuous
employment.
(b) This Option may not be exercised for a fraction of a share.
(c) In the event of Optionee's death, disability or other
termination of employment, the timing for exercise of the Option is governed by
Sections 7, 8, or 9 of this agreement, subject to the limitations in
Subsections 3(i)(e) and (f).
(d) NOTHING IN THIS AGREEMENT SHALL AFFECT IN ANY MANNER
WHATSOEVER THE RIGHT OR POWER OF THE COMPANY TO TERMINATE THE OPTIONEE'S
EMPLOYMENT OR CONSULTING RELATIONSHIP WITH THE COMPANY FOR ANY REASON, WITH OR
WITHOUT CAUSE. NOTHING IN THIS AGREEMENT
<PAGE>
CONSTITUTES AN EXPRESS OR IMPLIED PROMISE OF CONTINUED EMPLOYMENT OR A
CONSULTING RELATIONSHIP FOR THE EXERCISE PERIOD OR FOR ANY PERIOD AT ALL.
(e) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in Section 11 below.
(f) In no event may this Option become exercisable at a time or
times which, when this Option is aggregated with all other Incentive Stock
Options granted to Optionee by the Company or any Parent or Subsidiary, would
result in Shares having an aggregate fair market value (determined for each
Share as of the date of grant of the option covering such share) in excess of
$100,000 becoming first available for purchase upon exercise of one or more
incentive stock options during any calendar year.
(ii) METHOD OF EXERCISE. This Option shall be exercisable by written
notice in the form attached hereto as Exhibit A, which shall state the election
to exercise the Option, the number of Shares in respect of which the Option is
being exercised, and such other representations and agreements as to the
holder's investment intent with respect to such Shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the exercise price. This Option shall be deemed
exercised upon receipt by the Company of such written notice accompanied by the
exercise price.
No shares will be issued pursuant to the exercise of an Option unless
such issuance and such exercise shall comply with all relevant provisions of law
and the requirements of any stock exchange upon which the shares may then be
listed. Assuming such compliance, for income tax purposes, the shares shall be
considered transferred to the Optionee on the date on which the Option is
exercised with respect to such shares.
4. OPTIONEE'S REPRESENTATIONS. In the event the shares purchasable
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, concurrently with the exercise of all or any portion of this
Option, deliver to the Company his Investment Representation Statement in the
form attached hereto as Exhibit B, and shall read the applicable rules of the
Commissioner of Corporations attached to such Investment Representation
Statement.
5. METHOD OF PAYMENT. Payment of the exercise price shall be by any of
the following, or a combination thereof, at the election of the Board:
(i) cash;
(ii) check;
(iii) delivery of a promissory note (the "Note") of Optionee in the
amount of the exercise price together with the execution and delivery by the
Optionee of the Security Agreement
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<PAGE>
attached hereto as Exhibit C; the Note shall be in the form attached hereto
as Exhibit D, shall contain the terms and be payable as set forth therein,
shall bear interest at a rate not less than the rate required to ensure that
there will be no "unstated interest" with respect to the purchase of shares
under this Option, pursuant to Section 483 of the Code and the regulations in
effect thereunder at the time of such purchase, and shall be secured by a
pledge of the Shares purchased by the Note pursuant to the Security
Agreement; or
(iv) surrender of other Shares of Common Stock of the Company which
either have been owned by the Optionee for more than six (6) months or were not
acquired, directly or indirectly, from the Company and have a fair market value
equal to the exercise price of the Shares as to which the Option is being
exercised.
6. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such
time as the Plan has been amended by the shareholders of the Company to increase
the number of shares available for incentive stock options, or if the issuance
of such Shares upon such exercise or the method of payment of consideration for
such shares would constitute a violation of any applicable federal or state
securities or other law or regulation, including any rule under Part 207 of
Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by
the Federal Reserve Board. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
7. TERMINATION OF STATUS AS AN EMPLOYEE.
(i) If Optionee ceases to serve as an Employee, he may, but only
within 30 days after date he ceases to be an Employee of the Company (but in no
event later than the date of expiration of the term of this Option set forth in
Section 11 below), exercise this Option to the extent that he was entitled to
exercise it at the date of such termination as provided in paragraph 3(i). To
the extent that he was not entitled to exercise it at the date of such
termination, or if he does not exercise this Option within the time specified
herein, the Option shall terminate.
(ii) In the event that the Optionee has paid the purchase price
hereunder by delivery of a Note, and before the Note is paid in full, the
Optionee ceases to be an Employee or Consultant, the Company shall have the
right to accelerate the due date of the Note, and the whole unpaid balance on
the Note of principal and interest shall become immediately due.
8. DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 7
above, in the event of termination of an Optionee's consulting relationship or
Continuous Status as an Employee as a result of his or her disability, Optionee
may, but only within six (6) months from the date of such termination (and in no
event later than the expiration date of the term of such Option as set forth in
Section 11 of this Incentive Stock Option Agreement), exercise the Option to the
extent otherwise entitled to exercise it at the date of such termination;
provided, however, that if such disability is not a "disability" as such term is
defined in Section 22(e) (3) of the Code, in the case of an Incentive Stock
Option such Incentive Stock Option shall automatically convert to a Nonstatutory
Stock Option on the day three months and one day following such termination. To
the extent that Optionee was not entitled to exercise the Option at the
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<PAGE>
date of termination, or if Optionee does not exercise such Option to the
extent so entitled within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
9. DEATH OF OPTIONEE. In the event of the death of Optionee:
(i) during the term of this Option and while an Employee of the
Company and having been in Continuous Status as an Employee since the date of
grant of the Option, the Option may be exercised, at any time within twelve (12)
months following the date of death (but in no event later than the date of
expiration of the term of this Option set forth in Section 11 below), by
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
would have accrued had the Optionee continued living and remained in Continuous
Status as an Employee six (6) months after the date of death, subject to the
limitations contained in Section 3(i) (f) above; or
(ii) within 30 days after termination of Optionee's Continuous Status
as an Employee, the Option may be exercised, at any time within three (3) months
following the date of death (but in no event later than the date of expiration
of the term of this Option set forth in Section 11 below), by Optionee's estate
or by a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent of the right to exercise that had accrued at
the date of termination.
10. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of the Optionee only by him. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
11. TERM OF THE OPTION.
(a) This Option may not be exercised more than ten (10) years (five
(5) years if Optionee owns, immediately before this Option is granted, stock
representing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of any Parent or Subsidiary) from the date of
grant of this Option, and may be exercised during such term only in accordance
with the Plan and the terms of this Option.
(b) ADJUSTMENT UPON SALE OF ASSETS OR MERGER. In the event of a
proposed sale of all or substantially all of the assets of the Company, or the
merger of the Company with or into another corporation, this Option shall be
assumed or an equivalent Option shall be substituted by the successor
corporation or a parent or subsidiary of such successor corporation. In the
event that such successor corporation refuses to assume the Option, the Optionee
shall have the right to exercise this Option as to all of the Common Stock
subject to the Option, including Shares as to which the Option would not
otherwise be exercisable. The Board shall notify the Optionee that the Option
shall be fully exercisable for a period of 15 days from the date of notice and
that the Option will terminate upon expiration of such period.
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<PAGE>
12. EARLY DISPOSITION OF STOCK. Optionee understands that if he disposes
of any Shares received under this Option within two (2) years after the date of
this agreement or within one (1) year after such Shares were transferred to him,
he will be treated for federal income tax purposes as having received ordinary
income at the time of such disposition in an amount generally measured by the
difference between the price paid for the Shares and the lower of the fair
market value of the Shares on the date of the exercise or the fair market value
on the date of disposition. The amount of such ordinary income may be measured
differently if the Optionee is an officer, director, or 10% shareholder of the
Company or if the Shares are subject to a substantial risk of forfeiture at the
time they were transferred to Optionee. OPTIONEE HEREBY AGREES TO NOTIFY THE
COMPANY IN WRITING WITHIN 30 DAYS AFTER THE DATE OF ANY SUCH DISPOSITION.
Optionee understands that if he disposes of such Shares at any time after the
expiration of such two-year and one-year holding periods, any gain on such sale
will be taxed as long-term capital gain.
13. RESTRICTION ON TRANSFER; RIGHT OF FIRST REFUSAL. Optionee shall not
sell, transfer, pledge, hypothecate or otherwise dispose of any Shares, except
as follows:
(a) Before any Shares registered in the name of Optionee may be sold
or transferred (including transfer by operation of law), such Shares shall first
be offered to the Company. The Optionee shall deliver a notice ("Notice") to
the Company stating (i) his bona fide intention to sell or transfer such Shares,
(ii) the number of such Shares to be sold or transferred, (iii) the price for
which he proposes to sell or transfer such Shares, and (iv) the name of the
proposed purchaser or transferee.
(b) Within thirty (30) days after receipt of the Notice, the Company
or its assignee may elect to purchase all, but not less than all, Shares to
which the Notice refers, at the price per share specified in the Notice.
(c) If all of the Shares to which the Notice refers are not elected
to be purchased, as provided in subparagraph 13(b) hereof, the Optionee may sell
the remaining Shares to any person named in the Notice at the price specified in
the notice or at a higher price, provided that such sale or transfer is
consummated within 60 days after the date of said Notice to the Company, and
provided, further, that any such sale is in accordance with all the terms and
conditions hereof.
The provisions of this paragraph 13 shall terminate upon (i) the
effective date of a merger involving the Company in which the Company is not the
survivor (except a merger with an affiliate of the Company), (ii) the effective
date of a sale of all, or substantially all, of the assets of the Company
(except a sale to an affiliate of the Company) or (iii) the closing of the
Company's initial firmly underwritten public offering. The provisions of
subparagraphs 13(a), 13(b) and 13(c) shall not apply to a transfer of any shares
by Optionee, either during his lifetime or on death by will or intestacy to his
other ancestors, descendants or spouse, or any custodian or trustee for the
account of Optionee or Optionee's ancestors, descendants or spouse; provided, in
each such case any such transferee shall receive and hold such Shares subject to
the provisions of this paragraph 13 and there shall be no further transfer of
such Shares unless in accordance herewith.
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<PAGE>
The Company shall not be required (i) to transfer on its books any
Shares of the Company which shall have been sold or transferred in violation of
any of the provisions set forth in this Agreement, or (ii) to treat as owner of
such Shares or to accord the right to vote as such owner or to pay dividends to
any transferee to whom such Shares shall have been so transferred.
14. LOCKUP AGREEMENT. In consideration for the sale of the Shares, the
Optionee agrees, upon request of the Company or the underwriters managing the
initial underwritten offering of the Company's securities, not to sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any Shares of the Stock (other than those included in the registration)
without the prior written consent of the Company or such underwriters, as the
case may be, for such period of time (not to exceed 120 days) from the effective
date of such registration as the Company or underwriters may specify, provided,
however, that the Optionee shall have no obligation to enter into the agreement
described in this paragraph 14 unless all executive officers and directors of
the Company enter into similar agreements.
DATE OF GRANT: 11/01/94
CELLNET DATA SYSTEM, INC.,
a California Corporation
By: /s/JOHN M. SEIDL
------------------------------------------
John M. Seidl
Title: President
---------------------------------------
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION
3 HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY (NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS OPTION, THE
TRANSACTIONS CONTEMPLATED HEREUNDER, AND THE VESTING SCHEDULE SET FORTH HEREIN
DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED EMPLOYMENT FOR THE
VESTING PERIOD, FOR ANY PERIOD, OR AT ALL.
Optionee acknowledges receipt of a copy of the Plan and certain information
related thereto, a copy of which is annexed hereto, and represents that he is
familiar with the terms and provisions thereof, and hereby accepts this Option
subject to all of the terms and provisions thereof. Optionee hereby agrees to
accept as binding, conclusive and final all decisions or interpretations of the
Board upon any questions arising under the Plan. Optionee further acknowledges
that he has read and is familiar with the terms of the Plan and this agreement
and has read and understands Sections 3(i)(d) and 7(ii) and has had an
opportunity to obtain the advice of counsel prior to executing this Agreement.
Dated: Optionee: /s/David L. Perry
--------------- -------------------------------
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<PAGE>
CELLNET DATA SYSTEMS, INC.
1994 STOCK PLAN
NOTICE OF GRANT OF STOCK PURCHASE RIGHT
Unless otherwise defined herein, the terms defined in the 1994 Stock Plan
(the "Plan") shall have the same defined meanings in this Notice of Grant.
David L. Perry
1901 California Street #3
San Francisco, CA 94109
You have been granted the right to purchase Common Stock of the Company
pursuant to an Incentive Stock Option Agreement or Agreements which the Company
has amended to accelerate your ability to exercise, subject to the Company's
repurchase option and your ongoing Continuous Status as an Employee or
Consultant (as described in the Plan and the attached Restricted Stock Purchase
Agreement), as follows:
Prior Date of Grant February 8, 1995
Price Per Share $1.00
Total Number of Shares
Subject to Option
which are subject to
Accelerated Exercise 20,000
By your signature and the signature of the Company's representative below,
you and the Company agree that this Stock Purchase Right is granted under and
governed by the terms and conditions of the Plan, the Incentive Stock Option
Agreement (the "Option Agreement") and the Restricted Stock Purchase Agreement
attached hereto as Exhibit A-1, each of which is hereby incorporated herein by
reference. You further agree to execute the Restricted Stock Purchase Agreement
as a condition to purchasing any shares under this Stock Purchase Right.
GRANTEE: CELLNET DATA SYSTEMS, INC.
/s/DAVID L. PERRY By: /s/PAUL G. MANCA
- ---------------------------- --------------------------------------
Signature
David L. Perry Title: Vice President, Chief
- ---------------------------- Financial Officer
Print Name
<PAGE>
EXHIBIT A-1
CELLNET DATA SYSTEMS, INC.
1994 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Restricted Stock Purchase Agreement.
THIS AGREEMENT is made as of June 29, 1995, at San Carlos, California,
between CellNet Data Systems, Inc., a California corporation (the "Company"),
and David L. Perry (the "Purchaser").
WHEREAS the Purchaser named in the Notice of Grant, (the "Purchaser") is an
employee or consultant of the Company, and the Purchaser's continued
participation is considered by the Company to be important for the Company's
continued growth; and
WHEREAS in order to give the Purchaser an opportunity to acquire an equity
interest in the Company as an incentive for the Purchaser to participate in the
affairs of the Company, the Administrator has granted to the Purchaser stock
purchase rights subject to the terms and conditions of the Plan and the Notice
of Grant, which are incorporated herein by reference, and pursuant to this
Restricted Stock Purchase Agreement (the "Agreement").
THEREFORE, the parties agree as follows:
I. SALE OF STOCK. The Company hereby agrees to sell to the Purchaser and
the Purchaser hereby agrees to purchase shares of the Company's Common Stock
(the "Shares"), at the per share purchase price and as otherwise described in
the Notice of Grant.
II. PAYMENT OF PURCHASE PRICE. The purchase price for the Shares may be
paid by delivery to the Company at the time of execution of this Agreement of
cash, a check or promissory note in the form of Exhibit D to the Option
Agreement.
III. REPURCHASE OPTION.
(a) In the event the Purchaser's Continuous Status as an Employee or
Consultant terminates for any or no reason (including death or disability)
before all of the Shares are released from the Company's repurchase option (see
Section IV), but not in the event of Purchaser's change in status from Employee
to Consultant or Consultant to Employee, the Company shall, upon the date of
such termination (as reasonably fixed and determined by the Company) have an
irrevocable, exclusive option for a period of ninety (90) days from such date to
repurchase up to that number of shares which constitute the Unreleased Shares
(as defined in Section IV) at the original purchase price per share (the
"Repurchase Price"). Said option shall be exercised by the Company by
delivering written notice to the Purchaser or the Purchaser's executor (with a
copy to the Escrow Holder (as defined in Section VI)) and, at the Company's
option, (i) by delivering to the Purchaser or the Purchaser's
<PAGE>
executor a check in the amount of the aggregate Repurchase Price, or (ii) by
the Company canceling an amount of the Purchaser's indebtedness to the
Company equal to the aggregate Repurchase Price, or (iii) by a combination of
(i) and (ii) so that the combined payment and cancellation of indebtedness
equals such aggregate Repurchase Price. Upon delivery of such notice and the
payment of the aggregate Repurchase Price in any of the ways described above,
the Company shall become the legal and beneficial owner of the Shares being
repurchased and all rights and interests therein or relating thereto, and the
Company shall have the right to retain and transfer to its own name the
number of Shares being repurchased by the Company.
(b) Whenever the Company shall have the right to repurchase Shares
hereunder, the Company may designate and assign one or more employees, officers,
directors or shareholders of the Company or other persons or organizations to
exercise all or a part of the Company's purchase rights under this Agreement and
purchase all or a part of such Shares.
IV. RELEASE OF SHARES FROM REPURCHASE OPTION.
(a) 2,000 of the Shares beginning August 8, 1995 shall be immediately
fully vested and not subject to the Company's repurchase option and 1,000 of the
Shares shall be released every three months thereafter, provided that the
Purchaser's Continuous Status as an Employee or Consultant has not terminated
prior to the date of any such release.
(b) Any of the Shares which have not yet been released from the
Company's repurchase option are referred to herein as "Unreleased Shares."
(c) The Shares which have been released from the Company's repurchase
option are referred to herein as the "Released Shares." The Released Shares
shall be delivered to the Purchaser at the Purchaser's request (see Section VI).
V. RESTRICTION ON TRANSFER. Except for the escrow described in
Section VI or transfer of the Shares to the Company or its assignees
contemplated by this Agreement, none of the Shares or any beneficial interest
therein shall be transferred, encumbered or otherwise disposed of in any way
until the release of such Shares from the Company's repurchase option in
accordance with the provisions of this Agreement, other than by will or the laws
of descent and distribution.
VI. ESCROW OF SHARES.
(a) To ensure the availability for delivery of the Purchaser's
Unreleased Shares upon repurchase by the Company pursuant to the Company's
repurchase option under Section III above, the Purchaser shall, upon execution
of this Agreement, deliver and deposit with an escrow holder designated by the
Company (the "Escrow Holder") the share certificates representing the Unreleased
Shares, together with the stock assignment duly endorsed in blank, attached
hereto as Exhibit A-2. The Unreleased Shares and stock assignment shall be held
by the Escrow Holder, pursuant to the Joint Escrow Instructions of the Company
and Purchaser attached as Exhibit A-3
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<PAGE>
hereto, until such time as the Company's repurchase option expires. As a
further condition to the Company's obligations under this Agreement, the
spouse of Purchaser, if any, shall execute and deliver to the Company the
Consent of Spouse attached hereto as Exhibit A-4.
(b) The Escrow Holder shall not be liable for any act it may do or
omit to do with respect to holding the Unreleased Shares in escrow and while
acting in good faith and in the exercise of its judgment.
(c) If the Company or any assignee exercises its repurchase option
hereunder, the Escrow Holder, upon receipt of written notice of such option
exercise from the proposed transferee, shall take all steps necessary to
accomplish such transfer.
(d) When the repurchase option has been exercised or expires
unexercised or a portion of the Shares has been released from such repurchase
option, upon Purchaser's request the Escrow Holder shall promptly cause a new
certificate to be issued for such released Shares and shall deliver such
certificate to the Company or the Purchaser, as the case may be.
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a shareholder with respect to such Shares while they are held in
escrow, including without limitation, the right to vote the Shares and receive
any cash dividends declared thereon. If, from time to time during the term of
the Company's repurchase option, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of the Purchaser's ownership of the Shares shall be immediately subject
to this escrow, deposited with the Escrow Holder and included thereafter as
"Shares" for purposes of this Agreement and the Company's repurchase option.
VII. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Released Shares that are
held by Purchaser or any transferee (either being sometimes referred to herein
as the "Holder") may be sold or otherwise transferred (including transfer by
gift or operation of law), the Company or its assignee(s) shall have a right of
first refusal to purchase such shares (the "Offered Shares") on the terms and
conditions set forth in this Section (the "Right of First Refusal").
(a) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Offered Shares; (ii) the
name of each proposed purchaser or other transferee ("Proposed Transferee");
(iii) the number of Offered Shares to be transferred to each Proposed
Transferee; and (iv) the bona fide cash price or other consideration for which
the Holder proposes to transfer the Offered Shares (the "Offered Price"), and
the Holder shall offer the Offered Shares at the Offered Price to the Company or
its assignee(s).
(b) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder,
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<PAGE>
elect to purchase all, but not less than all, of the Offered Shares proposed
to be transferred to any one or more of the Proposed Transferees, at the
purchase price determined in accordance with subsection (c) below.
(c) PURCHASE PRICE. The purchase price ("Purchase Price") for the
Offered Shares purchased by the Company or its assignee(s) under this Section
shall be the Offered Price. If the Offered Price includes consideration other
than cash, the cash equivalent value of the non-cash consideration shall be
determined by the Board of Directors of the Company in good faith.
(d) PAYMENT. Payment of the Purchase Price shall be made, at the
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within thirty (30) days after receipt of the Notice or in
the manner and at the times set forth in the Notice.
(e) HOLDER'S RIGHT TO TRANSFER. If all of the Offered Shares
proposed in the Notice to be transferred to a given Proposed Transferee are not
purchased by the Company and/or its assignee(s) as provided in this Section,
then the Holder may sell or otherwise transfer such Offered Shares to that
Proposed Transferee at the Offered Price or at a higher price, provided that
such sale or other transfer is consummated within one hundred twenty (120) days
after the date of the Notice and provided further that any such sale or other
transfer is effected in accordance with any applicable securities laws and the
Proposed Transferee agrees in writing that the provisions of this Section shall
continue to apply to the Offered Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Offered Shares held by the Holder may be sold or
otherwise transferred.
(f) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the contrary
contained in this Section notwithstanding, the transfer of any or all of the
Offered Shares during the Purchaser's lifetime or on the Purchaser's death by
will or intestacy to the Purchaser's immediate family or a trust for the benefit
of the Purchaser's immediate family shall be exempt from the provisions of this
Section, provided that the Purchaser notifies the Company in writing within
thirty (30) days of said transfer. "Immediate Family" as used herein shall mean
spouse, lineal descendant or antecedent, father, mother, brother or sister. In
such case, the transferee or other recipient shall receive and hold the Offered
Shares so transferred subject to the provisions of this Agreement, including but
not limited to this Section and Section III, and there shall be no further
transfer of such Offered Shares except in accordance with the terms of this
Section.
(g) TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First
Refusal shall terminate as to any Offered Shares at the time of the first sale
of Common Stock of the Company to the general public pursuant to a registration
statement filed with and declared effective by the Securities and Exchange
Commission under the Securities Act of 1933 (the "1933 Act").
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<PAGE>
VIII. LEGENDS.
(a) Purchaser understands and agrees that the Company shall cause the
legends set forth below or legends substantially equivalent thereto, to be
placed upon any certificate(s) evidencing ownership of the Shares together with
any other legends that may be required by the Company or by applicable state or
federal securities laws:
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 EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN AGREEMENTS, COVENANTS AND RESTRICTIONS IN REGARD TO
THE TRANSFER OF SUCH SHARES, AS PROVIDED IN THE PROVISIONS
OF A SHAREHOLDERS' AGREEMENT, A COPY OF WHICH IS ON FILE IN
THE OFFICE OF THE SECRETARY OF THE CORPORATION.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
180 DAY LOCK-UP FOLLOWING THE CORPORATION'S INITIAL PUBLIC
OFFERING. A COPY OF THE LOCK-UP IS ON FILE AT THE PRINCIPAL
OFFICE OF THE CORPORATION.
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
Purchaser understands that transfer of the Shares may be restricted by
Section 260.141.11 of the Rules of the California Corporations Commissioner, a
copy of which is attached to Exhibit B, the Investment Representation Statement.
(b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to ensure
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instruc-
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<PAGE>
tions to its transfer agent, if any, and that, if the Company transfers its
own securities, it may make appropriate notations to the same effect in its
own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required (i) to
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
IX. ADJUSTMENT FOR STOCK SPLIT. All references to the number of Shares
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
X. TAX CONSEQUENCES. The Purchaser has reviewed with the Purchaser's own
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. The Purchaser
is relying solely on such advisors and not on any statements or representations
of the Company or any of its agents. The Purchaser understands that the
Purchaser (and not the Company) shall be responsible for the Purchaser's own tax
liability that may arise as a result of this investment or the transactions
contemplated by this Agreement. The Purchaser understands that Section 83 of
the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary
income the difference between the purchase price for the Shares and the Fair
Market Value of the Shares as of the date any restrictions on the Shares lapse.
In this context, "restriction" includes the right of the Company to buy back the
Shares pursuant to its repurchase option. The Purchaser understands that the
Purchaser may elect to be taxed at the time the Shares are purchased rather than
when and as the Company's repurchase option expires by filing an election under
Section 83(b) of the Code with the I.R.S. within thirty (30) days from the date
of purchase. The form for making this election is attached as Exhibit A-5
hereto.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER
SECTION 83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES
TO MAKE THIS FILING ON THE PURCHASER'S BEHALF.
XI. LOCKUP AGREEMENT. In consideration for the sale of the Shares by the
Company, the Purchaser agrees that in connection with the first registration of
the Company's securities whether for its own account or otherwise, not to sell,
make any short sale of, loan, grant any option for the purchase of, grant an
interest in, or otherwise dispose of any Shares or any other securities of the
Company (other than those included in the registration, if any) without the
prior written consent of the Company or underwriters managing the offering, as
the case may be, for such period of time (not to exceed 180 days or such shorter
time as the officers and directors have agreed to) from the date of the initial
public offering, pursuant to an effective registration statement, as the Company
or the underwriters may specify; provided, however, that such Purchaser shall be
relieved of its obligations
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under this provision unless all executive officers, directors and five
percent (5%) or more shareholders of the Company enter into similar
agreements.
XII. GENERAL PROVISIONS.
(a) This Agreement shall be governed by the laws of the State of
California. This Agreement, subject to the terms and conditions of the Plan,
the Incentive Stock Option Agreement and the Notice of Grant, represents the
entire agreement between the parties with respect to the purchase of Common
Stock by the Purchaser. Subject to Section 13(c) of the Plan, in the event of a
conflict between the terms and conditions of the Plan and the terms and
conditions of this Agreement, the terms and conditions of the Plan shall
prevail. Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Agreement.
(b) Any notice, demand or request required or permitted to be given
by either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or
deposited in the U.S. mail, First Class with postage prepaid, and addressed to
the parties at the addresses of the parties set forth at the end of this
Agreement or such other address as a party may request by notifying the other in
writing.
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party not sending the notice.
(c) The rights and benefits of the Company under this Agreement shall
be transferable to any one or more persons or entities, and all covenants and
agreements hereunder shall inure to the benefit of, and be enforceable by the
Company's successors and assigns. The rights and obligations of the Purchaser
under this Agreement may only be assigned with the prior written consent of the
Company.
(d) Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, nor prevent that party from thereafter enforcing each
and every other provision of this Agreement. The rights granted both parties
herein are cumulative and shall not constitute a waiver of either party's right
to assert all other legal remedies available to it under the circumstances.
(e) The Purchaser agrees upon request to execute any further
documents or instruments necessary or desirable to carry out the purposes or
intent of this Agreement.
(f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE RELEASE OF SHARES FROM
THE REPURCHASE OPTION OF THE COMPANY PURSUANT TO SECTION IV HEREOF IS EARNED
ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE
COMPANY (NOT THROUGH THE ACT OF BEING HIRED OR PURCHASING SHARES HEREUNDER).
PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS
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<PAGE>
CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT
CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN
EMPLOYEE OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND
SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE PURCHASER'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH
OR WITHOUT CAUSE.
By Purchaser's signature below, Purchaser represents that he or she is
familiar with the terms and provisions of the Plan, the Incentive Stock Option
Agreement and hereby accepts this Agreement subject to all of the terms and
provisions thereof. Purchaser has reviewed the Plan, the Incentive Stock Option
Agreement and this Agreement in their entirety, has had an opportunity to obtain
the advice of counsel prior to executing this Agreement and fully understands
all provisions of this Agreement. Purchaser agrees to accept as binding,
conclusive and final all decisions or interpretations of the Administrator upon
any questions arising under the Plan, the Incentive Stock Option Agreement or
this Agreement. Purchaser further agrees to notify the Company upon any change
in the residence indicated in the Notice of Grant.
PURCHASER: CELLNET DATA SYSTEMS, INC.
/s/DAVID L. PERRY By: /s/PAUL G. MANCA
- ---------------------------- --------------------------------------
Signature
David L. Perry Title: Vice President, Chief
- ---------------------------- Financial Officer
Print Name
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<PAGE>
EXHIBIT A-2
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign
and transfer unto _________________________________________________________
(__________) shares of the Common Stock of CellNet Data Systems, Inc.
standing in my name of the books of said corporation represented by
Certificate No. _____ herewith and do hereby irrevocably constitute and
appoint ____________________________________________ to transfer the said
stock on the books of the within named corporation with full power of
substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between________________________ and the undersigned
dated June 29, 1995.
Dated: _______________, 19__
Signature: /s/DAVID L. PERRY
---------------------------------------
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>
EXHIBIT A-3
JOINT ESCROW INSTRUCTIONS
June 30, 1995
David L. Perry, Esq.
Corporate Secretary
CellNet Data Systems, Inc.
125 Shoreway Road
San Carlos, CA 94070
Dear Mr. Perry:
As Escrow Agent for both CellNet Data Systems, Inc., a California
corporation (the "Company"), and the undersigned purchaser of stock of the
Company (the "Purchaser"), you are hereby authorized and directed to hold the
documents delivered to you pursuant to the terms of that certain Restricted
Stock Purchase Agreement ("Agreement") between the Company and the undersigned,
in accordance with the following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of stock to
be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's repurchase option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a shareholder of the Company while the
stock is held by you.
<PAGE>
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option.
Within ninety (90) days after cessation of Purchaser's continuous employment by
or services to the Company, or any parent or subsidiary of the Company, you will
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's repurchase
option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in
good faith, and any act done or omitted by you pursuant to the advice of your
own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree, you shall
not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
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<PAGE>
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be Secretary of the Company or if you shall resign by written
notice to each party. In the event of any such termination, the new Secretary
of this Company shall be automatically appointed the successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
(10) days' advance written notice to each of the other parties hereto.
COMPANY: CellNet Data Systems, Inc.
125 Shoreway Road
San Carlos, CA 94070
PURCHASER: David L. Perry
1901 California Street #3
San Francisco, CA 94109
ESCROW AGENT: Corporate Secretary
CellNet Data Systems, Inc.
125 Shoreway Road
San Carlos, CA 94070
16. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
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<PAGE>
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the laws of the State of California.
Very truly yours,
CELLNET DATA SYSTEMS, INC.
By: /s/PAUL G. MANCA
--------------------------------------------------
Title: Vice President, Chief Financial Officer
-----------------------------------------------
PURCHASER:
/s/DAVID L. PERRY
------------------------------------------------------
(Signature)
David L. Perry
------------------------------------------------------
(Typed or Printed Name)
ESCROW AGENT:
/s/DAVID L. PERRY
------------------------------------------------------
Corporate Secretary
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<PAGE>
EXHIBIT A-4
CONSENT OF SPOUSE
I, ____________________, spouse of ___________________, have read and
approve the foregoing Agreement. In consideration of granting of the right to
my spouse to purchase shares of CellNet Data Systems, Inc., as set forth in the
Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the
exercise of any rights under the Agreement and agree to be bound by the
provisions of the Agreement insofar as I may have any rights in said Agreement
or any shares issued pursuant thereto under the community property laws or
similar laws relating to marital property in effect in the state of our
residence as of the date of the signing of the foregoing Agreement.
Dated: _______________, 19__
______________________________
<PAGE>
EXHIBIT A-5
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal
Tax Code, to include in taxpayer's gross income for the current taxable year,
the amount of any compensation taxable to taxpayer in connection with his
receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER: David L. Perry SPOUSE:
ADDRESS: 1901 California St, #3, San Francisco, CA 94109
IDENTIFICATION NO.: TAXPAYER: ###-##-#### SPOUSE:
TAXABLE YEAR: 1995
2. The property with respect to which the election is made is described as
follows: shares (the "Shares") of the Common Stock of CellNet Data Systems,
Inc. (the "Company").
3. The date on which the property was transferred is: June 30, 1995
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, on certain
events. This right lapses with regard to a portion of the Shares as
follows:
2,000 shares August 8, 1995; 1,000 shares every 3 months thereafter until
20,000 shares are vested.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is:
$20,000.00
6. The amount (if any) paid for such property is:
$20,000.00
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
THE UNDERSIGNED UNDERSTANDS THAT THE FOREGOING ELECTION MAY NOT BE REVOKED
EXCEPT WITH THE CONSENT OF THE COMMISSIONER.
Dated: June 30, 1995 /s/DAVID L. PERRY
----------------------------------
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: N/A
----------------------------------
Spouse of Taxpayer
<PAGE>
ATTACHMENT 1
STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE
Title 10. Investment - Chapter 3. Commissioner of Corporations
260.141.11: RESTRICTION ON TRANSFER. (a) The issuer of any security upon
which a restriction on transfer has been imposed pursuant to Sections 260.102.6,
260.141.10 or 260.534 shall cause a copy of this section to be delivered to each
issuee or transferee of such security at the time the certificate evidencing the
security is delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of
the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or
custodian for the account of the transferee or the transferee's ancestors,
descendants or spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign state, territory
or country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign state,
territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the security for which
the Commissioner's written consent is obtained or under this rule not
required;
(10) by way of a sale qualified under Sections 25111, 25112, 25113 or
25121 of the Code, of the securities to be transferred, provided that no
order under Section 25140 or subdivision (a) of Section 25143 is in effect
with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
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<PAGE>
(12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code, provided that no order under Section 25140 or
subdivision (a) of Section 25143 is in effect with respect to such
qualification;
(13) between residents of foreign states, territories or countries who
are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or
to the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or
by the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the
sale that transfer of the securities is restricted under this rule, (ii)
delivers to each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of
Section 25110 of the Code but exempt from that qualification requirement by
subdivision (f) of Section 25102; provided that any such transfer is on the
condition that any certificate evidencing the security issued to such
transferee shall contain the legend required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR
ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR,
WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS
OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S
RULES."
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<PAGE>
CELLNET DATA SYSTEMS, INC.
1994 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
David L. Perry
1901 California Street, #3
San Francisco, CA 94109
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number 000844
Date of Grant 02/08/95
Vesting Commencement Date 02/08/95
Exercise Price per Share $1.0000
Total Number of Shares Granted 20,000
Type of Option: X Incentive Stock Option
----
Nonstatutory Stock Option
----
Term/Expiration Date: 02/08/05
VESTING SCHEDULE:
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
One-tenth (1/10th) of the Shares subject to the Option shall vest six (6)
months after the Vesting Commencement Date, and one-twentieth (1/20th) of the
Shares shall vest every three (3) months thereafter, such that all shares shall
be vested five (5) years from the Vesting Commencement Date.
<PAGE>
TERMINATION PERIOD:
This Option may be exercised for thirty (30) days after termination of your
employment or consulting relationship, or such longer period as may be
applicable upon death or disability of Optionee as provided in the Plan. In the
event of the Optionee's change in status from Employee to Consultant or
Consultant to Employee, this Option Agreement shall remain in effect. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
II. AGREEMENT
1. GRANT OF OPTION. CellNet Data Systems, Inc., a California corporation
(the "Company"), hereby grants to the Optionee named in the Notice of Grant (the
"Optionee"), an option (the "Option") to purchase the total number of shares of
Common Stock (the "Shares") set forth in the Notice of Grant, at the exercise
price per share set forth in the Notice of Grant (the "Exercise Price") subject
to the terms, definitions and provisions of the 1994 Stock Plan (the "Plan")
adopted by the Company, which is incorporated herein by reference. Unless
otherwise defined herein, the terms defined in the Plan shall have the same
defined meanings in this Option Agreement.
If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option as defined in
Section 422 of the Code. Nevertheless, to the extent that it exceeds the
$100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
2. EXERCISE OF OPTION.
(a) RIGHT TO EXERCISE. This Option shall be exercisable during its
term in accordance with the Vesting Schedule set out in the Notice of Grant and
with the applicable provisions of the Plan and this Option Agreement. In the
event of Optionee's death, disability or other termination of the employment or
consulting relationship, this Option shall be exercisable in accordance with the
applicable provisions of the Plan and this Option Agreement.
(b) METHOD OF EXERCISE. This Option shall be exercisable by written
notice (in the form attached as Exhibit A) which shall state the election to
exercise the Option, the number of Shares in respect of which the Option is
being exercised, and such other representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the Exercise Price. This Option shall be deemed to be
exercised upon receipt by the Company of such written notice accompanied by the
Exercise Price.
No Shares will be issued pursuant to the exercise of an Option unless
such issuance and such exercise shall comply with all relevant provisions of
law and the requirements of any stock exchange upon which the Shares may then
be listed. Assuming such compliance, for income tax purposes the
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<PAGE>
Shares shall be considered transferred to the Optionee on the date on which
the Option is exercised with respect to such Shares.
3. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, if required by the Company, concurrently with the exercise of
all or any portion of this Option, deliver to the Company his or her Investment
Representation Statement in the form attached hereto as Exhibit B, and shall
read the applicable rules of the Commissioner of Corporations attached to such
Investment Representation Statement.
4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of
the following, or a combination thereof, at the election of the Optionee:
(a) cash;
(b) check;
(c) surrender of other shares of Common Stock of the Company which
(A) in the case of Shares acquired pursuant to the exercise of a Company option,
have been owned by the Optionee for more than six (6) months on the date of
surrender, and (B) have a Fair Market Value on the date of surrender equal to
the Exercise Price of the Shares as to which the Option is being exercised; or
(d) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the Exercise Price.
5. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board.
6. TERMINATION OF RELATIONSHIP. In the event an Optionee's Continuous
Status as an Employee or Consultant terminates, Optionee may, to the extent
otherwise so entitled at the date of such termination (the "Termination Date"),
exercise this Option during the Termination Period set out in the Notice of
Grant. To the extent that Optionee was not entitled to exercise this Option at
the date of such termination, or if Optionee does not exercise this Option
within the time specified herein, the Option shall terminate.
7. DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 6
above, in the event of termination of an Optionee's consulting relationship or
Continuous Status as an Employee as
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<PAGE>
a result of his or her disability, Optionee may, but only within twelve (12)
months from the date of such termination (and in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise
it at the date of such termination; provided, however, that if such
disability is not a "disability" as such term is defined in Section 22(e)(3)
of the Code, in the case of an Incentive Stock Option such Incentive Stock
Option shall cease to be treated as an Incentive Stock Plan and shall be
treated for tax purposes as a Nonstatutory Stock Option on the day three
months and one day following such termination. To the extent that Optionee
was not entitled to exercise the Option at the date of termination, or if
Optionee does not exercise such Option to the extent so entitled within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
8. DEATH OF OPTIONEE. In the event of termination of Optionee's
Continuous Status as an Employee or Consultant as a result of the death of
Optionee, the Option may be exercised at any time within twelve (12) months
following the date of death (but in no event later than the date of expiration
of the term of this option as set forth in Section 10 below), by Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent the Optionee could exercise the Option at
the date of death.
9. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
10. TERM OF OPTION. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option. The limitations set out
in Section 7 of the Plan regarding Options designated as Incentive Stock Options
and Options granted to more than ten percent (10%) shareholders shall apply to
this Option.
11. TAX CONSEQUENCES. Set forth below is a brief summary as of the date
of this Option of some of the federal and California tax consequences of
exercise of this Option and disposition of the Shares. This summary is
necessarily incomplete, and the tax laws and regulations are subject to change.
Optionee should consult a tax adviser before exercising this option or disposing
of the Shares.
(a) EXERCISE OF ISO. If this Option qualifies as an ISO, there will
be no regular federal income tax liability or California income tax liability
upon the exercise of the Option, although the excess, if any, of the Fair Market
Value of the Shares on the date of exercise over the Exercise Price will be
treated as an adjustment to the alternative minimum tax for federal tax purposes
and may subject the Optionee to the alternative minimum tax in the year of
exercise.
(b) EXERCISE OF ISO FOLLOWING DISABILITY. If the Optionee's
Continuous Status as an Employee or Consultant terminates as a result of
disability that is not total and permanent disability as defined in
Section 22(e)(3) of the Code, to the extent permitted on the date of
termination, the
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<PAGE>
Optionee must exercise an ISO within 90 days of such termination for the ISO
to be qualified as an ISO.
(c) EXERCISE OF NONSTATUTORY STOCK OPTION. There may be a regular
federal income tax liability and California income tax liability upon the
exercise of a Nonstatutory Stock Option. The Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates) equal to the
excess, if any, of the Fair Market Value of the Shares on the date of exercise
over the Exercise Price. If Optionee is an Employee or a former Employee, the
Company will be required to withhold from Optionee's compensation or collect
from Optionee and pay to the applicable taxing authorities an amount in cash
equal to a percentage of this compensation income at the time of exercise, and
may refuse to honor the exercise and refuse to deliver Shares if such
withholding amounts are not delivered at the time of exercise.
(d) DISPOSITION OF SHARES. In the case of an NSO, if Shares are held
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal and California income tax
purposes. In the case of an ISO, if Shares transferred pursuant to the Option
are held for at least one year after exercise and are disposed of at least two
years after the Date of Grant, any gain realized on disposition of the Shares
will also be treated as long-term capital gain for federal and California income
tax purposes. If Shares purchased under an ISO are disposed of within such one-
year period or within two years after the Date of Grant, any gain realized on
such disposition will be treated as compensation income (taxable at ordinary
income rates) to the extent of the difference between the Exercise Price and the
lesser of (1) the Fair Market Value of the Shares on the date of exercise, or
(2) the sale price of the Shares.
(e) NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
12. SHAREHOLDERS' AGREEMENT. In consideration for the grant of the
Option, the Optionee agrees that all Shares acquired upon exercise of the Option
shall be bound by the restrictions in the Shareholders' Agreement dated
August 15, 1994, as amended (the "Shareholders' Agreement"), or by any successor
to the Shareholders' Agreement.
13. LOCKUP AGREEMENT. In consideration for the grant of the Option, the
Optionee agrees that in connection with the first registration of the Company's
securities whether for its own account or otherwise, not to sell, make any short
sale of, loan, grant any option for the purchase of, grant an interest in, or
otherwise dispose of any Shares or any other securities of the Company (other
than those included in the registration, if any) without the prior written
consent of the Company or underwriters managing the offering, as the case may
be, for such period of time (not to exceed 180 days or such shorter time as the
officers and directors have agreed to) from the date of the initial public
offering, pursuant to an effective registration statement, as the Company or the
underwriters may
-5-
<PAGE>
specify; provided, however, that such Optionee shall be relieved of its
obligations under this provision unless all executive officers, directors and
five percent (5%) or more shareholders of the Company enter into similar
agreements.
14. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by California law except for that body of
law pertaining to conflict of laws.
CELLNET DATA SYSTEMS, INC.
a California corporation
By: /s/JOHN M. SEIDL
-------------------------------------
Optionee acknowledges and agrees at the vesting of shares pursuant to the
option hereof is earned only by continuing consultancy or employment at the will
of the company (not through the act of being hired, being granted this option or
acquiring shares hereunder). Optionee further acknowledges and agrees that
nothing in this agreement, nor in the company's stock option plan which is
incorporated herein by reference, shall confer upon optionee any right with
respect to continuation of employment or consultancy by the company, nor shall
it interfere in any way with optionee's right or the company's right to
terminate optionee's employment or consultancy at any time, with or without
cause.
Optionee acknowledges receipt of a copy of the Plan and represents that he
is familiar with the terms and provisions thereof, and hereby accepts this
Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
Dated: /s/DAVID L. PERRY
------------------------- ------------------------------------------
Optionee
Residence Address:
1901 California Street, #3
San Francisco, CA 94109
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<PAGE>
CELLNET DATA SYSTEMS, INC.
1994 STOCK PLAN
NOTICE OF GRANT OF STOCK PURCHASE RIGHT
Unless otherwise defined herein, the terms defined in the 1994 Stock Plan
(the "Plan") shall have the same defined meanings in this Notice of Grant.
Paul G. Manca
6654 Pineneedle Dr.
Oakland, CA 94611
You have been granted the right to purchase Common Stock of the Company
pursuant to an Incentive Stock Option Agreement or Agreements which the Company
has amended to accelerate your ability to exercise, subject to the Company's
repurchase option and your ongoing Continuous Status as an Employee or
Consultant (as described in the Plan and the attached Restricted Stock Purchase
Agreement), as follows:
Prior Date of Grant May 18, 1995
Price Per Share $1.00
Total Number of Shares
Subject to Option
which are subject to
Accelerated Exercise 90,000
By your signature and the signature of the Company's representative below,
you and the Company agree that this Stock Purchase Right is granted under and
governed by the terms and conditions of the Plan, the Incentive Stock Option
Agreement (the "Option Agreement") and the Restricted Stock Purchase Agreement
attached hereto as Exhibit A-1, each of which is hereby incorporated herein by
reference. You further agree to execute the Restricted Stock Purchase Agreement
as a condition to purchasing any shares under this Stock Purchase Right.
GRANTEE: CELLNET DATA SYSTEMS, INC.
/s/PAUL G. MANCA By: /s/DAVID L. PERRY
- ---------------------------- --------------------------------------
Signature
Paul G. Manca Title: Vice President, General
- ---------------------------- Counsel and Secretary
Print Name
<PAGE>
EXHIBIT A-1
CELLNET DATA SYSTEMS, INC.
1994 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Restricted Stock Purchase Agreement.
THIS AGREEMENT is made as of July 31, 1995, at San Carlos, California,
between CellNet Data Systems, Inc., a California corporation (the "Company"),
and Paul G. Manca (the "Purchaser").
WHEREAS the Purchaser named in the Notice of Grant, (the "Purchaser") is an
employee or consultant of the Company, and the Purchaser's continued
participation is considered by the Company to be important for the Company's
continued growth; and
WHEREAS in order to give the Purchaser an opportunity to acquire an equity
interest in the Company as an incentive for the Purchaser to participate in the
affairs of the Company, the Administrator has granted to the Purchaser stock
purchase rights subject to the terms and conditions of the Plan and the Notice
of Grant, which are incorporated herein by reference, and pursuant to this
Restricted Stock Purchase Agreement (the "Agreement").
THEREFORE, the parties agree as follows:
I. SALE OF STOCK. The Company hereby agrees to sell to the Purchaser and
the Purchaser hereby agrees to purchase shares of the Company's Common Stock
(the "Shares"), at the per share purchase price and as otherwise described in
the Notice of Grant.
II. PAYMENT OF PURCHASE PRICE. The purchase price for the Shares may be
paid by delivery to the Company at the time of execution of this Agreement of
cash, a check or promissory note in the form of Exhibit D to the Option
Agreement.
III. REPURCHASE OPTION.
(a) In the event the Purchaser's Continuous Status as an Employee or
Consultant terminates for any or no reason (including death or disability)
before all of the Shares are released from the Company's repurchase option (see
Section IV), but not in the event of Purchaser's change in status from Employee
to Consultant or Consultant to Employee, the Company shall, upon the date of
such termination (as reasonably fixed and determined by the Company) have an
irrevocable, exclusive option for a period of ninety (90) days from such date to
repurchase up to that number of shares which constitute the Unreleased Shares
(as defined in Section IV) at the original purchase price per share (the
"Repurchase Price"). Said option shall be exercised by the Company by
delivering written notice to the Purchaser or the Purchaser's executor (with a
copy to the Escrow Holder (as defined in Section VI)) and, at the Company's
option, (i) by delivering to the Purchaser or the Purchaser's
<PAGE>
executor a check in the amount of the aggregate Repurchase Price, or (ii) by
the Company canceling an amount of the Purchaser's indebtedness to the
Company equal to the aggregate Repurchase Price, or (iii) by a combination of
(i) and (ii) so that the combined payment and cancellation of indebtedness
equals such aggregate Repurchase Price. Upon delivery of such notice and the
payment of the aggregate Repurchase Price in any of the ways described above,
the Company shall become the legal and beneficial owner of the Shares being
repurchased and all rights and interests therein or relating thereto, and the
Company shall have the right to retain and transfer to its own name the
number of Shares being repurchased by the Company.
(b) Whenever the Company shall have the right to repurchase Shares
hereunder, the Company may designate and assign one or more employees, officers,
directors or shareholders of the Company or other persons or organizations to
exercise all or a part of the Company's purchase rights under this Agreement and
purchase all or a part of such Shares.
IV. RELEASE OF SHARES FROM REPURCHASE OPTION.
(a) 9,000 of the Shares beginning November 18, 1995 shall be
immediately fully vested and not subject to the Company's repurchase option and
4,500 of the Shares shall be released every three months thereafter, provided
that the Purchaser's Continuous Status as an Employee or Consultant has not
terminated prior to the date of any such release.
(b) Any of the Shares which have not yet been released from the
Company's repurchase option are referred to herein as "Unreleased Shares."
(c) The Shares which have been released from the Company's repurchase
option are referred to herein as the "Released Shares." The Released Shares
shall be delivered to the Purchaser at the Purchaser's request (see Section VI).
V. RESTRICTION ON TRANSFER. Except for the escrow described in
Section VI or transfer of the Shares to the Company or its assignees
contemplated by this Agreement, none of the Shares or any beneficial interest
therein shall be transferred, encumbered or otherwise disposed of in any way
until the release of such Shares from the Company's repurchase option in
accordance with the provisions of this Agreement, other than by will or the laws
of descent and distribution.
VI. ESCROW OF SHARES.
(a) To ensure the availability for delivery of the Purchaser's
Unreleased Shares upon repurchase by the Company pursuant to the Company's
repurchase option under Section III above, the Purchaser shall, upon execution
of this Agreement, deliver and deposit with an escrow holder designated by the
Company (the "Escrow Holder") the share certificates representing the Unreleased
Shares, together with the stock assignment duly endorsed in blank, attached
hereto as Exhibit A-2. The Unreleased Shares and stock assignment shall be held
by the Escrow Holder, pursuant to the Joint Escrow Instructions of the Company
and Purchaser attached as Exhibit A-3
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<PAGE>
hereto, until such time as the Company's repurchase option expires. As a
further condition to the Company's obligations under this Agreement, the
spouse of Purchaser, if any, shall execute and deliver to the Company the
Consent of Spouse attached hereto as Exhibit A-4.
(b) The Escrow Holder shall not be liable for any act it may do or
omit to do with respect to holding the Unreleased Shares in escrow and while
acting in good faith and in the exercise of its judgment.
(c) If the Company or any assignee exercises its repurchase option
hereunder, the Escrow Holder, upon receipt of written notice of such option
exercise from the proposed transferee, shall take all steps necessary to
accomplish such transfer.
(d) When the repurchase option has been exercised or expires
unexercised or a portion of the Shares has been released from such repurchase
option, upon Purchaser's request the Escrow Holder shall promptly cause a new
certificate to be issued for such released Shares and shall deliver such
certificate to the Company or the Purchaser, as the case may be.
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a shareholder with respect to such Shares while they are held in
escrow, including without limitation, the right to vote the Shares and receive
any cash dividends declared thereon. If, from time to time during the term of
the Company's repurchase option, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of the Purchaser's ownership of the Shares shall be immediately subject
to this escrow, deposited with the Escrow Holder and included thereafter as
"Shares" for purposes of this Agreement and the Company's repurchase option.
VII. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Released Shares that are
held by Purchaser or any transferee (either being sometimes referred to herein
as the "Holder") may be sold or otherwise transferred (including transfer by
gift or operation of law), the Company or its assignee(s) shall have a right of
first refusal to purchase such shares (the "Offered Shares") on the terms and
conditions set forth in this Section (the "Right of First Refusal").
(a) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Offered Shares; (ii) the
name of each proposed purchaser or other transferee ("Proposed Transferee");
(iii) the number of Offered Shares to be transferred to each Proposed
Transferee; and (iv) the bona fide cash price or other consideration for which
the Holder proposes to transfer the Offered Shares (the "Offered Price"), and
the Holder shall offer the Offered Shares at the Offered Price to the Company or
its assignee(s).
(b) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder,
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<PAGE>
elect to purchase all, but not less than all, of the Offered Shares proposed
to be transferred to any one or more of the Proposed Transferees, at the
purchase price determined in accordance with subsection (c) below.
(c) PURCHASE PRICE. The purchase price ("Purchase Price") for the
Offered Shares purchased by the Company or its assignee(s) under this Section
shall be the Offered Price. If the Offered Price includes consideration other
than cash, the cash equivalent value of the non-cash consideration shall be
determined by the Board of Directors of the Company in good faith.
(d) PAYMENT. Payment of the Purchase Price shall be made, at the
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within thirty (30) days after receipt of the Notice or in
the manner and at the times set forth in the Notice.
(e) HOLDER'S RIGHT TO TRANSFER. If all of the Offered Shares
proposed in the Notice to be transferred to a given Proposed Transferee are not
purchased by the Company and/or its assignee(s) as provided in this Section,
then the Holder may sell or otherwise transfer such Offered Shares to that
Proposed Transferee at the Offered Price or at a higher price, provided that
such sale or other transfer is consummated within one hundred twenty (120) days
after the date of the Notice and provided further that any such sale or other
transfer is effected in accordance with any applicable securities laws and the
Proposed Transferee agrees in writing that the provisions of this Section shall
continue to apply to the Offered Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Offered Shares held by the Holder may be sold or
otherwise transferred.
(f) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the contrary
contained in this Section notwithstanding, the transfer of any or all of the
Offered Shares during the Purchaser's lifetime or on the Purchaser's death by
will or intestacy to the Purchaser's immediate family or a trust for the benefit
of the Purchaser's immediate family shall be exempt from the provisions of this
Section, provided that the Purchaser notifies the Company in writing within
thirty (30) days of said transfer. "Immediate Family" as used herein shall mean
spouse, lineal descendant or antecedent, father, mother, brother or sister. In
such case, the transferee or other recipient shall receive and hold the Offered
Shares so transferred subject to the provisions of this Agreement, including but
not limited to this Section and Section III, and there shall be no further
transfer of such Offered Shares except in accordance with the terms of this
Section.
(g) TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First
Refusal shall terminate as to any Offered Shares at the time of the first sale
of Common Stock of the Company to the general public pursuant to a registration
statement filed with and declared effective by the Securities and Exchange
Commission under the Securities Act of 1933 (the "1933 Act").
-4-
<PAGE>
VIII. LEGENDS.
(a) Purchaser understands and agrees that the Company shall cause the
legends set forth below or legends substantially equivalent thereto, to be
placed upon any certificate(s) evidencing ownership of the Shares together with
any other legends that may be required by the Company or by applicable state or
federal securities laws:
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 EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN AGREEMENTS, COVENANTS AND RESTRICTIONS IN REGARD TO
THE TRANSFER OF SUCH SHARES, AS PROVIDED IN THE PROVISIONS
OF A SHAREHOLDERS' AGREEMENT, A COPY OF WHICH IS ON FILE IN
THE OFFICE OF THE SECRETARY OF THE CORPORATION.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
180 DAY LOCK-UP FOLLOWING THE CORPORATION'S INITIAL PUBLIC
OFFERING. A COPY OF THE LOCK-UP IS ON FILE AT THE PRINCIPAL
OFFICE OF THE CORPORATION.
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
Purchaser understands that transfer of the Shares may be restricted by
Section 260.141.11 of the Rules of the California Corporations Commissioner, a
copy of which is attached to Exhibit B, the Investment Representation Statement.
(b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to ensure
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instruc-
-5-
<PAGE>
tions to its transfer agent, if any, and that, if the Company transfers its
own securities, it may make appropriate notations to the same effect in its
own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required (i) to
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
IX. ADJUSTMENT FOR STOCK SPLIT. All references to the number of Shares
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
X. TAX CONSEQUENCES. The Purchaser has reviewed with the Purchaser's own
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. The Purchaser
is relying solely on such advisors and not on any statements or representations
of the Company or any of its agents. The Purchaser understands that the
Purchaser (and not the Company) shall be responsible for the Purchaser's own tax
liability that may arise as a result of this investment or the transactions
contemplated by this Agreement. The Purchaser understands that Section 83 of
the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary
income the difference between the purchase price for the Shares and the Fair
Market Value of the Shares as of the date any restrictions on the Shares lapse.
In this context, "restriction" includes the right of the Company to buy back the
Shares pursuant to its repurchase option. The Purchaser understands that the
Purchaser may elect to be taxed at the time the Shares are purchased rather than
when and as the Company's repurchase option expires by filing an election under
Section 83(b) of the Code with the I.R.S. within thirty (30) days from the date
of purchase. The form for making this election is attached as Exhibit A-5
hereto.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER
SECTION 83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES
TO MAKE THIS FILING ON THE PURCHASER'S BEHALF.
XI. LOCKUP AGREEMENT. In consideration for the sale of the Shares by the
Company, the Purchaser agrees that in connection with the first registration of
the Company's securities whether for its own account or otherwise, not to sell,
make any short sale of, loan, grant any option for the purchase of, grant an
interest in, or otherwise dispose of any Shares or any other securities of the
Company (other than those included in the registration, if any) without the
prior written consent of the Company or underwriters managing the offering, as
the case may be, for such period of time (not to exceed 180 days or such shorter
time as the officers and directors have agreed to) from the date of the initial
public offering, pursuant to an effective registration statement, as the Company
or the underwriters may specify; provided, however, that such Purchaser shall be
relieved of its obligations
-6-
<PAGE>
under this provision unless all executive officers, directors and five
percent (5%) or more shareholders of the Company enter into similar
agreements.
XII. GENERAL PROVISIONS.
(a) This Agreement shall be governed by the laws of the State of
California. This Agreement, subject to the terms and conditions of the Plan,
the Incentive Stock Option Agreement and the Notice of Grant, represents the
entire agreement between the parties with respect to the purchase of Common
Stock by the Purchaser. Subject to Section 13(c) of the Plan, in the event of a
conflict between the terms and conditions of the Plan and the terms and
conditions of this Agreement, the terms and conditions of the Plan shall
prevail. Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Agreement.
(b) Any notice, demand or request required or permitted to be given
by either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or
deposited in the U.S. mail, First Class with postage prepaid, and addressed to
the parties at the addresses of the parties set forth at the end of this
Agreement or such other address as a party may request by notifying the other in
writing.
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party not sending the notice.
(c) The rights and benefits of the Company under this Agreement shall
be transferable to any one or more persons or entities, and all covenants and
agreements hereunder shall inure to the benefit of, and be enforceable by the
Company's successors and assigns. The rights and obligations of the Purchaser
under this Agreement may only be assigned with the prior written consent of the
Company.
(d) Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, nor prevent that party from thereafter enforcing each
and every other provision of this Agreement. The rights granted both parties
herein are cumulative and shall not constitute a waiver of either party's right
to assert all other legal remedies available to it under the circumstances.
(e) The Purchaser agrees upon request to execute any further
documents or instruments necessary or desirable to carry out the purposes or
intent of this Agreement.
(f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE RELEASE OF SHARES FROM
THE REPURCHASE OPTION OF THE COMPANY PURSUANT TO SECTION IV HEREOF IS EARNED
ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE
COMPANY (NOT THROUGH THE ACT OF BEING HIRED OR PURCHASING SHARES HEREUNDER).
PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS
-7-
<PAGE>
CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT
CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN
EMPLOYEE OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND
SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE PURCHASER'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH
OR WITHOUT CAUSE.
By Purchaser's signature below, Purchaser represents that he or she is
familiar with the terms and provisions of the Plan, the Incentive Stock Option
Agreement and hereby accepts this Agreement subject to all of the terms and
provisions thereof. Purchaser has reviewed the Plan, the Incentive Stock Option
Agreement and this Agreement in their entirety, has had an opportunity to obtain
the advice of counsel prior to executing this Agreement and fully understands
all provisions of this Agreement. Purchaser agrees to accept as binding,
conclusive and final all decisions or interpretations of the Administrator upon
any questions arising under the Plan, the Incentive Stock Option Agreement or
this Agreement. Purchaser further agrees to notify the Company upon any change
in the residence indicated in the Notice of Grant.
PURCHASER: CELLNET DATA SYSTEMS, INC.
/s/PAUL G. MANCA By: /s/DAVID L. PERRY
- ---------------------------- --------------------------------------
Signature
Paul G. Manca Title: Vice President, General
- ---------------------------- Counsel and Secretary
Print Name
-8-
<PAGE>
EXHIBIT A-2
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto ___________________________________________________ (__________)
shares of the Common Stock of CellNet Data Systems, Inc. standing in my name
of the books of said corporation represented by Certificate No. _____
herewith and do hereby irrevocably constitute and appoint ___________________
_________________________ to transfer the said stock on the books of the
within named corporation with full power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between________________________ and the undersigned
dated July 31, 1995.
Dated: _______________, 19___
Signature: /s/PAUL G. MANCA
----------------------------------------
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>
EXHIBIT A-3
JOINT ESCROW INSTRUCTIONS
July 31, 1995
David L. Perry, Esq.
Corporate Secretary
CellNet Data Systems, Inc.
125 Shoreway Road
San Carlos, CA 94070
Dear Mr. Perry:
As Escrow Agent for both CellNet Data Systems, Inc., a California
corporation (the "Company"), and the undersigned purchaser of stock of the
Company (the "Purchaser"), you are hereby authorized and directed to hold the
documents delivered to you pursuant to the terms of that certain Restricted
Stock Purchase Agreement ("Agreement") between the Company and the undersigned,
in accordance with the following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of stock to
be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's repurchase option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a shareholder of the Company while the
stock is held by you.
<PAGE>
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option.
Within ninety (90) days after cessation of Purchaser's continuous employment by
or services to the Company, or any parent or subsidiary of the Company, you will
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's repurchase
option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in
good faith, and any act done or omitted by you pursuant to the advice of your
own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree, you shall
not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
-2-
<PAGE>
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be Secretary of the Company or if you shall resign by written
notice to each party. In the event of any such termination, the new Secretary
of this Company shall be automatically appointed the successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
(10) days' advance written notice to each of the other parties hereto.
COMPANY: CellNet Data Systems, Inc.
125 Shoreway Road
San Carlos, CA 94070
PURCHASER: Paul G. Manca
6654 Pineneedle Dr.
Oakland, CA 94611
ESCROW AGENT: Corporate Secretary
CellNet Data Systems, Inc.
125 Shoreway Road
San Carlos, CA 94070
16. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
-3-
<PAGE>
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the laws of the State of California.
Very truly yours,
CELLNET DATA SYSTEMS, INC.
By: /s/DAVID L. PERRY
----------------------------------------------
Title: Vice President, General Counsel
-------------------------------------------
PURCHASER:
/s/PAUL G. MANCA
--------------------------------------------------
(Signature)
Paul G. Manca
--------------------------------------------------
(Typed or Printed Name)
ESCROW AGENT:
/s/DAVID L. PERRY
--------------------------------------------------
Corporate Secretary
-4-
<PAGE>
EXHIBIT A-4
CONSENT OF SPOUSE
I, Debra Manca, spouse of Paul Manca, have read and approve the
foregoing Agreement. In consideration of granting of the right to my spouse
to purchase shares of CellNet Data Systems, Inc., as set forth in the
Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to
the exercise of any rights under the Agreement and agree to be bound by the
provisions of the Agreement insofar as I may have any rights in said
Agreement or any shares issued pursuant thereto under the community property
laws or similar laws relating to marital property in effect in the state of
our residence as of the date of the signing of the foregoing Agreement.
Dated: August 1, 1995
/s/DEBRA W. MANCA
-----------------------------------------
<PAGE>
EXHIBIT A-5
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal
Tax Code, to include in taxpayer's gross income for the current taxable year,
the amount of any compensation taxable to taxpayer in connection with his
receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER: Paul G. Manca SPOUSE: Debra W. Manca
ADDRESS:: 6654 Pineneedle Dr., Oakland, CA 94611
IDENTIFICATION NO.: TAXPAYER: ###-##-#### SPOUSE: ###-##-####
TAXABLE YEAR: 1995
2. The property with respect to which the election is made is described as
follows: shares (the "Shares") of the Common Stock of CellNet Data Systems,
Inc. (the "Company").
3. The date on which the property was transferred is: August 1, 1995
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, on certain
events. This right lapses with regard to a portion of the Shares as
follows:
9,000 of the shares beginning November 18, 1995 and 4,500 of the shares
remaining each quarter thereafter
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is:
$90,000.00
6. The amount (if any) paid for such property is:
$90,000.00
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
THE UNDERSIGNED UNDERSTANDS THAT THE FOREGOING ELECTION MAY NOT BE REVOKED
EXCEPT WITH THE CONSENT OF THE COMMISSIONER.
Dated: August 1, 1995 /s/PAUL G. MANCA
------------------------------------
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: August 1, 1995 /s/DEBRA W. MANCA
------------------------------------
Spouse of Taxpayer
<PAGE>
ATTACHMENT 1
STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE
Title 10. Investment - Chapter 3. Commissioner of Corporations
260.141.11: RESTRICTION ON TRANSFER. (a) The issuer of any security upon
which a restriction on transfer has been imposed pursuant to Sections 260.102.6,
260.141.10 or 260.534 shall cause a copy of this section to be delivered to each
issuee or transferee of such security at the time the certificate evidencing the
security is delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of
the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or
custodian for the account of the transferee or the transferee's ancestors,
descendants or spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign state, territory
or country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign state,
territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the security for which
the Commissioner's written consent is obtained or under this rule not
required;
(10) by way of a sale qualified under Sections 25111, 25112, 25113 or
25121 of the Code, of the securities to be transferred, provided that no
order under Section 25140 or subdivision (a) of Section 25143 is in effect
with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
-7-
<PAGE>
(12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code, provided that no order under Section 25140 or
subdivision (a) of Section 25143 is in effect with respect to such
qualification;
(13) between residents of foreign states, territories or countries who
are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or
to the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or
by the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the
sale that transfer of the securities is restricted under this rule, (ii)
delivers to each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of
Section 25110 of the Code but exempt from that qualification requirement by
subdivision (f) of Section 25102; provided that any such transfer is on the
condition that any certificate evidencing the security issued to such
transferee shall contain the legend required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR
ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR,
WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS
OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S
RULES."
-8-
<PAGE>
PROMISSORY NOTE
$90,000.00 San Carlos, CA
July 31, 1995
FOR VALUE RECEIVED, the undersigned, Paul G. Manca, promises to pay to
CellNet Data Systems, Inc., a California Corporation (the "Company"), on order,
the principal sum of ninety thousand Dollars ($90,000), together with interest
on the unpaid principal hereof from the date hereof at the rate of six and
28/100 percent (6.28%) per annum.
Principal and interest shall be due and payable five years from the date
hereof. Should the undersigned fail to make full payment of any installment of
principal or interest for a period of 10 days or more after the due date
thereof, or in the event that the undersigned's employment with the Company is
terminated for any reason, or no reason, with or without cause, the whole unpaid
balance on this Note of principal and interest shall become immediately due at
the option of the holder of this Note. Payments of principal and interest shall
be made in lawful money of the United States of America. The undersigned may at
any time prepay all or any portion of the principal or interest owing hereunder.
This Note is subject to the terms of a Restricted Stock Purchase Agreement,
dated as of July 31, 1995. This Note is secured by a pledge of the Company's
Common Stock under the terms of a Security Agreement of even date herewith and
is subject to all the provisions thereof.
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
The holder of this Note shall have full recourse against the maker, and
shall not be required to proceed against the collateral securing this Note in
the event of default.
The undersigned understands that the two-year holding period under Rule 144
of the Securities Act of 1933 generally will not begin to run until this Note
has been paid in full.
Paul G. Manca
-----------------------------------------
Print Name
/s/PAUL G. MANCA
-----------------------------------------
Signature
<PAGE>
SECURITY AGREEMENT
This Security Agreement is made as of July 31, 1995 between CELLNET DATA
SYSTEMS, INC., a California corporation ("Pledgee"), and Paul G. Manca
("Pledgor").
RECITALS
Pursuant to Pledgor's election to purchase Shares under the Restricted
Stock Purchase Agreement dated July 31, 1995 (the "Purchase Agreement"),
between Pledgor and Pledgee under Pledgee's 1994 Stock Plan, and Pledgor's
election under the terms of the Purchase Agreement to pay for such shares
with his promissory note of even date herewith (the "Note"), Pledgor has
purchased ninety thousand (90,000) shares of Pledgee's Common Stock (the
"Shares") at a price of $1.00 per share for a total purchase price of
$90,000.00.
NOW, THEREFORE, it is agreed as follows:
1. CREATION AND DESCRIPTION OF SECURITY INTEREST. In consideration of
the loan under the Note, Pledgor, pursuant to the Commercial Code of the
State of California, hereby pledges 90,000 shares of the Common Stock of
Pledgee registered in the name of Pledgor (herein sometimes referred to as
the "Collateral") represented by certificate number ______________, duly
endorsed in blank or with an executed stock power, and herewith delivers said
certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold such
certificate subject to the terms and conditions of this Security Agreement.
The pledged stock (together with executed blank stock assignments for
use in transferring all or a portion of the pledged stock to Pledgee if, as
and when required pursuant to this Security Agreement) shall be held by the
Pledgeholder as security for the repayment of the Note, and any extensions or
renewals thereof, to be executed by Pledgor pursuant to the terms of the
Purchase Agreement, and the Pledgeholder shall not encumber or dispose of
such pledged stock except in accordance with the provisions of this Security
Agreement. The pledged stock is hereafter referred to as the "Shares".
2. PLEDGOR'S REPRESENTATIONS AND COVENANTS. To induce Pledgee to
enter into this Security Agreement, Pledgor represents and covenants to
Pledgee, its successors and assigns, as follows:
(a) PAYMENT OF INDEBTEDNESS. Pledgor will pay the principal sum
of the Note secured thereby, together with interest thereon, at the time and
in the manner provided in the Note.
(b) ENCUMBRANCES. The Shares are free of all other encumbrances,
defenses and liens, and Pledgor will not further encumber the Shares without
the prior written consent of Pledgee.
(c) MARGIN REGULATIONS. In the event that Pledgee's Common Stock
becomes margin-listed by the Federal Reserve Board subsequent to the
execution of this Security Agreement,
<PAGE>
the Pledgee is classified as a "lender" within the meaning of the regulations
under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation
G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the
Note or providing any additional collateral as may be necessary to comply
with such regulations.
3. VOTING RIGHTS. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the
terms of the Note, Pledgor shall have the right to vote all of the Shares
pledged hereunder.
4. STOCK ADJUSTMENTS. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes declared
or made in the capital structure of Pledgee, all new, substituted and
additional shares or other securities issued by reason of any such change
shall be delivered to and held by the Pledgee under the terms of this
Security Agreement in the same manner as the Shares originally pledged
hereunder. In the event of substitution of such securities, Pledgor, Pledgee
and Pledgeholder shall cooperate and execute such documents as are reasonable
so as to provide for the substitution of such Collateral and, upon such
substitution, references to "Shares" in this Security Agreement shall include
the substituted shares of capital stock of Pledgor as a result thereof.
5. WARRANTS AND RIGHTS. In the event that, during the term of this
pledge, subscription warrants or other rights or options shall be issued in
connection with the pledged Shares, such rights, warrants and options shall
be the property of Pledgor and, if exercised by Pledgor, all new stock or
other securities so acquired by Pledgor as it relates to the pledged Shares
then held by Pledgeholder shall be immediately delivered to Pledgeholder, to
be held under the terms of this Security Agreement in the same manner as the
Shares pledged.
6. DEFAULT. Pledgor shall be deemed to be in default of the Note and
of this Security Agreement in the event:
(a) Payment of principal or interest on the Note shall be
delinquent for a period of 10 days or more; or
(b) Pledgor fails to perform any of the covenants set forth in the
Purchase Agreement or contained in this Security Agreement for a period of 10
days after written notice thereof from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall
have the right to accelerate payment of the Note upon notice to Pledgor, and
Pledgee shall thereafter be entitled to pursue his remedies under the
California Commercial Code.
7. RELEASE OF COLLATERAL. Subject to any applicable contrary rules
under Regulation G, there shall be released from this pledge a portion of the
pledged Shares held by Pledgeholder hereunder upon payments of the principal
of the Note. The number of the pledged Shares which shall
-2-
<PAGE>
be released shall be that number of full Shares which bears the same
proportion to the initial number of Shares pledged hereunder as the payment
of principal bears to the initial full principal amount of the Note.
8. WITHDRAWAL OR SUBSTITUTION OF COLLATERAL. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. TERM. The within pledge of Shares shall continue until the payment
of all indebtedness secured hereby, at which time the remaining pledged stock
shall be promptly delivered to Pledgor, subject to the provisions for prior
release of a portion of the Collateral as provided in paragraph 7 above.
10. INSOLVENCY. Pledgor agrees that if a bankruptcy or insolvency
proceeding is instituted by or against him, or if a receiver is appointed for
the property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due
and payable, and Pledgee may proceed as provided in the case of default.
11. PLEDGEHOLDER LIABILITY. In the absence of willful or gross
negligence, Pledgeholder shall not be liable to any party for any of his
acts, or omissions to act, as Pledgeholder.
12. INVALIDITY OF PARTICULAR PROVISIONS. Pledgor and Pledgee agree
that the enforceability or invalidity of any provision or provisions of this
Security Agreement shall not render any other provision or provisions herein
contained unenforceable or invalid.
13. SUCCESSORS OR ASSIGNS. Pledgor and Pledgee agree that all of the
terms of this Security Agreement shall be binding on their respective
successors and assigns, and that the term "Pledgor" and the term "Pledgee" as
used herein shall be deemed to include, for all purposes, the respective
designees, successors, assigns, heirs, executors and administrators.
14. GOVERNING LAW. This Security Agreement shall be interpreted and
governed under the laws of the State of California as such laws are applied
to agreements between California residents entered into and to be performed
entirely within California, except for any conflict of laws or rules that
would require use or employment of the laws of any other jurisdiction. All
disputes arising out of this Security Agreement shall be subject to the
exclusive jurisdiction and venue of the California state courts of Santa
Clara County, California (or, if there is exclusive federal jurisdiction, the
United States District Court for the Northern District of California), and
the parties consent to the personal and exclusive jurisdiction and venue of
those courts.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
-3-
<PAGE>
"PLEDGOR" /s/PAUL G. MANCA
--------------------------------------
Signature
Address: 6654 Pineneedle Dr.
Oakland, CA 94611
"PLEDGEE" CELLNET DATA SYSTEMS, INC.
By: /s/DAVID L. PERRY
--------------------------------------
Title:
--------------------------------------
"PLEDGEHOLDER" --------------------------------------
Secretary of CellNet Data Systems, Inc.
-4-
<PAGE>
CELLNET
DATA SYSTEMS
February 5, 1997
Dear Britton:
Pursuant to the terms of that certain Agreement between Axonn
Corporation ("Axonn") and CellNet Data Systems, Inc. (formerly Domestic
Automation Company) ("CellNet") dated August 21, 1992, as amended (the
"Agreement"; capitalized terms used herein and not defined shall have the
meanings assigned such terms in the Agreement), CellNet desires to sublicense
its rights under Section 2 of the Agreement to the following entities for the
UDS MARKET.
General Electric Company Process Systems, Inc. Metretek, Inc.
ABB Power T&D Company, Inc. Siemens, Inc. Honeywell, Inc.
Landis & Gyr, Inc. American Meter Company Fisher-Pierce
Schlumberger, Inc. Badger Meter, Inc.
Section 2 [c] of the Agreement requires Axonn's approval of the foregoing
SUBLICENSEES.
CellNet acknowledges and agrees that notwithstanding any terms in any
Endpoint Product License Agreement between CellNet and any SUBLICENSEE, all
of the terms of the Agreement remain in full force and effect, subject to the
terms of this letter agreement. In particular, CellNet agrees that the
indemnification terms, choice of law and jurisdiction provisions of the
Agreement remain unaffected as between Axonn and CellNet. The 50 square mile
minimum operating coverage area shall also be maintained as part of the
definition of the "CellNet System."
Axonn acknowledges and agrees that notwithstanding the confidentiality
provisions of Section 8 of the Agreement, CellNet has the right to disclose
to its SUBLICENSEES, pursuant to appropriate non-disclosure agreements, the
source code for transmit-only endpoint devices, the object code for the
MASTER and SLAVE processors and COMM processor, and the source code for the
HOST processor contained within the receiver/transceiver. CellNet shall not,
however, sublicense Axonn's DSP RF technology or patents, except that CellNet
may offer for sale completed digital and RF subassemblies for the DSP
transceiver, under the terms of the Agreement.
In regards to section 9 [a] of the Agreement concerning patent marking,
for SUBLICENSEES only, the attached list of patents will supersede those
listed in Exhibit 1 of the Agreement.
<PAGE>
I appreciate your signing the enclosed copy of this letter and returning
it to me to indicate Axonn's approval of the foregoing SUBLICENSEEE and the
foregoing terms.
Very truly yours,
/s/ROBERT A. HAYES
Robert A. Hayes
APPROVED, ACCEPTED AND AGREED;
AXONN CORPORATION
By: /s/ H. BRITTON SANFORD
--------------------------------
Name: H. Britton Sanford
------------------------------
Title: President
-----------------------------
176 SHOREWAY ROAD
SAN CARLOS, CA 94070
TEL 415.508.6000
FAX 415.502.0800
<PAGE>
FEBRUARY 3, 1997
APPLICABLE RECEIVER PATENT NUMBERS (NON-DSP)
- -------------------------------------------------------------------------------
PATENT NUMBER INVENTION
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,067,136 Wireless Alarm - ASK, Impulse Noise Reject,
Spectral Enrichment (CIP of Parent)
5,095,493 Wireless Alarm - Two Step Algorithm Chip Code
Synchronizer (Div. of Parent)
5,457,713 Spread Spectrum Alignment Repositioning Method
(Parent)
PCT/US95/02690 Spread Spectrum Alignment Repositioning Method
(PCT of Parent)
08/487,523 Wireless Alarm System Continuation
- -------------------------------------------------------------------------------
If used in a transceiver application, also include:
- -------------------------------------------------------------------------------
PATENT NUMBER INVENTION
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,977,577 Wireless Alarm System - Spread Spectrum
Modulator (Parent)
08/769,138 Power spectral Density Techniques
- -------------------------------------------------------------------------------
NOTE
This list will be updated from time to time as pending patents
become issued, when international filings grant, and as
divisional/continuation/continuation-in-part patents become pending.
ATTACHMENT TO LETTER AGREEMENT OF FEBRUARY 5, 1997
<PAGE>
FEBRUARY 3, 1997
APPLICABLE TRANSMIT-ONLY PATENT NUMBERS (NON-DSP)
- -------------------------------------------------------------------------------
PATENT NUMBER INVENTION
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TOMMs
-----
4,977,577 Wireless Alarm - Spread Spectrum Modulator (Parent)
5,067,136 Wireless Alarm - ASK, Impulse Noise Reject,
Spectral Enrichment (CIP of Parent)
08/487,523 Wireless Alarm System (Continuation)
5,265,120 Binary Phase Shift Keying Modulation (CIP of Parent)
08/560,304 Binary Phase Shift Keying Modulation and or
Frequency Multiplier (Continuation)
5,457,713 Spread Spectrum Alignment Repositioning Method (Parent)
5,408,217 Secure Fire/Security/Sensor Transmitter System (Parent)
PCT/US95/04731 Secure Fire/Security/Sensor Transmitter System
(PCT/CIP of Parent)
08/769,138 Power Spectral Density Techniques
- -------------------------------------------------------------------------------
NOTE
This list will be updated from time to time as pending patents
become issued, when international filings grant, and as
divisional/continuation/continuation-in-part patents become pending.
ATTACHMENT TO LETTER AGREEMENT OF FEBRUARY 5, 1997
<PAGE>
[LOGO]
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-16399 of CellNet Data Systems, Inc. on Form S-8 of our report dated February
3, 1997, appearing in this Annual Report on Form 10-K of CellNet Data Systems,
Inc. for the year ended December 31, 1996.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
February 28, 1997
68 CELLNET
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 48,018 124,232
<SECURITIES> 95,779 54,643
<RECEIVABLES> 2,143 2,139
<ALLOWANCES> (25) (25)
<INVENTORY> 0 0
<CURRENT-ASSETS> 146,855 182,113
<PP&E> 35,366 81,634
<DEPRECIATION> (3,561) (9,761)
<TOTAL-ASSETS> 184,306 259,551
<CURRENT-LIABILITIES> (9,855) (11,762)
<BONDS> (183,068) (207,544)
(29,486) 0
(27,195) 0
<COMMON> (27,608) (205,793)
<OTHER-SE> (2,118) (2,170)
<TOTAL-LIABILITY-AND-EQUITY> (184,306) (259,551)
<SALES> 1,663 368
<TOTAL-REVENUES> 2,126 1,669
<CGS> (1,294) (329)
<TOTAL-COSTS> (4,965) (8,429)
<OTHER-EXPENSES> (33,550) (49,574)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (4,564) (16,355)
<INCOME-PRETAX> (40,953) (72,689)
<INCOME-TAX> 3 5
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (40,956) (72,694)
<EPS-PRIMARY> (1.22) (2.19)
<EPS-DILUTED> 0 0
</TABLE>
