<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1996.
REGISTRATION NO. 333-
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CELLULAR TECHNICAL SERVICES COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4812 11-2962080
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
2401 FOURTH AVENUE, SEATTLE, WASHINGTON 98121
(206) 443-6400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
------------------------
STEPHEN KATZ, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
CELLULAR TECHNICAL SERVICES COMPANY, INC.
2401 FOURTH AVENUE, SEATTLE, WASHINGTON 98121
(206) 443-6400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
EDWARD R. MANDELL, ESQ. EMANUEL S. CHERNEY, ESQ.
PARKER CHAPIN FLATTAU & KLIMPL, LLP ANDREWS & KURTH L.L.P.
1211 AVENUE OF THE AMERICAS 425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10036-8701 NEW YORK, NEW YORK 10017
TEL: (212) 704-6000 TEL: (212) 850-2811
FAX: (212) 704-6288 FAX: (212) 850-2929
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the 'Securities Act'), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1)
<S> <C> <C> <C>
Shares of Common Stock, par value $.001 per share(3)........ 1,984,900 Shares $18.00 $35,728,200
<CAPTION>
AMOUNT OF
TITLE OF EACH CLASS OF REGISTRATION
SECURITIES TO BE REGISTERED FEE(2)
<S> <C>
Shares of Common Stock, par value $.001 per share(3)........ $12,320.07
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Calculated pursuant to Rule 457(a) of the Securities Act.
(3) Includes up to 258,900 shares of Common Stock subject to the over-allotment
option granted to the Underwriters by the Company and certain of the Selling
Shareholders of the Company. See 'Underwriting.'
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL
THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
________________________________________________________________________________
<PAGE>
<PAGE>
CELLULAR TECHNICAL SERVICES COMPANY, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
REFERENCING ITEMS IN PART I OF FORM S-1 TO THE PROSPECTUS
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION PROSPECTUS CAPTION OF PAGE
--------------------------------------------------------------- ------------------------------------------
<C> <S> <C>
1. Forepart of the registration Statement and Outside Front Cover
Page of Prospectus........................................... Facing Page of Registration Statement;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus........ Inside Front Cover Page of Prospectus;
Outside Back Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of Earnings to
Fixed Charges................................................ Prospectus Summary; Risk Factors
4. Use of Proceeds................................................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price................................ Outside Front Cover Page of Prospectus;
Risk Factors; Underwriting
6. Dilution....................................................... Prospectus Summary; Risk Factors; Dilution
7. Selling Security Holders....................................... Principal and Selling Shareholders
8. Plan of Distribution........................................... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be Registered..................... Outside Front Cover Page of Prospectus;
Prospectus Summary; Description of
Capital Stock
10. Interests of Named Experts and Counsel......................... Legal Matters; Experts
11. Information with respect to the Registrant..................... Outside Front Cover Page of Prospectus;
Inside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors; Use of
Proceeds; Dividend Policy;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
Principal Shareholder; Description of
Capital Stock; Shares Eligible for
Future Sale; Financial Statements
12. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities................................... Part II
</TABLE>
<PAGE>
<PAGE>
SUBJECT TO COMPLETION -- DATED JULY 2, 1996
PROSPECTUS
1,726,000 SHARES
CELLULAR TECHNICAL SERVICES COMPANY, INC.
COMMON STOCK
Of the 1,726,000 shares of common stock (the 'Common Stock') offered
hereby, 1,500,000 shares are being sold by Cellular Technical Services Company,
Inc., a Delaware corporation (the 'Company'), and 226,000 shares are being sold
by the Selling Shareholders. The Company will not receive any of the proceeds
from the sale of the shares being sold by the Selling Shareholders. See
'Principal and Selling Shareholders.'
The Common Stock is included in The Nasdaq Stock Market's National Market
(the 'Nasdaq National Market') under the symbol 'CTSC.' On July 1, 1996, the
last reported sales price for the Common Stock on the Nasdaq National Market was
$18.25 per share. See 'Price Range of Common Stock.'
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share.................................... $ $ $ $
Total (3).................................... $ $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the 'Securities Act'). See 'Underwriting.' The Company has agreed
to reimburse the Selling Shareholders for a portion of the commission to be
paid to the Underwriters in connection with shares sold by the Selling
Shareholders hereunder.
(2) Before deducting expenses payable by the Company estimated to be $300,000.
(3) The Company and certain of the Selling Shareholders of the Company have
granted the several Underwriters a 45-day over-allotment option to purchase,
in the aggregate, up to 258,900 additional shares of Common Stock on the
same terms and conditions as set forth above. If all such additional shares
are purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be
$ , and the total Proceeds to Company will be $ .
------------------------
The shares of Common Stock offered hereby are offered by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to the right of the Underwriters to reject any order
in whole or in part and certain other conditions. It is expected that delivery
of certificates for the shares of Common Stock will be made at the offices of
Bear, Stearns Securities Corp., 1 Metrotech Center North, Brooklyn, New York
11201 as agent for the Representative, on or about , 1996.
GERARD KLAUER MATTISON & CO., LLC
------------------------
THE DATE OF THIS PROSPECTUS IS , 1996
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
<PAGE>
<PAGE>
[Photo to follow]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
'UNDERWRITING.'
2
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. Unless
otherwise indicated, all information in this Prospectus assumes no exercise of
the Underwriter's over-allotment option and has been adjusted to give
retroactive effect to a 2 for 1 split of the Company's common stock effected in
June, 1996 in the form of a 100% stock dividend. Investors should carefully
consider the information set forth under the caption 'Risk Factors.' The
'Company' refers to Cellular Technical Services Company, Inc.
THE COMPANY
The mission of Cellular Technical Services Company, Inc. (the 'Company') is
to be the premier developer and provider of real-time information processing and
information management systems for the wireless communications industry in the
United States and international markets. The Company designs and engineers
software and hardware products for sale to the wireless communications industry
to provide user/device authentication (for 'cloning' fraud prevention) and to
provide service metering (for credit management and prepaid billing). Although
the Company's products and services currently are used exclusively by cellular
telephone system operators, commonly known as carriers, the Company believes
they may be generally adaptable to other wireless communications systems.
User/device authentication primarily involves various forms of 'pre-call'
verification to ensure that the use of a wireless communications device (e.g., a
cellular telephone) is legitimate before the device is allowed to connect to a
wireless network. The Company's Blackbird'r' Platform ('Blackbird Platform')
provides the underlying technology for pre-call application products. The first
application product on the Blackbird Platform, PreTect'tm' ('PreTect'), is
designed to proactively prevent cloning fraud. The Cellular Telecommunications
Industry Association has estimated that in 1995 cloning fraud has resulted in
costs and lost revenues to the cellular industry of an amount in excess of $650
million. The Company believes that in 1996 cloning fraud will result in an
increased amount of such costs and lost revenues. Cloning fraud is the term used
by the cellular industry to describe the illegal activity of using a cellular
telephone whose electronic serial number and telephone number have been altered
to match those of a legitimate subscriber's telephone. See 'Business -- The
Blackbird Platform.'
Service metering primarily involves the collection of various forms of
'post-call' information (within minutes after the end of the call) to ensure
that a wireless communications carrier's subscriber has proper account status to
make additional calls. The Company's Hotwatch'r' Platform ('Hotwatch Platform')
provides the underlying technology for post-call application products and
services for credit management and prepaid billing ('Hotwatch Products'). See
'Business -- The Hotwatch Platform.'
The Blackbird and Hotwatch Platforms, each based on open systems
architecture, are designed to allow a broad range of interconnection and
data-sharing possibilities between various geographic markets and different
wireless communications carriers.
The Company's primary activities are currently focused on the further
development, marketing and deployment of the Blackbird Platform and the PreTect
fraud prevention application product and services (the 'Blackbird Products').
PreTect, which is transparent to the subscriber, uses patented signal
processing, commonly referred to as radio frequency ('RF') 'fingerprinting'
technology to accurately distinguish between legitimate subscribers and
counterfeit users before the call is connected. PreTect captures information
from the cellular telephone call at the cell site, before it enters the
carrier's system, and compares it to valid fingerprints and data. If a proper
match is not made, PreTect can then automatically prevent connection of the
call. The Company also provides a seamless Real-Time Roaming Fraud Prevention
ServiceSM ('Real-Time Roaming Fraud Prevention Service') between markets which
use the Blackbird Platform and PreTect. During 1996, the Company entered into
agreements with AirTouch Cellular ('AirTouch') and Bell Atlantic NYNEX Mobile
('BANM') for the provision of the Blackbird Products for use in over 1,000 cell
sites, subject to the Blackbird Products' compliance with contractual
requirements. The Company believes that as of the end of 1995 there were
3
<PAGE>
<PAGE>
approximately 23,000 domestic and 10,000 international cell sites to which the
Company's Blackbird Products are adaptable. The Company also believes there are
approximately 14,000 additional international cell sites to which the Company's
Blackbird Products may be adaptable.
During the last ten years, wireless communications service has been one of
the fastest growing segments of the telecommunications industry. The Cellular
Telecommunications Industry Association has estimated that the number of
cellular subscribers in the United States increased from approximately 340,000
subscribers in December 1985 to approximately 34 million subscribers in December
1995. The Company believes the worldwide wireless communications market may
exceed 100 million subscribers by the end of 1996. The Company expects
significant growth in wireless communications in the United States to continue
in the future, as a result of the increased demand for cellular service and the
emergence of personal communications services ('PCS') as a new form of wireless
communications service, and that significant growth will also occur in
international markets. The Company believes that the number of cellular and PCS
subscribers may grow to 80 million in the United States and more than 300
million worldwide in the year 2001. The Company believes that the demand for its
products and services may increase as the Company adapts its products and
creates new products to service an expanded wireless communications industry.
The Company was incorporated in Delaware in August 1988 under the name NCS
Ventures Corp. ('Ventures') as a majority-owned subsidiary of Nationwide
Cellular Service Inc. ('Nationwide'), a publicly traded company. In September
1988, Ventures formed, as equal partners with NYNEX Mobile Billing Services,
Inc. ('NYNEX'), a partnership, Cellular Technical Services Company
('Partnership'). In May 1991, Ventures changed its name to Cellular Technical
Services Company, Inc. In August 1991 the Company exercised an option to
purchase the interest in the Partnership owned by NYNEX and consummated the
initial public offering of its securities. In 1995, concurrent with the merger
of Nationwide into MCI Communications Corp., Nationwide distributed to its
stockholders all of its shares of the Company's Common Stock.
The Company's principal offices are located at 2401 Fourth Avenue, Seattle,
Washington, 98121 and its telephone number is (206) 443-6400.
BUSINESS STRATEGY
DEVELOPMENT OF BLACKBIRD
The Company's immediate strategy is to achieve commercial acceptance and
significant market penetration of the Blackbird Platform. To accomplish this,
the Company plans to expand its domestic and international sales and marketing
efforts. After it has achieved an installed base of the Blackbird Platform, the
Company believes that it will be able to leverage its relationships with
carriers and its position at the carriers' cell sites to offer additional
products and services. The Company plans to expand its research and development
efforts to enhance its existing products and services and to develop new
value-added products for the Blackbird Platform which can be sold in connection
with PreTect or on a stand-alone basis.
LEVERAGE CORE COMPETENCIES
Through the development and deployment of the Blackbird and Hotwatch
Platforms, the Company has developed several core competencies. The Company
believes that these core competencies may facilitate its development of products
and services which complement its platforms and add value to its current and
potential customer base.
Ability to interface with carriers' cell sites and switches. The
Company's proprietary software and hardware products collect and
utilize information resident at the carrier's cell site and/or switch.
This expertise may facilitate the development of future products and
services in both an analog and digital environment.
4
<PAGE>
<PAGE>
Real-time database expertise. The Company has developed the ability to
optimize database performance, which enables systems to reach
transaction decisions in very short time frames. For example, PreTect
can determine whether or not to connect a call within five seconds of
call origination.
Real-time rating expertise. The Company has developed the ability to
combine streams of telephone billing information, such as toll
charges, discounts and promotions, surcharges, etc. to mimic a
carrier's billing system on a real-time basis, within minutes after
the end of the call, rather than in a batch process for monthly
customer billing. This currently allows the Company to determine
account authorization for future telephone calls. The Company believes
this expertise may be applicable to other systems that involve
real-time charges.
Transaction Control Protocol ('TCP')/Internet Protocol ('IP')
expertise. The Company believes it can apply the experience it has
gained in its existing TCP/IP networks and add its other core
competencies, such as real-time rating and real-time database
expertise to other TCP/IP networking infrastructures.
Ability to interface with billing systems. The Company has developed
the ability to interface with the systems infrastructures of major
billing service companies in the wireless communications industry. As
these companies expand their customer base beyond telephone carriers,
the Company believes it can apply its knowledge to provide its
value-added service metering technologies to this expanded customer
base.
5
<PAGE>
<PAGE>
<TABLE>
<S> <C>
THE OFFERING
Common Stock Offered by the Company(1)....... 1,500,000 shares
Common Stock Offered by the Selling
Shareholders(1)(2)......................... 226,000 shares
Common Stock Outstanding prior to the
Offering................................... 21,706,468 shares
Common Stock Outstanding after the
Offering(1)(3)............................. 23,432,468 shares
Use of Proceeds.............................. To finance (i) research and development to enhance the
Company's existing technologies and develop new technologies;
(ii) expansion of sales and marketing activities including the
establishment of international marketing, sales and
distribution operations; (iii) expansion of customer support
capabilities; (iv) enhancement and expansion of the Company's
manufacturing activities; (v) provision of lease financing to
certain of the Company's customers; (vi) possible acquisitions
of complementary technologies and businesses; and (vii)
expansion of working capital and general corporate purposes.
See 'Use of Proceeds.'
Nasdaq National Market Symbol................ 'CTSC'
</TABLE>
- ------------
(1) Does not include shares of Common Stock issuable upon the exercise of the
over-allotment option.
(2) Such shares will be issued to the Selling Shareholders upon their exercise
of stock options.
(3) Based on the number of shares of Common Stock outstanding at March 31, 1996.
Includes 226,000 shares of Common Stock issuable upon the exercise of
options by the Selling Shareholders. Excludes 2,713,040 shares of Common
Stock issuable upon the exercise of other stock options outstanding at March
31, 1996, of which 237,280 shares of Common Stock were issued upon the
exercise of stock options since March 31, 1996 through the date of this
Prospectus. Also excludes 160,000 shares of Common Stock issuable upon the
exercise of options granted since March 31, 1996.
6
<PAGE>
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(IN DOLLARS EXCEPT WEIGHTED SHARES OUTSTANDING)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
REVENUES
License and service fees.................. $ 3,875,353 $ 8,691,036 $10,944,788 $ 2,736,768 $ 645,622
Equipment sales........................... 1,215,738 1,040,863 1,164,536 612,812 89,164
Interest income........................... 176,594 280,181 475,512 118,984 107,493
----------- ----------- ----------- ----------- -----------
Total revenues................................ 5,267,685 10,012,080 12,584,836 3,468,564 842,279
COSTS AND EXPENSES
Cost of license and service fees.......... 1,574,521 2,619,435 3,330,801 922,539 785,200
Cost of equipment sales................... 1,329,276 1,112,254 1,485,952 611,731 278,405
Sales and marketing....................... 738,068 789,578 2,141,853 507,607 822,873
General and administrative................ 1,563,794 2,269,170 2,115,991 601,783 510,611
Research and development.................. 1,268,361 1,661,772 3,445,052 576,777 945,749
----------- ----------- ----------- ----------- -----------
Total costs and expenses...................... 6,474,020 8,452,209 12,519,649 3,220,437 3,342,838
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES............. (1,206,335) 1,559,871 65,187 248,127 (2,500,559)
PROVISION FOR INCOME TAXES.................... 0 10,000 2,000 5,000 0
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)............................. $(1,206,335) $ 1,549,871 $ 63,187 $ 243,127 $(2,500,559)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) PER SHARE................... $(0.07) $0.08 $0.00 $0.01 $(0.12)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING........... 17,363,680 20,297,326 22,026,150 22,158,686 21,608,900
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------
ACTUAL AS ADJUSTED(1)
----------- --------------
<S> <C> <C>
Balance Sheet Data:
Total assets..................................................................... $16,031,129 $ 42,232,129
Working capital.................................................................. 8,839,554 35,040,554
Total Stockholders' equity....................................................... 14,597,368 40,798,368
</TABLE>
- ------------
(1) Adjusted to reflect (i) the sale by the Company of the shares of Common
Stock offered hereby (based upon an assumed offering price of $18.00 per
share) and the application of the net proceeds therefrom and (ii) the
Company's receipt of the proceeds from the exercise by the Selling
Shareholders of options to acquire 226,000 shares of Common Stock. See
'Capitalization.'
7
<PAGE>
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information set forth in this Prospectus,
in connection with an investment in the shares of Common Stock offered hereby.
Dependence on Cellular Market; Rapid Industry Change and Technological
Obsolescence. The Company's future success will depend on the continued and
expanded use of its existing products and services, and its ability to develop
new products and services or adapt existing products and services to keep pace
with changes in the wireless communications industry. The Company historically
has provided its products and services exclusively to cellular carriers. In
addition, the Company's user/device authentication products currently are
designed to provide security exclusively for analog cellular telephones. The
Company believes that over 95% of cellular telephone service currently is
provided in the analog mode, but that the industry is undertaking a shift to
digital mode in the major markets due to certain advantages of the digital mode,
including expanded capacity, greater privacy and enhanced security.
Technological changes or developments in the cellular industry, such as
encryption technology for enhanced privacy, 'Authentication' ('A-Key')
technology for enhanced security against cloning fraud, improved switching
technologies, or further industry consolidation, could reduce or eliminate
demand for the Company's user/device authentication products. A rapid shift away
from the use of analog cellular telephones in favor of digital cellular
telephones utilizing A-Key or to other wireless services, such as PCS, could
affect demand for the Company's user/device authentication products and could
require the Company to develop modified or alternative user/device
authentication products addressing the particular needs of providers of such new
services. There can be no assurance that the Company will be successful in
modifying or developing its existing or future user/device authentication
products in a timely manner, or at all. If the Company is unable, due to
resource, technological or other constraints, to adequately anticipate or
respond to changing market, customer or technological requirements, the
Company's business, financial condition and results of operations will be
materially adversely affected. Further, there can be no assurance that products
or services developed by others will not render the Company's products and
services non-competitive or obsolete. See 'Business -- Operation of Wireless
Communications Systems and -- Competition.'
Limited Product Line; Uncertainty of Market Acceptance. The Company's
revenues have been and can be expected to continue to be derived from a limited
number of products and services. The Company recently expanded its product line
with the introduction of the Blackbird Products. Although the Company believes
that the Blackbird Products present significant growth opportunities for its
business, there can be no assurance that the Company will derive significant
revenues from the commercialization of such technology or any other products. By
virtue of the recent signing of certain contracts and letters of intent, the
Company commenced the commercial installation of the Blackbird Products in
several major cellular markets during the second quarter of 1996 and expects the
Blackbird Products to be commercially operational in the second half of 1996.
Achieving market acceptance and penetration of the Blackbird Products and the
Company's other products and services will require, in addition to enhancing and
improving those products and services, increased marketing efforts to
effectively compete and increase customer awareness of the Company's products
and services. There can be no assurance, however, that the Company's expanded
marketing and sales efforts and increased expenditures will result in successful
commercialization and increased market penetration of the Company's products and
services. See 'Use of Proceeds' and 'Business -- Marketing.'
Technological Factors; Uncertainty of Product Development; Unproven
Technology. The Company's products are currently being utilized by a limited
number of customers and there can be no assurance that they will prove to be
sufficiently reliable in widespread commercial use. It is common for hardware
and software as complex and sophisticated as that incorporated in the Company's
products to experience errors or 'bugs' both during development and subsequent
to commercial introduction. In particular, the Company has identified certain
software and hardware errors in its Blackbird Products and to date corrected
some, but not all, of such errors. There can be no assurance that any errors in
the Company's existing or future products will be identified, and if identified,
corrected. Any such errors could delay commercial introduction of new products
and require modifications in products that have
8
<PAGE>
<PAGE>
already been installed. Remedying such errors has been and may continue to be
costly and time consuming. Delays in remedying any such errors could materially
adversely affect the Company's competitive position with respect to existing or
new technologies and products offered by its competitors. In particular, delays
in remedying existing or future errors in the Company's Blackbird Products could
materially adversely affect the Company's ability to achieve significant market
penetration prior to the possible widespread use of A-Key. In addition, software
and hardware warranties are generally included as part of the Company's
obligations under its agreements with its customers. To date, the costs to the
Company of meeting the Company's warranty obligations relating to its Hotwatch
Products have not been substantial. Warranty obligations related to the
Blackbird Products will begin upon customer acceptance of such products.
However, to the extent that the software and hardware maintenance fees from its
products are not adequate to cover the costs of making any necessary
modifications or meeting the Company's warranty obligations, the Company could
be required to make significant additional expenditures, which could have a
material adverse effect on the Company. The Company is continually seeking to
enhance and improve its existing products and services and to develop new
products and services, including other application products utilizing the
Blackbird and Hotwatch Platforms. Accordingly, the Company remains subject to
all of the risks inherent in new product development, including unanticipated
technical or other development problems which could result in material delays in
product commercialization or significantly increased costs. There can be no
assurance that the Company will be able to successfully enhance or improve
existing products or develop new products. See 'Business -- Research and
Development.'
Risk of New Hardware Manufacturing Activities. For the most part, the
Company's engineering resources are devoted to software design and development.
As a result, only a limited number of such resources are used in the design and
prototype production of the Company's proprietary hardware. Consequently, the
Company utilizes subcontractors for hardware design, engineering, manufacturing
and integration of certain proprietary printed circuit boards, radio equipment
and other subassemblies which are components of the Company's Blackbird
Products. The Company's future success will depend on enhancing and expanding
its manufacturing activities with respect to the design and engineering of
hardware, improving its inventory control systems, maintaining effective quality
control, procuring component parts and maintaining subcontractor relationships.
Failure to achieve any of these factors could have a material adverse effect on
the Company's business, financial condition and results of operations.
Ability to Manage Growth. The Company has expanded its operations rapidly,
which has created significant demands on the Company's administrative,
operational, development and financial personnel and other resources. Additional
expansion by the Company may further strain the Company's management, financial
and other resources. There can be no assurance that the Company's systems,
procedures, controls and existing space will be adequate to support expansion of
the Company's operations. The Company's future operating results will depend,
among other things, on its ability to manage changing business conditions and to
continue to improve its operational and financial control and reporting systems.
If the Company's management is unable to manage growth effectively, its
business, financial condition and results of operations could be materially
adversely affected. See 'Business -- Employees' and 'Management.' The Company's
ability to manage growth depends in part upon the Company's ability to attract,
train and retain a sufficient number of qualified personnel or independent
contractors commensurate with the expanding needs of the Company. An increase in
the turnover rate among the Company's employees would increase the Company's
recruiting and training costs, and if the Company were unable to recruit and
retain a sufficient number of employees or independent contractors, it could be
forced to limit its growth or possibly curtail its operations. There can be no
assurance that the Company will be successful in attracting, training and
retaining the required number of qualified employees or independent contractors
to support the Company's business in the future. See 'Business -- Employees.'
Dependence on Key Personnel. The Company's future success depends in large
part on the continued services of its key management, sales, engineering,
research and development and operational personnel and on its ability to
continue to attract, motivate and retain highly qualified employees and
independent contractors in those areas. Competition for such personnel is
intense and there can be no assurance that the Company will be successful in
attracting, motivating and retaining
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key personnel. The inability to hire and retain qualified personnel or the loss
of the services of key personnel could have a material adverse effect upon the
Company's business, financial condition and results of operations. The Company
has entered into employment agreements with, among others, its President and
Chief Financial Officer which both expire in December 1996. There can be no
assurance that any of these contracts will be renewed. The Company does not
maintain any key-man life insurance policies on any of its employees. See
'Business -- Employees' and 'Management.'
Limited Customer Base; Reliance on Significant Customers. The Company's
potential customer base is relatively limited due to the significant
concentration of ownership and/or operational control of wireless communication
markets. Currently, the Company markets its services and products only to
cellular carriers, of which there are 27 in the United States and approximately
150 in international markets. There can be no assurance that any customers,
current or future, will maintain business relationships with the Company. See
' -- International Operations.' Revenues attributable to a relatively small
number of customers have historically represented and are likely for the
foreseeable future to continue to represent a significant percentage, in any
given period, of its total revenues. Sales to customers aggregating 10% or more,
either individually or combined as affiliates due to common ownership, were
concentrated as follows: four customers with sales of 39%, 17%, 16% and 11%
during the quarterly period ended March 31, 1996, three customers with sales of
59%, 15% and 12% in 1995, three customers with sales of 54%, 22% and 11% in 1994
and two customers with sales of 56% and 24% in 1993. The aggregate sales to
these customers (only one of which has accounted for more than 10% during all
periods presented) represented 83%, 86%, 87% and 80% of the Company's total
product and service revenues during the three months ended March 31, 1996, and
the three years ended December 31, 1995, respectively. There can be no assurance
that such customers will continue to maintain business relationships with the
Company. The Company has recently signed contracts with new customers which, if
successfully implemented and performed, would generate significant revenue.
However, the loss of one or more major customers could have a material adverse
effect on the Company's business, financial condition and results of operations.
Competition. The market for the Company's products and services is highly
competitive and subject to rapid change. A number of companies currently offer
one or more similar products and services offered by the Company. In addition,
many wireless communications carriers are providing or can provide, in-house,
certain of the Hotwatch Products that the Company offers. Trends in the wireless
communications industry, including greater consolidation and technological or
other developments that make it simpler or more cost-effective for wireless
communications carriers to provide certain services themselves, could affect
demand for the Company's products and services and could make it more difficult
for the Company to offer a cost-effective alternative to a wireless
communications carrier's own capabilities. Current and potential competitors
have established or may in the future establish collaborative relationships
among themselves or with third parties, including third parties with whom the
Company has a relationship, to increase the visibility and utility of their
products and services. Accordingly, it is possible that new competitors or
alliances may emerge and rapidly acquire significant market share. In addition,
the Company anticipates continued growth in the wireless communications industry
and, consequently, the entrance of new competitors in the future. An increase in
competition could result in price reductions and loss of market share and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company believes that the principal competitive factors facing the
Company in the wireless communications industry include the ability to identify
and respond to customer needs, the quality and breadth of products and services,
technical expertise and price. To remain competitive, the Company will need to
continue to invest in research and development, sales and marketing, customer
service, manufacturing activities and administrative systems. There can be no
assurance that the Company will have sufficient resources to make such
investments or that the Company will be able to make the technological advances
necessary to remain competitive. Many of the Company's current and potential
competitors have significantly greater financial, marketing, technical and other
competitive resources, as well as greater name recognition, than the Company. As
a result, the Company's competitors may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or may be able to
devote greater resources to the promotion and sale of their products and
services. There can be no assurance that the Company will be able to compete
successfully with its existing competitors
10
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or with new competitors. The Company's principal competitors in the service
metering field include IBM, I-NET, Inc., GTE Telecommunications Services, Inc.,
Boston Communications Group, EDS Personal Communications Corporation, Cincinnati
Bell Information Systems, Inc., Lightbridge, Inc., Subscriber Computing, Inc.,
CSC Intellicom, and Systems/Link Corporation. The Company's principal
competitors in the user/device authentication field include Corsair
Communications, Inc., Coral Systems, Inc. (in connection with a joint venture
with Applied Signal Technology), Authentix Network, Inc., and GTE
Telecommunications Services, Inc. Two of these competitors, Corsair
Communications, Inc. and Coral Systems, Inc. compete directly with the Company's
RF-based fingerprinting fraud protection products. The Company believes that
Corsair Communications, Inc. has agreements pursuant to which Corsair
Communications, Inc. has installed or will install its RF-based fingerprinting
fraud protection product in four major markets. The Company has no knowledge of
any such agreements or installations by Coral Systems, Inc. In addition, there
are numerous companies, including wireless communications carriers, hardware and
software development companies and others, which have or may develop the
expertise which would encourage them to attempt to develop and market products
(such as A-Key) which could render the Company's products obsolete or less
marketable. See 'Business -- Competition.'
History of Net Losses; Accumulated Deficit. Although the Company had net
income of $63,187 for the year ended December 31, 1995 and net income of
$1,549,871 for the year ended December 31, 1994, the Company sustained a net
loss in each of the preceding years, had a net loss of $2,500,559 for the
quarter ended March 31, 1996, and, at March 31, 1996, had an accumulated deficit
of $6,126,823. Further, the Company expects to record a loss in the range of
$1,250,000 to $1,750,000 for the quarter ending June 30, 1996. In addition, in
the event that the Company is not successful in generating sufficient future
product revenues, the carrying value of capitalized software development costs,
inventories and other assets could be significantly impaired. There can be no
assurance that the Company's operations will be profitable in the future. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
International Operations. The Company is in the early stages of marketing
its products and services in international markets. In pursuing such
opportunities, the Company is and will remain subject to all the risks inherent
in international transactions, such as changes in export, import, tariff and
other trade regulations, currency exchange rates, foreign tax laws, and other
legal, economic, and political conditions. There can be no assurance that
changes in any of the foregoing will not have a material adverse effect on the
Company's business, financial condition and results of operations. Further, the
laws of certain foreign countries do not protect the Company's intellectual
property to the same extent as the laws of the United States. See
' -- Proprietary Rights' and 'Business -- Proprietary Rights.' In certain
international markets, the Company will need to modify its products or develop
new or additional products to adapt to the different wireless technologies or
network standards utilized by the carriers in such markets. There can be no
assurance that the Company's marketing efforts and technological enhancements
will result in successful commercialization or market acceptance or penetration
in such international markets. If the Company is unable to adequately anticipate
and respond to marketing or technological requirements in the international
marketplace, the Company's business, financial condition and results of
operation could be materially adversely affected. See 'Business.'
Potential Fluctuations in Quarterly Performance. The Company has
experienced fluctuations in its quarterly operating results and anticipates that
such fluctuations will continue and could intensify. The Company's quarterly
operating results may vary significantly depending on a number of factors,
including the timing of the introduction or acceptance of new products and
services offered by the Company, changes in the mix of products and services
provided by the Company, long sales cycles, changes in regulations affecting the
wireless industry, changes in the Company's operating expenses, uneven revenue
streams, and general economic conditions. Revenue recognition for the Company's
products is based upon various performance criteria and varies from customer to
customer and product to product. Hardware and software delivery and customer
acceptance in accordance with contractual definitions are generally the
significant factors used in determining revenue recognition. There can be no
assurance that the Company's levels of profitability will not vary significantly
among quarterly periods or that in future quarterly periods the Company's
results of operations will not be below prior
11
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<PAGE>
results or the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock could be materially adversely
affected. See 'Business -- Revenue Generation.'
Dependence on Third-Party Vendors. The Company has been and will continue
to be dependent on third-party vendors for computer equipment, network services,
component parts, manufacturing, systems integration and certain software all of
which are incorporated in its products and services. While available from
multiple sources, the Company currently obtains or licenses certain equipment
and software from a limited number of sources. Although the Company believes
that there are currently available substitute sources for all such equipment and
software, the Company could be required to redesign affected products to
accommodate substitutes therefor. In an attempt to ensure satisfactory sources
of supply, the Company currently maintains supply and software license
arrangements with various suppliers. There can be no assurance, however, that
the Company will be able to procure necessary equipment and software on a
satisfactory and timely basis. For example, from time to time the electronic
computer component parts industry has experienced parts allocation restrictions.
Any failure or delay in obtaining necessary equipment, component parts or
software, or if necessary, establishing alternative procurement arrangements,
could cause delays in product commercialization and could require product
redesign or modification. There can be no assurance that the Company could
complete any necessary modifications in a timely manner or that modified or
redesigned products would maintain current functionality or performance features
or could be successfully commercialized. Any inability or delay in establishing
necessary procurement arrangements or successfully modifying products could have
a material adverse effect on the Company's business, financial condition and
results of operations. See 'Business -- Suppliers.'
Possible Need for Additional Financing. In the event of unanticipated
technical or other problems, or if the proceeds of this offering otherwise prove
to be insufficient to fund operations, the Company may be required to seek
additional financing sooner than currently anticipated or may be required to
curtail its activities. There can be no assurance that additional financing will
be available on acceptable terms, or at all. See 'Use of Proceeds' and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
Proprietary Rights. The Company's success will depend in part on its
ability to protect its technology, processes, trade secrets and other
proprietary rights from unauthorized disclosure and use and to operate without
infringing the proprietary rights of third parties. The Company's strategy is to
protect its technology and other proprietary rights through patents, copyrights,
trademarks, nondisclosure agreements, license agreements, and other forms of
protection. The Company has been active in pursuing patent protection for
technology and processes involving its Hotwatch Products and Blackbird Products
that it believes to be proprietary and that offer a potential competitive
advantage for the Company's products and services. To date, the Company has been
granted patents on certain features of the Hotwatch Products and has patents
pending for certain features of the Hotwatch Products and Blackbird Products. In
addition, the Company has also licensed patents from third parties in an effort
to maintain flexibility in the development and use of its technology, including
exclusive and non-exclusive rights to use patents in connection with the
Blackbird Products. There can be no assurance, however, that any pending or
future patent application of the Company or its licensors will result in
issuance of a patent, that the scope of protection of any patent of the Company
or its licensors will be held valid if subsequently challenged, or that third
parties will not claim rights in or ownership of the products and other
proprietary rights held by the Company or its licensors. In addition, the laws
of certain foreign countries do not protect the Company's intellectual property
rights to the same extent as the laws of the United States.
Litigation or regulatory proceedings, which could result in substantial
cost and uncertainty to the Company, may also be necessary to enforce patent or
other proprietary rights of the Company or to determine the scope and validity
of a third party's proprietary rights. Although the Company believes that its
technology has been independently developed and that its products do not
infringe patents known to be valid or violate other proprietary rights of third
parties, it is possible that such infringement of existing or future patents or
violation of proprietary rights may occur. There can be no assurance that third
parties will not assert infringement claims in the future with respect to the
12
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<PAGE>
Company's current or future products or that any such claims will not result in
litigation or regulatory proceedings or require the Company to modify its
products or enter into licensing arrangements, regardless of the merits of such
claims. No assurance can be given that any necessary licenses can be obtained in
a timely manner, upon commercially reasonable terms, or at all, and no assurance
can be given that third parties will not assert infringement claims with respect
to any current licensing arrangements. The Company's failure to successfully
enforce its proprietary rights or defend against infringement claims brought by
third parties could have a material adverse effect upon the Company. In
addition, there can be no assurance that the Company will have the resources
necessary to successfully defend an infringement claim brought by a third party.
In addition to the foregoing methods of protection, the Company employs
various physical security measures to protect its software source codes,
technology and other proprietary rights. However, such measures may not afford
complete protection and there can be no assurance that others will not
independently develop similar source codes, technology or other proprietary
rights or obtain access to the Company's software codes, technology, or other
proprietary rights. Furthermore, although the Company has and expects to
continue to have internal nondisclosure agreements with its employees and
consultants, and license agreements with customers, which contain restrictions
on disclosure, use and transfer of proprietary information, there can be no
assurance that such arrangements will adequately protect the Company's
proprietary rights or that the Company's proprietary rights will not become
known to third parties in such a manner that the Company has no practical
recourse. See 'Business -- Proprietary Rights.'
Risk of System Failure or Inadequacy. The Company operates and maintains
internal computers and telecommunication equipment for, among other things,
monitoring and supporting its products and services, and operating its Real-Time
Roaming Fraud Prevention Service. The Company's operations are dependent upon
its ability to maintain such equipment and systems in effective working order
and to protect them against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. Although the Company provides
back-up for substantially all of its systems, these measures will not eliminate
the risk to the Company's operations from a system failure. In addition to its
own systems, the Company relies on certain equipment, systems and services from
third parties that are also subject to risks, including risks of system failure.
There can be no assurance that the Company's property and business interruption
insurance will be adequate to compensate the Company for any losses that may
occur in the event of a system failure. Any damage, failure or delay that causes
interruptions in the Company's operations could have a material adverse effect
on the Company's business, financial condition and results of operations. See
' -- Dependence on Third Party Vendors.'
Radio Frequency Emission Concerns; Medical Device Interference. Media
reports have suggested that certain RF emissions from portable cellular
telephones might be linked to various health concerns, including cancer.
Concerns over RF emissions may have the effect of discouraging the use of
cellular and other wireless communications services, such as PCS, which could
have an adverse effect upon the Company's business. The Federal Communications
Commissions ('FCC') has a rulemaking proceeding pending to update the guidelines
and methods it uses for evaluating RF emissions from radio equipment, including
cellular telephones, and the 1996 Telecommunications Act requires the FCC to
complete this rulemaking by August 1996. Although PCS handsets operate at lower
power than cellular handsets and are therefore likely to comply with proposed
new standards, the same concerns about RF emissions could be present with PCS
handsets.
Certain interest groups have requested that the FCC investigate claims that
certain wireless technology poses health concerns and causes interference with
hearing aids, pacemakers and other medical devices. In addition, the Personal
Communications Industry Association announced in July 1995 that it was
undertaking an industry-wide study to gather information on possible PCS
interference with medical devices for all PCS protocols. There can be no
assurance that the findings of such studies will not have a material adverse
effect on the Company's business, financial condition and results of operations
or that such findings will not lead to government regulation that will have a
material adverse effect on the Company's business, financial condition and
results of operations.
Government Regulation and Legal Uncertainties. While, for the most part,
the Company's operations are not directly regulated, the wireless carriers that
constitute the Company's customers are
13
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heavily regulated at both the federal and state levels. Such regulation may
inhibit the growth of the wireless telecommunications industry, limit the number
of potential customers for the Company's services and impede the Company's
ability to offer competitive services to the wireless communications market or
otherwise have a material adverse effect on the Company's business, financial
condition and results of operations. At the same time, recently enacted federal
legislation deregulating the telecommunications industry may cause changes in
the industry, including entrance of new competitors or industry consolidation,
which could in turn subject the Company to increased pricing pressures, decrease
the demand for the Company's services, increase the Company's cost of doing
business or otherwise have a material adverse effect on the Company's business,
financial condition and results of operations.
No Dividends. To date, the Company has not paid any dividends on the Common
Stock and does not expect to declare or pay any dividends on such Common Stock
in the foreseeable future. See 'Dividend Policy.'
Dilution. This offering involves an immediate dilution of $16.41 per share
between the pro forma as adjusted net tangible book value per share after the
offering and the assumed public offering price of $18.00 per share. See
'Dilution.'
Outstanding Options. As of March 31, 1996, there were outstanding stock
options to purchase an aggregate of 2,713,040 shares of Common Stock at a
weighted average exercise price of $5.95 per share (after giving effect to the
exercise by the Selling Shareholders of options to acquire 226,000 shares of
Common Stock). To the extent that these outstanding stock options are exercised,
dilution to the Company's stockholders may occur if the market price or book
value of the Common Stock of the Company at the time of exercise is greater than
the exercise price of the options. Moreover, the terms upon which the Company
will be able to obtain additional equity capital may be adversely affected since
the holders of such outstanding securities can be expected to exercise them at a
time when the Company would, in all likelihood, be able to obtain any needed
capital on terms more favorable to the Company than those provided in the
outstanding options. See 'Management -- Stock Option Plans.'
Shares Eligible for Future Sale. Upon completion of this offering, the
Company will have outstanding 23,669,748 shares of Common Stock (including
237,280 shares issued for option exercises, from April 1, 1996 to the date of
this Prospectus), of which the 1,726,000 shares sold in this offering (1,984,900
shares if the Underwriters' over-allotment option is exercised in full) and the
4,600,000 shares sold in the Company's initial public offering in August 1991
and all other shares will be freely tradeable without restriction or further
registration under the Securities Act, except for those shares held by
'affiliates' (as defined in the Securities Act) of the Company. There are no
restricted shares currently outstanding. Affiliates are able to sell shares
pursuant to Rule 144 ('Rule 144') under the Securities Act, subject to
compliance with certain requirements set forth in Rule 144. In addition,
5,400,000 shares of Common Stock are authorized under the Company's 1991
Qualified Stock Option Plan, 1991 Non-Qualified Stock Option Plan, as amended,
1993 Non-Employee Directors Stock Option Plan and 1996 Stock Option Plan. Of
these shares, 2,176,160 shares are issuable upon the exercise of outstanding
stock options granted by the Company, of which options to purchase 513,100
shares are currently exercisable (assuming the exercise by certain Selling
Stockholders of options to purchase 76,000 shares of Common Stock). Registration
statements on Form S-8 have been filed with the Securities and Exchange
Commission (the 'Commission') registering all of the shares of Common Stock that
may be issued under these plans, other than the 1996 Stock Option Plan, and
registering 600,000 shares of Common Stock issued to Robert Dahut which were not
issued in connection with any stock option plan of the Company. Of these shares,
390,000 are issuable upon exercise of certain options to purchase shares of
Common Stock (which are in addition to the 150,000 shares being sold by Mr.
Dahut in connection with this Prospectus and which include 30,000 options
currently exercisable by Mr. Dahut. The Company and each of its executive
officers and directors have agreed with the Underwriters, subject to limited
exceptions, not to offer, sell, pledge, contract to sell, grant any other option
to purchase or otherwise dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for, or warrants, rights or
options to acquire shares of Common Stock, for a period of 180 days from the
date of this Prospectus without the prior written consent of the Representative.
The Company estimates that 540,434 shares of outstanding Common Stock and
838,820 shares of Common
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Stock that are issuable upon the exercise of outstanding options will be subject
to such agreements. No new options will be granted under either the Company's
1991 Non-Qualified Stock Option Plan, or under the Company's 1991 Qualified
Stock Option Plan. Sales of substantial amounts of shares of Common Stock in the
public market, or the availability of such shares for future sale, could
adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise additional capital through an offering of its
equity securities. See 'Shares Eligible for Future Sale' and 'Underwriting.'
Possible Volatility of Stock Price. The market price of the Common Stock
could be subject to significant fluctuations in response to variations in
financial results or announcements of material events by the Company or its
competitors. Regulatory changes or changes in the general condition of the
economy or the financial markets could also adversely affect the market price of
the Common Stock. See 'Price Range of Common Stock.'
Anti-Takeover Provisions. The Certificate of Incorporation and By-laws of
the Company contain various provisions which may have the effect of
discouraging, delaying or preventing future changes of control or takeover
attempts, which the Company's stockholders may deem to be in their best
interests, and perpetuating the Company's existing management. Among other
things, such provisions: (i) provide the Board of Directors with broad
discretion to issue serial preferred stock; (ii) provide for three-year terms
for the directors of the Company and the election of such directors on a
staggered basis; (iii) prohibit repurchases by the Company from a stockholder
owning 5% or more or the Company's voting securities (other than those
stockholders meeting such description as of May 30, 1991) who have held their
securities for less than two years, unless approved by a majority of the
disinterested stockholders; and (iv) require the approval of two-thirds of all
shares eligible to vote for any proposed amendment to the Certificate of
Incorporation or By-laws that seeks to modify or remove the foregoing
provisions. In addition, in certain circumstances, Delaware law requires the
approval of two-thirds of all shares eligible to vote for certain business
combinations involving a stockholder owning 15% or more of the Company's voting
securities (other than stockholders currently meeting such description),
excluding the voting power held by such stockholder. The existence of all of the
above provisions may have the effect of discouraging, delaying or preventing a
future change of control or takeover attempt of the Company, which could have an
adverse effect on the market price of the Common Stock. See 'Description of
Capital Stock -- Anti-Takeover Provisions.'
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USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of 1,500,000
shares offered hereby by the Company (after deducting underwriting discounts and
commissions and estimated expenses payable by the Company), are estimated to be
approximately $25,080,000 (or approximately $28,887,000 if the Underwriter's
over-allotment option is exercised in full pro rata between the Company and the
Selling Shareholders).
The Company intends to use the net proceeds of the offering to finance (i)
research and development to enhance the Company's existing technologies and
develop new technologies; (ii) expansion of sales and marketing activities
including the establishment of international marketing, sales and distribution
operations; (iii) expansion of customer support capabilities; (iv) enhancement
and expansion of the Company's manufacturing activities; (v) provision of lease
financing to certain of the Company's customers; (vi) possible acquisitions of
complementary technologies and businesses; and (vii) expansion of working
capital and general corporate purposes. While from time to time the Company
evaluates potential acquisitions of businesses, products or technologies, and
anticipates continuing to make such evaluations, the Company has no present
understandings, commitments or agreements with respect to any acquisition of
other technologies or businesses. Pending such uses of funds, the proceeds will
be invested in short-term, investment grade, interest-bearing securities. Since
a significant portion of the net proceeds will be used for general corporate
purposes, the Board of Directors and management of the Company will have
significant flexibility in applying the net proceeds of this offering.
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Stockholders.
DILUTION
At March 31, 1996, the Company had a net tangible book value of
approximately $.51 per share of Common Stock based on 21,706,468 shares of
Common Stock outstanding. Net tangible book value per share of Common Stock
represents the total amount of tangible assets of the Company less the total
amount of its liabilities, divided by the number of Common Shares outstanding.
Tangible assets are defined as the assets of the Company excluding intangible
assets (consisting of capitalized software development costs). Dilution per
share represents the difference between the price per share of Common Stock to
be paid by investors in the offering and the pro forma net tangible book value
per share of Common Stock immediately after the offering. After giving effect to
(i) the sale of 1,500,000 shares of Common Stock offered by the Company hereby
and the application of the net proceeds therefrom, which are estimated to be in
the aggregate approximately $25,080,000 (after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company) and (ii)
the exercise of options by the Selling Shareholders to purchase 226,000 shares
of Common Stock and the application of the proceeds in the amount of $1,121,000
from the exercise of such stock options, the net tangible book value of the
Company at March 31, 1996 would have been $37,297,763 or $1.59 per share. This
represents an immediate increase in the net tangible book value of $1.03 per
share to existing shareholders and an immediate dilution of $16.41 per share to
new investors. The following table illustrates this per share dilution at March
31, 1996:
<TABLE>
<S> <C> <C>
Assumed public offering price(1)...................................................... $18.00
------
Net tangible book value per share of Common Stock at March 31, 1996.............. $ .51
-----
Increase per share of Common Stock attributable to new investors................. 1.08
-----
Pro forma net tangible book value per share after the offering(2)(3)(4)............... 1.59
------
Dilution per share of Common Stock to new investors(3)................................ $16.41
------
------
</TABLE>
------------
(1) Before deducting underwriting discounts and commissions and offering
expenses payable by the Company.
(footnotes continued on next page)
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(footnotes continued from previous page)
(2) Based on the number of shares of Common Stock outstanding at March 31, 1996
giving effect to the issuance of 226,000 shares of Common Stock upon the
exercise of options by the Selling Shareholders. Excludes 2,713,040 shares
of Common Stock issuable upon the exercise of other stock options
outstanding at March 31, 1996, of which 237,280 shares of Common Stock were
issued upon the exercise of stock options since March 31, 1996 through the
date of this Prospectus. Also excludes 160,000 shares of Common Stock
issuable upon exercise of options granted since March 31, 1996. See 'Risk
Factors -- Dilution,' 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources,'
'Management -- Stock Option Plans,' and 'Underwriting.'
(3) Assuming all outstanding options were exercised, the net tangible book value
at March 31, 1996 would have been $55,073,763 or $2.11 per share of Common
Stock and the dilution per share of Common Stock to new investors would be
$15.89 per share of Common Stock.
(4) After deducting underwriting discounts and commissions of approximately
$1,620,000 and offering expenses of approximately $300,000 payable by the
Company.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been included in the Nasdaq National Market
since February 3, 1994 and prior thereto on the Nasdaq Small-Cap Market under
the symbol 'CTSC' The following table sets forth for the periods indicated the
high and low sales prices for the Common Stock as reported by the Nasdaq
National Market and has been adjusted to give retroactive effect to a 2 for 1
split of the Company's Common Stock effected in February 1994 and a 2 for 1
split effected in June 1996:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal 1994
First Quarter................................................................... $12.38 $ 6.06
Second Quarter.................................................................. 9.25 4.13
Third Quarter................................................................... 7.25 5.00
Fourth Quarter.................................................................. 8.38 5.50
Fiscal 1995
First Quarter................................................................... 9.25 6.50
Second Quarter.................................................................. 15.38 7.75
Third Quarter................................................................... 15.50 9.63
Fourth Quarter.................................................................. 12.25 7.50
Fiscal 1996
First Quarter................................................................... 15.25 10.56
Second Quarter.................................................................. 20.13 13.50
</TABLE>
On July 1, 1996, the last reported sales price of the Common Stock on the
Nasdaq National Market was $18.25 per share. As of June 14, 1996, there were 177
holders of record and the Company believes its Common Stock is beneficially
owned by in excess of 5,000 holders.
DIVIDEND POLICY
The Company has not declared or paid dividends on the Common Stock since
its inception and does not intend to declare or pay any dividends to its
shareholders in the foreseeable future.
The Company currently intends to reinvest earnings, if any, in the
development and expansion of its business. The declaration of dividends in the
future will be at the election of the Board of Directors and will depend upon
the earnings, capital requirements and financial position of the Company,
general economic conditions and other relevant factors.
17
<PAGE>
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996, and its capitalization at March 31, 1996, as adjusted to give effect
to (i) the sale of 1,500,000 shares of Common Stock offered by the Company
hereby and the application of the net proceeds therefrom, which are estimated to
be in the aggregate approximately $25,080,000 (after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company) and (ii) the exercise of options by the Selling Shareholders to
purchase 226,000 shares of Common Stock and the application of the proceeds in
the amount of $1,121,000 from the exercise of such stock options. See 'Use of
Proceeds,' 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and the Financial Statements and Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
ACTUAL AS ADJUSTED(2)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Stockholder's equity:
Preferred stock -- $.01 par value, authorized -- 5,000,000 shares, none issued... $ 0 $ 0
Common Stock -- $.001 par value, authorized -- 30,000,000 shares, issued and
outstanding -- 21,706,468 shares; as adjusted -- 23,432,468 shares(1)........... 22 23
Additional paid-in capital....................................................... 20,702 46,902
Retained deficit................................................................. (6,127) (6,127)
------- --------------
Total Stockholders' equity..................................................... 14,597 40,798
------- --------------
Total capitalization........................................................ $14,597 $ 40,798
------- --------------
------- --------------
</TABLE>
- ------------
(1) Based on the number of shares of Common Stock outstanding at March 31, 1996.
Includes 226,000 shares of Common Stock issuable upon the exercise of
options by the Selling Shareholders. Excludes 2,713,040 shares of Common
Stock issuable upon the exercise of other stock options outstanding at March
31, 1996, of which 237,280 shares of Common Stock were issued upon the
exercise of stock options since March 31, 1996 through the date of this
Prospectus. Also excludes 160,000 shares of Common Stock issuable upon
exercise of options granted since March 31, 1996. See 'Principal
Shareholders.'
(2) Based upon an assumed offering price of $18.00 per share of Common Stock.
18
<PAGE>
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December 31,
1995, are derived from the financial statements of the Company, which have been
audited by Ernst & Young LLP, independent auditors. The financial statements of
the Company for the three years ended December 31, 1995 are included elsewhere
herein. The financial data for the three month periods ended March 31, 1995 and
1996 are derived from unaudited financial statements, included elsewhere herein.
The unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the operating results for these
periods. Operating results for the three months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1996. The data should be read in conjunction with the
financial statements, related notes, and other financial information included
herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------------- --------------------------
1991(3) 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ----------- ----------- ----------- -----------
(IN DOLLARS EXCEPT WEIGHTED SHARES OUTSTANDING)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues.................. $2,417,536 $4,978,050 $5,267,685 $10,012,080 $12,584,836 $ 3,468,564 $ 842,279
Gross Research &
Development
Expenditures(1)......... 1,407,000 2,183,000 2,019,000 4,021,000 5,724,000 1,215,000 1,397,000
Net Income (Loss)......... (986,876) (1,542,424) (1,206,335) 1,549,871 63,187 243,127 (2,500,559)
Net Income (Loss) Per
Share(2)................ (0.13) (0.10) (0.07) 0.08 0.00 0.01 (0.12)
Cash Dividends Declared... 0 0 0 0 0 0 0
Weighted Average Shares
Outstanding............. 7,322,192 15,687,280 17,363,680 20,297,326 22,026,150 22,158,686 21,608,900
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, --------------------------
-------------------------------------------------------------------- AS
1991 1992 1993 1994 1995 ACTUAL ADJUSTED(4)
---------- ---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working Capital........... $3,865,235 $7,182,375 $6,577,988 $ 9,783,021 $11,093,831 $ 8,839,554 $35,040,554
Cash...................... 3,626,211 6,445,271 5,157,541 9,041,985 9,448,255 5,720,399 31,921,399
Capitalized Software
Development Costs....... 945,322 1,238,035 1,431,370 2,605,835 3,346,748 3,500,605 3,500,605
Total Assets.............. 6,648,443 10,056,343 9,863,431 15,476,720 18,370,645 16,031,129 42,232,129
Long Term Obligations..... 0 0 0 0 0 0 0
Total Stockholders'
Equity.................. 5,641,293 9,456,920 9,052,301 13,725,771 16,733,211 14,597,368 40,798,368
</TABLE>
- ------------
(1) Gross research and development expenditures presented in the Statement of
Operations Data are higher than research and development costs and expenses
disclosed in the Statements of Operations for the respective periods due to
the inclusion of capitalized software development costs and design and
development services costs which are disclosed elsewhere in the financial
statements. See Management's Discussion and Analysis of Financial Condition
and Results of Operations.
(2) Per common share amounts and weighted average shares outstanding have been
retroactively adjusted to give effect to the two for one stock split in
February 1994 and the two for one stock split in June 1996. See Notes I and
J of Notes to Financial Statements.
(3) The Company was incorporated in Delaware in August 1988 under the name
Ventures as a majority-owned subsidiary of Nationwide. In September 1988,
Ventures formed the Partnership as equal partners with NYNEX. In May 1991,
Ventures changed its name to Cellular Technical Services Company, Inc. In
August 1991 the Company exercised an option to purchase the interest in the
Partnership owned by NYNEX and consummated the initial public offering of
its securities. The Statement of Operations Data for the year ended December
31, 1991 combines the results of operations of the Partnership with those of
the Company in order to provide a more meaningful comparison between the
periods presented. The net loss for the period has been reduced by $254,000,
representing the partner's interest in the net loss for the period
commencing January 1, 1991 and ending August 12, 1991.
(4) Adjusted to reflect (i) the sale by the Company of the shares of Common
Stock offered hereby (based on an assumed offering price of $18.00 per
share) and the application of the net proceeds therefrom and (ii) the
Company's receipt of the proceeds from the exercise by the Selling
Shareholders of options to acquire 226,000 shares of Common Stock. See
'Capitalization.'
19
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues to date have been primarily derived from the
Company's Hotwatch Products and phone rental products (the latter of which are
no longer being marketed by the Company). To address the wireless communications
industry's increasing need for a product to more effectively combat cloning
fraud, which has become a major industry problem, the Company has developed the
Blackbird Products. The Company engineered the Blackbird Platform with an open
architecture design to allow the Company and others to develop application
products which could run on or exchange information with the Blackbird Platform.
In 1995, the Company began conducting trials for the purpose of testing and
evaluating its Blackbird Products. These trials recently resulted in the signing
of contracts with AirTouch and BANM, for installation of the Blackbird Products
in over 1,000 cell sites, subject to the Blackbird Products compliance with
contractual performance requirements.
The Company sustained a loss of $2,550,559 during the three months ended
March 31, 1996, and expects to record a loss in the range of $1,250,000 to
$1,750,000 for the quarter ending June 30, 1996. Although the Company
anticipates that it will begin to recognize revenues from AirTouch and BANM for
the Blackbird Products during the second half of 1996, it cannot predict the
actual timing or amount of such revenues. Moreover, the Company expects
increases in its costs and expenses during such period and in the future due to
increased research and development, sales and marketing activities and expansion
of customer support capabilities.
As the Company expands its domestic and international marketing efforts,
and as the wireless communications industry expands beyond cellular telephony to
include other wireless communication services, the Company believes that it will
be able to diversify its revenue and customer base. The Company's success in
exploiting these expanded markets and in achieving profitability will depend,
among other things, on its ability to make its existing and future technology
commercially acceptable, deal successfully with rapid changes in the wireless
communications industry (including the anticipated growth of digital services)
and enhance and expand its manufacturing activities. See 'Risk Factors' and
'Business.'
The following discussion and analysis should be read in conjunction with
the Company's financial statements and notes thereto and other financial
information included elsewhere in this Prospectus.
The following table presents the Company's Statement of Operations for the
three years ended December 31, 1993, 1994 and 1995, and for the quarters ended
March 31, 1995 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES
License and service fees..................... $ 3,875,353 $ 8,691,036 $10,944,788 $ 2,736,768 $ 645,622
Equipment sales.............................. 1,215,738 1,040,863 1,164,536 612,812 89,164
Interest income.............................. 176,594 280,181 475,512 118,984 107,493
----------- ----------- ----------- ----------- -----------
Total revenues............................... 5,267,685 10,012,080 12,584,836 3,468,564 842,279
COSTS AND EXPENSES
Cost of license and service fees............. 1,574,521 2,619,435 3,330,801 922,539 785,200
Cost of equipment sales...................... 1,329,276 1,112,254 1,485,952 611,731 278,405
Sales and marketing.......................... 738,068 789,578 2,141,853 507,607 822,873
General and administrative................... 1,563,794 2,269,170 2,115,991 601,783 510,611
Research and development..................... 1,268,361 1,661,772 3,445,052 576,777 945,749
----------- ----------- ----------- ----------- -----------
Total costs and expenses......................... 6,474,020 8,452,209 12,519,649 3,220,437 3,342,838
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................ (1,206,335) 1,559,871 65,187 248,127 (2,500,559)
PROVISION FOR INCOME TAXES....................... 0 10,000 2,000 5,000 0
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)................................ $(1,206,335) $ 1,549,871 $ 63,187 $ 243,127 $(2,500,559)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) PER SHARE...................... $(0.07) $0.08 $0.00 $0.01 $(0.12)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING.............. 17,363,680 20,297,326 22,026,150 22,158,686 21,608,900
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
20
<PAGE>
<PAGE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Total revenues decreased 76% to $842,279 for the three months ended March
31, 1996, from $3,468,564 for the three months ended March 31, 1995, and the
Company had a net loss of $2,500,559, or $.12 per share, compared to net income
of $243,127, or $.01 per share, for the three months ended March 31, 1995. This
decline in operating results was primarily attributable to: (i) long sales
cycles, (ii) uneven contract revenue streams from the Hotwatch Platform and
related application products ('Hotwatch Products'), and (iii) increased efforts
and expenditures in both sales and marketing and research and development of the
Blackbird Products.
License and service fees were derived from the Company's Hotwatch Products
and phone rental products. Such revenues decreased 76% to $645,622 for the three
months ended March 31, 1996, from $2,736,768 for the three months ended March
31, 1995.
License and service fees for the Company's Hotwatch Products were derived
principally from agreements with four customers. These agreements are the AWS
Axys agreements and the AWS Hotwatch Products agreement (collectively, the 'AWS
Agreements') between the Company and AT&T Wireless Services, Inc. ('AWS'), a
license agreement ('LIN/ACC Agreement') between the Company and collectively LIN
Broadcasting Company ('LIN') and American Cellular Communications ('ACC'),
subsidiaries of AWS and BellSouth Cellular, respectively, and license agreements
with 360[d]Communications Company (formerly Sprint Cellular Company) ('360[d]
CC') and Ameritech Mobile Communications, Inc. ('Ameritech'). License and
service fees from the Company's Hotwatch Products decreased 80% to $508,000 for
the three months ended March 31, 1996, from $2,511,000 for the three months
ended March 31, 1995. Such revenues under the AWS Agreements totaled $90,000 and
$1,820,000 for the three months ended March 31, 1996, and March 31, 1995,
respectively. This decrease was due primarily to completion of various phases of
these contracts during the three months ended March 31, 1995 that included large
non-recurring license, service and implementation fees. License and service fees
under the LIN/ACC Agreement continued their expected decline as they decreased
24% to $292,000 for the three months ended March 31, 1996, from $385,000 for the
three months ended March 31, 1995. Recurring license and service fees from this
agreement are expected to be minimal once products under the AWS Agreements are
deployed and as AWS installs its internally-developed fraud management system in
some or all of the LIN/ACC markets covered under the agreement. Other Hotwatch
license and service revenues decreased 59% to $126,000 from $306,000 principally
as a result of non-recurring license fees during the three months ended March
31, 1995, associated with the installation of software called for in the
Company's 1994 license agreement with 360[d] CC.
License and service fees from the Company's phone rental products decreased
38% to $147,000 for the three months ended March 31, 1996, from $237,000 for the
three months ended March 31, 1995. Marketing and further deployment of these
products ceased in early 1995 as a result of the Company's decision to exit the
phone rental market. This decision was prompted by the Company's evaluation of
the long term prospects of this market as anticipated growth had been lower than
previously expected. Revenues during the remainder of 1996 are expected to be
minimal and reflect the wind down of the phone rental operations.
Equipment sales, which primarily consist of the sale of computer systems
(which are generally non-recurring) and various peripheral and hardware
components, decreased 85% to $89,164 for the three months ended March 31, 1996,
from $612,812 for the three months ended March 31, 1995. Revenues for the three
months ended March 31, 1995, were derived primarily from equipment sales
associated with the AWS, 360[d] CC and Ameritech agreements.
Interest income decreased 10% to $107,493 for the three months ended March
31, 1996 from $118,984. The decrease was attributable to lower average cash
balances invested at lower average interest rates for the three months ended
March 31, 1996 as compared to the three months ended March 31, 1995.
Cost of license and service fees includes (i) the customer service and
engineering support costs that are directly associated with supporting software
license and service fee revenues, (ii) the amortization of software development
costs, and (iii) the costs associated with the design and development of custom
21
<PAGE>
<PAGE>
programming and related services. Cost of license and service fees decreased 15%
to $785,200 for the three months ended March 31, 1996, from $922,539 for the
three months ended March 31, 1995. The decrease was principally attributable to
$250,000 of non-recurring design and development costs associated with service
revenues under the AWS agreements recorded during the three months ended March
31, 1995, which decrease was partially offset by (a) a 16% increase to $279,972
for the three months ended March 31, 1996, from $241,775 for the three months
ended March 31, 1995, in amortization of software development costs primarily
attributable to the 1995 release of the first phase of the Blackbird Products
for which no license revenues were received, and (b) a 34% increase to $390,000
for the three months ended March 31, 1996, from $291,000 for the three months
ended March 31, 1995, for personnel and overhead related costs incurred in
supporting anticipated growth in new customers and products during the three
months ended March 31, 1996.
Cost of equipment sales decreased 54% to $278,405 for the three months
ended March 31, 1996, from $611,731 for the three months ended March 31, 1995.
Cost of equipment sales, which includes purchased hardware, allocated
installation costs, and, more recently, manufacturing overhead costs, has
historically exceeded the related revenues from equipment sales. Amounts
recorded for the three months ended March 31, 1995, included the costs of
purchased hardware associated with the AWS, 360[d] CC and Ameritech equipment
sales. The costs to sales ratio increased to 312% for the three months ended
March 31, 1996 from 100% for the three months ended March 31, 1995. The negative
margins were primarily attributable to fixed engineering, installation overhead,
and manufacturing overhead costs that were not recovered from equipment sales,
and, for the three months ended March 31, 1996, included overhead-related costs
associated with the Blackbird Products which are being deployed under both sales
contracts and trial agreements for testing and evaluation in several markets and
for which no revenues were recorded.
Sales and marketing expenses increased 62% to $822,873 for the three months
ended March 31, 1996 from $507,607 for the three months ended March 31, 1995 as
a result of increased personnel and related costs incurred in connection with
the Company's increased efforts to generate demand for the Company's products.
The Company's first quarter activities generally included its largest
expenditures for trade shows and related events.
General and administrative expenses decreased 15% to $510,611 for the three
months ended March 31, 1996, from $601,783 for the three months ended March 31,
1995. This decrease was primarily the result of reduced management fees paid to
Nationwide under the four-year management services agreement between the Company
and Nationwide that expired in August 1995.
Research and development costs increased 64% to $945,749 for the three
months ended March 31, 1996 from $576,777 for the three months ended March 31,
1995 primarily due to the continued and expanded investment in the Blackbird
Products. Software development costs of $433,829 and $413,857 were capitalized
during the three months ended March 31, 1996 and the three months ended March
31, 1995, respectively, and related primarily to the development of the
Blackbird Products. In addition, expenditures of $224,000 related primarily to
billable design and development services under the AWS Agreements were expensed
as costs of services for the three months ended March 31, 1995. Such expenses
for the three months ended March 31, 1996, were minimal. Including capitalized
software development and contract design and development costs, the Company
incurred gross research and development expenditures of $1,397,000 for the three
months ended March 31, 1996, which represented a 15% increase over the three
months ended March 31, 1995. This increase is primarily the result of additional
expenditures for personnel related costs for development of the Blackbird
Products, and for legal fees expended to protect the Company's intellectual
property.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues increased 26% to $12,584,836 in 1995 from $10,012,080 in
1994 and the Company had net income of $63,187 compared to $1,549,871 in 1994.
The decrease in net income for 1995 was primarily due to acceleration of efforts
and expenses associated with both research and development, and marketing and
sales of the Blackbird Products.
22
<PAGE>
<PAGE>
License and service fees were derived primarily from the Company's Hotwatch
and phone rental products. In addition, the Company derived limited service fee
revenues from a trial related to its Blackbird Products. Such license and
service fees increased 26% to $10,944,788 in 1995 from $8,691,036 in 1994.
License and service revenues for the Hotwatch Products are principally derived
from agreements with the four customers described above.
License and service fees from the Hotwatch Products increased 20% to
$9,490,000 in 1995 from $7,920,000 in 1994. License and service fees under the
AWS Agreements totaled $6,666,000 in 1995 and $5,066,000 in 1994. License and
service fees under the LIN/ACC Agreement continued their expected decline as
they decreased 24% to $1,473,000 in 1995 from $1,947,000 in 1994. Other Hotwatch
license and service fees increased 49% to $1,351,000 from $907,000 in 1994
principally as a result of 1995 license and service fees associated with the
Company's agreements with 360[d] CC.
License and service fees from the Company's phone rental products increased
11% to $1,017,000 in 1995 from $917,000 in 1994. The increased revenues in 1995
resulted principally from fees received for a source code license and for early
termination of the Company's agreement with its largest phone rental product
customer.
Equipment sales, which primarily consist of the sale of computer systems
(which are generally non-recurring) and various peripheral and hardware
components, increased 12% to $1,164,536 from $1,040,863 in 1994. Revenues during
1995 were primarily derived from equipment sales associated with the AWS, 360[d]
CC and Ameritech agreements.
Interest income increased 70% to $475,512 in 1995 from $280,181 in 1994,
and is attributable to higher average cash balances invested at higher average
interest rates during 1995 as compared to 1994.
Cost of license and service fees included (i) the customer service and
engineering support costs that are directly associated with supporting software
license and service fee revenues, (ii) the amortization of software development
costs, and (iii) the costs associated with the design and development of custom
programming and related services. Cost of license and service fees increased 27%
to $3,330,801 in 1995 from $2,619,435 in 1994. The increase was principally
attributable to (i) a 79% increase to $984,977 in 1995 from $550,257 in 1994 in
amortization of software development costs substantially attributable to the
release of the first phase of the Blackbird Products in 1995 for which there
were no license revenues received, and (ii) a 25% increase to $1,793,000 in 1995
from $1,434,000 in 1994 for personnel and overhead related costs incurred in
supporting new customers and installed products. A 13% decrease to $553,000 from
$635,000 of design and development costs related primarily to the AWS Axys
service revenues partially offset these increases.
Cost of equipment sales increased 34% to $1,485,952 in 1995 from $1,112,254
in 1994. Cost of equipment sales, which includes purchased hardware and
allocated engineering and installation costs, has historically exceeded the
related revenues from equipment sales. The cost to sales ratio increased to 128%
in 1995 from 107% in 1994. The negative margins were primarily attributable to
fixed engineering and installation overhead costs that were not recovered from
equipment sales, and, in 1995, include costs associated with installing hardware
components of the Blackbird Products which had been deployed for testing and
evaluation in several markets and for which no revenues were recorded.
Sales and marketing expenses increased 171% to $2,141,853 in 1995 from
$789,578 in 1994 as a result of increased personnel and related costs incurred
in connection with the Company's expansion efforts to generate demand for the
Company's products and, to a lesser extent, sales incentive compensation
attributable to certain contracts.
General and administrative expenses decreased 7% to $2,115,991 in 1995 from
$2,269,170 in 1994. This decrease was primarily the result of 1994 expenditures
associated with hiring and relocation of the Company's President, 1994
management incentive bonuses that were non-recurring during 1995, and reduced
management fees paid to Nationwide under the four-year management services
agreement between the Company and Nationwide that expired in August 1995.
Research and development costs increased 107% to $3,445,052 in 1995 from
$1,661,772 in 1994. Software development costs of $1,725,890 and $1,724,722 were
capitalized during 1995 and 1994, respectively, and related primarily to the
development of the Blackbird Products in both years and to development in 1994
of the Accountlink'tm' product ('Accountlink') which provides a pre-paid based
23
<PAGE>
<PAGE>
solution for real-time credit limit monitoring. In addition, costs of $553,000
and $635,000 related primarily to design and development services under the AWS
Agreements were expensed in 1995 and 1994, respectively, as costs of services.
Including the $1,725,890 of capitalized software development costs and the
$553,000 of contract design and development services costs, the Company incurred
gross research and development expenditures of $5,724,000 in 1995 which
represents a 42% increase over 1994. This increase was primarily the result of
additional expenditures for personnel related costs, outside consulting services
and prototype hardware expenditures for development of the Blackbird Products.
The $2,000 provision for income taxes in 1995 reflected partial utilization
of the Company's net operating loss carry forward while providing for the
Company's estimate of alternative minimum taxes.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Total revenues increased 90% to $10,012,080 in 1994 from $5,267,685 in 1993
and the Company had net income of $1,549,871, compared to a net loss of
$1,206,335 in 1993. The signing of the AWS Agreements, and the 360[d] CC and
Ameritech agreements during 1994 contributed greatly to the improved financial
performance.
License and service fees were derived primarily from the Hotwatch Products.
Such license and service fees increased 152% to $7,920,000 in 1994 from
$3,142,000 in 1993. License and service fees under the AWS Agreements totaled
$5,066,000 in 1994. License and service fees under the LIN/ACC Agreement
decreased 31% to $1,947,000 in 1994 from $2,842,000 in 1993 as a result of the
renegotiation of the contract in 1993 and 1994 and cancellation of licenses in
the LIN New York market effective July 31, 1994. Other Hotwatch license and
service fees increased to $907,000 from $300,000 in 1993 principally as a result
of 1994 license and service fees associated with the Ameritech and 360[d] CC
contracts.
License and service fees from the Company's phone rental products increased
21% to $917,000 in 1994 from $758,000 in 1993 primarily due to the continued
deployment of the Company's in-car rental products to the rental car agency
market.
Equipment sales decreased 14% to $1,040,863 in 1994 from $1,215,738 in
1993. The decrease was primarily due to reduced shipments of the Company's
in-car credit card phone modules that were deployed in the rental car agency
market.
Interest income increased 59% to $280,181 in 1994 from $176,594 in 1993,
and was attributable to higher average cash balances invested at higher average
interest rates during 1994 as compared to 1993.
Cost of license and service fees increased 66% to $2,619,435 in 1994 from
$1,574,521 in 1993. The increase was principally attributed to; (i) a 41%
increase to $1,434,000 in 1994 from $1,018,000 in 1993 for personnel and
overhead related costs incurred in supporting new customers and products and
(ii) $635,000 of 1994 design and development costs associated with the AWS Axys
service revenues.
Cost of equipment sales decreased 16% to $1,112,254 in 1994 from $1,329,276
in 1993 commensurate with the equipment sales decline. The cost-to-sales ratio
decreased to 107% in 1994 from 109% in 1993. The improvement was attributable to
improved pricing practices and balancing of the Company's engineering and
installation resources.
Sales and marketing expenses increased 7% to $789,578 in 1994 from $738,068
in 1993. The increase was attributed to variable expenses related to the
increased sales in 1994 and to the Company's expansion efforts to generate and
meet market demand for the purchase and licensing of the Company's products.
General and administrative expenses increased 45% to $2,269,170 in 1994
from $1,563,794 in 1993. This increase was primarily the result of costs
associated with the hiring, relocation and compensation of the Company's new
President, management incentive bonuses and to a lesser degree, legal and
accounting costs associated with purchase and license agreements with several
cellular carriers.
Research and development costs increased 31% to $1,661,772 in 1994 from
$1,268,361 in 1993. Software development costs of $1,724,722 and $750,277 were
capitalized during 1994 and 1993, respectively, and relate primarily to the
development of the Blackbird Platform, PreTect and
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Accountlink products in 1994 and the enhancement of its Hotwatch and phone
rental products in 1993. In addition, costs of $635,000 related to design and
development services under the AWS Billing Agreements were expensed in 1994 as
costs of services. Including the $1,724,722 of capitalized software development
costs and the $635,000 of contract services costs, the Company incurred gross
research and development expenditures of $4,021,000 in 1994 which represents a
99% increase over 1993. This increase is principally attributable to additional
expenditures for personnel related costs and outside consulting services for
development of the Blackbird and Accountlink products and the recurring costs
associated with the AWS Axys project.
The $10,000 provision for income taxes in 1994 reflected partial
utilization of the Company's net operating loss carryforward while providing for
the Company's estimate of alternative minimum taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have consisted primarily of financing
software development, property and equipment requirements, working capital and
funding the Company's operating losses. The Company has historically funded
these capital requirements through the issuance of Common Stock (including
proceeds from the exercise of warrants and options) and from operating profits
generated in certain periods. On March 31, 1996, the Company's cash balance was
$5,720,399 as compared to $9,448,255 on December 31, 1995, and $9,041,985 at
December 31, 1994. The Company's working capital decreased to $8,839,554 at
March 31, 1996, from $11,093,831 at December 31, 1995, which represented an
increase from $9,783,021 at December 31, 1994.
Cash used by operating activities amounted to $3,513,515 for the three
months ended March 31, 1996, as compared to $1,010,710 during the same period in
1995. This increased utilization of cash reflects the loss for the three months
ended March 31, 1996, as compared to a profit in the corresponding 1995 period,
with the 1996 results being partially offset by increased depreciation and
amortization and the changes in the balances of operating assets and
liabilities. Cash provided by operating activities amounted to $753,379 and
$3,213,257 in 1995 and 1994, respectively, as compared to cash used by operating
activities in the amount of $866,674 during 1993. The improved cash flow during
the 1995 and 1994 periods was primarily attributable to having achieved
profitability, as compared to a net loss during 1993, the positive impact of
depreciation and amortization, and to changes in the balances of operating
assets and liabilities. The Company continues to increase its proprietary
Blackbird hardware inventory to meet anticipated sales demand for Blackbird
Products during 1996. Additional inventory at March 31, 1996, in an amount
exceeding $2,000,000, was on order and was expected to be funded by customer
payments under existing and future contracts, cash generated from operating
activities and/or from cash balances. At March 31, 1996, approximately $600,000
in deposits was prepaid to vendors by the Company for these inventory orders.
The Company does not currently expect its operating activities to provide
consistent positive cash flow on a quarter-to-quarter basis as long sales cycles
and staggered sales contract payments cause uneven cash flow streams.
Cash utilized by investing activities totaled $579,057 and $1,011,061
during the three months ended March 31, 1996, and March 31, 1995, respectively.
Investing activities utilized $3,291,362, $2,452,412 and $1,189,772 during the
years ended December 31, 1995, 1994 and 1993, respectively. The Company's
capital requirements during such periods were (i) software development,
particularly with respect to the Blackbird Products and (ii) property and
equipment, primarily for furniture, leaseholds, and equipment associated with
expanding the Company's business. These expenditure levels are expected to
continue in 1996 at or above the levels of 1995. At March 31, 1996, the Company
had no significant commitments for capital expenditures. The Company, as part of
its growth strategy, would consider the cost/benefit of purchasing software
technology in the event that an attractive opportunity arises.
During the three months ended March 31, 1996 and 1995, cash provided by
financing activities was generated from the exercise of stock options issued to
the Company's directors, officers and employees. Proceeds from these activities
totaled $364,716 and $268,399 for the three months ended March 31, 1996 and
1995, respectively. Cash provided by financing activities was generated from the
exercise of stock options by Nationwide in 1995 and by the Company's directors,
officers and employees in the three years ended December 31, 1995, and during
1994 and 1993, from the exercise of Common Stock
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Warrants issued in connection with the Company's initial public offering in
1991. Proceeds from these activities totaled $2,944,253, $3,123,599 and $768,716
during 1995, 1994 and 1993, respectively.
Prior to September 14, 1995, Nationwide owned 6,680,000 shares of the
Company's Common Stock and was the holder of an option to purchase an additional
1,280,000 shares. On September 14, 1995, in connection with its merger with MCI
Communications Corp., Nationwide exercised its option and distributed the
combined total of 7,960,000 shares to its stockholders. As a result of the
exercise of the option, the Company received $1,600,000 and issued 1,280,000
shares of Common Stock. The majority of the cash provided by financing
activities in 1994 resulted from the exercise in March 1994 of 287,437 Class A
Warrants from which the Company received $2,122,611, net of expenses, in
exchange for 1,149,748 shares of Common Stock. All of the Company's warrants had
been exercised or had expired by the end of 1994.
The Company expects to continue to incur substantial expenses in support of
research and development activities, growth of its sales and marketing
organization, support for new products and the anticipated expanded customer
base, enhancing the hardware design and manufacturing processes and
administrative activities. Although the Company believes that the proceeds from
this offering together with existing cash will be sufficient to fund its
operations for at least the next 12 months, there can be no assurance that the
Company will not require additional financing within such period. The Company's
capital requirements may vary materially from those planned because of results
of research and development, changes in focus and direction of the Company's
research and development programs, competitive and technological advances,
changes in the Company's marketing and distribution strategy, and other factors.
There can be no assurance that additional financing, if required, will be
available on satisfactory terms, if at all.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
A number of statements contained in this Prospectus are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that involve risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in the applicable statements.
These risks and uncertainties include but are not limited to: the Company's
dependence on the cellular communications market; its vulnerability to rapid
industry change and technological obsolescence; the limited nature of its
product life, and the uncertainty of market acceptance of its products; the
unproven status of its products in widespread commercial use, including the
risks that its current and future products may contain errors that would be
difficult and costly to detect and correct and that technological difficulties
may in general hinder or prevent commercialization of its present and future
products; potential manufacturing difficulties; potential difficulties in
managing growth; dependence on key personnel; the Company's limited customer
base and reliance on a relatively small number of customers; the possible impact
of competitive products and pricing; the uncertain level of actual purchases of
its products by current and prospective customers under existing and future
agreements; uncertainties in the Company's ability to implement these agreements
sufficiently to permit it to recognize revenue under its accounting policies
(including its ability to meet product performance criteria contained in such
contracts); uncertainties with respect to the Company's business strategy;
general economic conditions; and other risks described in this Prospectus. See
'Risk Factors.'
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BUSINESS
The Company's mission is to be the premier developer and provider of
real-time information processing and information management systems for the
wireless communications industry in the United States and in international
markets. The Company designs and engineers software and hardware products for
sale to wireless communications industry to provide user/device authentication
(for cloning fraud prevention) and to provide service metering (for credit
management and prepaid billing). Although the Company's products and services
currently are used exclusively by cellular carriers, the Company believes they
may be generally adaptable to other wireless communications systems.
User/device authentication primarily involves various forms of 'pre-call'
verification to ensure that the use of a wireless communications device (e.g., a
cellular telephone) is legitimate before the device is allowed to connect to a
wireless network. The Company's Blackbird Platform provides the underlying
technology for pre-call application products. The first application product on
the Blackbird Platform, PreTect, is designed to proactively prevent cloning
fraud. The Cellular Telecommunications Industry Association has estimated that
in 1995 cloning fraud has resulted in costs and lost revenues to the cellular
industry of an amount in excess of $650 million. The Company believes that in
1996 cloning fraud will result in an increased amount of such costs and lost
revenues.
Service metering primarily involves the collection of various forms of
'post-call' information (within minutes after the end of the call) to ensure
that a wireless communications carriers' subscriber has proper account status to
make additional calls. The Company's Hotwatch Platform provides the underlying
technology for Hotwatch Products. See ' -- The Hotwatch Platform.'
The Blackbird and Hotwatch Platforms, each based on open systems
architecture, are designed to allow a broad range of interconnection and
data-sharing possibilities between various geographic markets and different
wireless communications carriers.
The Company's primary activities are currently focused on the further
development, marketing and deployment of the Blackbird Platform and the PreTect
fraud prevention application product and services. PreTect, which is transparent
to the subscriber, uses patented signal processing commonly referred to as RF
'fingerprinting' technology to accurately distinguish between legitimate
subscribers and counterfeit users before the call is connected. PreTect captures
information from the cellular telephone call at the cell site, before it enters
the carrier's system, and compares it to valid fingerprints and data. If a
proper match is not made, PreTect can then automatically prevent connection of
the call. The Company also provides a seamless Real-Time Roaming Protection
Service between markets which use the Blackbird Platform and PreTect. During
1996, the Company entered into agreements with AirTouch and BANM for the
provision of the Blackbird Products for use in over 1,000 cell sites subject to
the products' compliance with certain requirements. The Company believes that as
of the end of 1995 there were approximately 23,000 domestic and 10,000
international cell sites to which the Company's Blackbird Products are
adaptable. The Company also believes that there are approximately 14,000
additional international cell sites to which the Company's Blackbird Products
may be adaptable.
During the last ten years, wireless communications service has been one of
the fastest growing segments of the telecommunications industry. The Cellular
Telecommunications Industry Association has estimated that the number of
cellular subscribers in the United States increased from approximately 340,000
subscribers in December 1985 to approximately 34 million subscribers in December
1995. The Company believes the worldwide wireless communications market may
exceed 100 million subscribers in 1996. The Company expects significant growth
in wireless communications in the United States to continue as a result of the
increased demand for cellular service and the emergence of PCS as a new form of
wireless communications service and that significant growth will also occur in
international markets. The Company believes that significant growth will also
occur in international markets. In addition, the Company believes that the
number of Cellular and PCS subscribers may grow to 80 million in the United
States and more than 300 million worldwide in the year 2001. The Company
believes that the demand for its products and services may increase as the
Company adapts its products and creates new products to service an expanded
wireless communications industry.
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BUSINESS STRATEGY
DEPLOYMENT OF BLACKBIRD
The Company's immediate strategy is to achieve commercial acceptance and
significant market penetration of the Blackbird Platform. To accomplish this,
the Company plans to expand its domestic and international sales and marketing
efforts. After it has achieved an installed base of the Blackbird Platform, the
Company believes that it will be able to leverage its relationships with
carriers and its position at the carriers' cell sites to offer additional
products and services. The Company plans to expand its research and development
efforts to enhance its existing products and services and to develop new
value-added products for the Blackbird Platform which can be sold in connection
with PreTect or on a stand-alone basis.
LEVERAGE CORE COMPETENCIES
Through the development and deployment of the Blackbird and Hotwatch
Platforms, the Company has developed several core competencies. The Company
believes that these core competencies may facilitate its development of products
and services which complement its platforms and add value to its current and
potential customer base.
Ability to interface with carriers' cell sites and switches. The
Company's proprietary software and hardware products collect and
utilize information resident at the carrier's cell site and/or switch.
This expertise may facilitate the development of future products and
services in both an analog and digital environment.
Real-time database expertise. The Company has developed the ability to
optimize database performance which enables systems to reach
transaction decisions in very short time frames. For example, PreTect
can determine whether or not to connect a call within five seconds of
call origination.
Real-time rating expertise. The Company has developed the ability to
combine streams of telephone billing information, such as toll
charges, discounts and promotions, surcharges, etc. to mimic a
carrier's billing system on a real-time basis, within minutes after
the end of the call, rather than in a batch process for monthly
customer billing. This currently allows the Company to determine
account authorization for future telephone calls. The Company believes
this expertise may be applicable to other systems that involve
real-time charges.
Transaction Control Protocol ('TCP')/Internet Protocol ('IP')
expertise. The Company believes it can apply the experience it has
gained in its existing TCP/IP networks and add its other core
competencies, such as real-time rating and real-time database
expertise to other TCP/IP networking infrastructures.
Ability to interface with billing systems. The Company has developed
the ability to interface with the systems infrastructures of major
billing service companies in the wireless communications industry. As
these companies expand their customer base beyond telephone carriers
the Company believes it can apply its knowledge to provide its
value-added service metering technologies to this expanded customer
base.
GENERAL
The FCC regulates the wireless communications industry in the United States
and is responsible for granting the licenses required to operate wireless
communications systems. The FCC has divided the United States into a number of
service (license) areas. Wireless communications services, each of which
utilizes a different portion of the radio spectrum, are expected to be dominated
by cellular services and PCS and, to a lesser extent, enhanced specialized
mobile radio ('ESMR'). The introduction of PCS and digital ESMR is expected to
add new service providers in each market and provide added competition,
increased features and a greater number of choices for wireless communications
subscribers.
Currently, cellular service dominates wireless communication services. At
year end 1995 there were approximately 34 million cellular subscribers in the
United States. The Company believes that over 95%
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of service currently is provided in an analog mode but that the industry is
undertaking a shift to digital mode in the major markets due to certain systems
advantages in the digital mode, including expanded capacity and greater privacy.
Cellular subscribers are serviced by two carriers in each market (commonly
referred to as 'A Band' and 'B Band' carriers). The markets are defined as
Metropolitan Service Areas ('MSAs'), of which there are 306, and Rural Service
Areas ('RSAs'), of which there are 428. As a result of the current duopoly
structure, there are 612 MSAs and 856 RSAs. These cellular systems serve to
interconnect a cellular subscriber with standard land-line telephone service and
other cellular subscribers. Service is available on a nationwide basis and the
major providers, through adherence to industry standards, offer interoperability
to markets that they do not own. The 10 largest cellular carriers own or operate
180 of the largest 200 MSA markets.
PCS systems are digital-based wireless communications systems which will
initially compete directly with existing cellular telephone, paging and
specialized mobile radio services. The Company believes that PCS providers will
be the first direct wireless competitors to cellular providers and the first to
offer mass market all-digital mobile networks. In addition, PCS providers may be
the first to offer mass market wireless local loop applications, in competition
with wired local communications services.
To date, the FCC has completed three auctions of PCS licenses to the public
(Channel block A, B and C). Service resulting from these licenses will provide
the primary competition to cellular service. The service areas for PCS vary from
those of cellular. The PCS licenses are based on Major Trading Areas ('MTAs'),
of which there are 51, and Basic Trading Areas ('BTAs'), of which there are 493.
BTAs are a subset of MTAs and are wholly contained within the MTA boundaries. As
with cellular, ownership of the PCS licenses is concentrated. Sprint
Telecommunications Venture, AT&T Wireless and PCS PrimeCo (ultimately owned by
AirTouch Communications, Inc., Bell Atlantic Corporation, NYNEX Corporation, and
US West, Inc.) account for 71 of the 102 Channel block A & B licenses.
ESMR service is dominated by one carrier, Nextel Corporation, which the
Company believes will be focusing its attention on commercial, rather than
consumer, uses of wireless solutions.
OPERATION OF WIRELESS COMMUNICATIONS SYSTEMS
Wireless communications system service areas, whether cellular or PCS, are
divided into multiple cells. Due to the frequencies in which they operate,
cellular cells generally cover a wider transmission radius than PCS cells. In
both cellular and PCS systems, each cell contains a transmitter, a receiver and
signaling equipment located at a cell site which is connected by microwave or
landline telephone lines to a Mobile Switching Center ('MSC'), that controls the
operation of the cellular communications system for the entire service area. The
MSC controls the transfer of calls from cell to cell as a subscriber's telephone
travels, coordinates calls to and from telephones, allocates calls among the
cells within the system and connects calls to the local landline telephone
system or to a long distance telephone carrier. Wireless communications carriers
establish interconnection agreements with local exchange carriers and
interexchange carriers, thereby integrating their system with the existing
landline communications system.
Because the signal strength of a transmission between a handset and a cell
site declines as the telephone moves away from the cell site, the MSC and the
cell site monitor the signal strength of calls in progress. When the signal
strength of a call declines to a predetermined level, the MSC may 'hand off' the
call to another cell site where the signal strength is stronger. If a telephone
leaves the service area of a cellular or PCS system, the call is disconnected
unless there is a technical connection with the adjacent system.
A major component of any wireless system is the switching equipment,
commonly known as a 'Switch', located in the carrier's MSC. The Switch, which is
owned and/or operated by the carrier, manages the provision of service, the
interconnection of subscribers' telephones with the public telephone network,
and the hand-off from cell site to cell site within a system. The Switch
maintains a database of the carrier's subscriber information, such as phone and
electronic serial numbers, and call option features. The Switch tracks the
progress of calls made to or from such subscribers and records call detail for
billing purposes.
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Analog cellular handsets are functionally compatible with cellular systems
in the United States, Canada and certain other international markets. As a
result, analog cellular handsets may be used wherever a subscriber is located,
as long as a cellular system is operational in the area. Cellular system
operators normally agree to provide service to subscribers from other cellular
markets commonly known as roamers who are temporarily located in or traveling
through their service areas. Agreements among system operators provide that the
carrier that normally provides services to the roaming subscriber pays the
serving carrier at rates prescribed by the serving carrier.
While analog and digital cellular systems and PCS digital systems utilize
similar conceptual technologies and hardware, they operate on different
frequencies and use different technical and network standards. As a result, it
initially will not be possible for users of one type of digital system to roam
seamlessly across the United States as an analog cellular subscriber does today.
PCS systems are expected to operate under one of three principal digital
signal transmission technologies, or standards, that have been proposed by
various vendors for use in PCS systems: Global System for Mobile ('GSM'), Code
Division Multiple Access ('CDMA') or Time Division Multiple Access ('TDMA').
Digital cellular and PCS systems are expected to operate under either the TDMA
or CDMA standards. GSM and TDMA are both 'time division-based' standards that
are not currently compatible with each other and are incompatible with CDMA.
Therefore, for example, a subscriber of a system that utilizes GSM technology
will be unable to use a GSM handset when traveling in an area not served by
GSM-based operators, unless the subscriber carries a dual-mode handset that
permits the subscriber to default to the analog cellular system in that area.
Such dual-mode handsets are not yet widely commercially available and may be
larger and more expensive than single-mode handsets. The Company believes that
cellular carriers will maintain an underlying analog network after they convert
their systems to a digital mode thereby allowing, for an unknown period of time,
a continued use of analog cellular telephones.
GSM is the most prevalent digital wireless technology in the world, with
approximately 120 systems operating in 92 countries serving over 13 million
subscribers. GSM-based systems also offer features and services not currently
offered by cellular systems.
The TDMA-based PCS standard is a higher frequency version of the time
division-based digital cellular standard currently in limited use by cellular
operators in the United States.
The CDMA standard is expected to be the most widely adopted PCS technology
in the United States. CDMA-based systems are expected to require more cell sites
and offer greater capacity, call quality and hand-off advantages than cellular
systems. CDMA-based PCS systems are expected initially to offer the same
features and services offered by CDMA-based cellular systems.
SYSTEM DESIGN AND ARCHITECTURE
SYSTEM SOFTWARE
The Company's products incorporate a modular software design and utilize
the UNIX operating system, which provides customers with significant flexibility
in their choice of computer equipment. The widely-used UNIX operating system is
especially suited to multi-user environments and has essentially become the
standard in a number of important data processing environments, especially
telecommunications. In addition, the Company utilizes database and advanced
language technology which allows for flexibility in platform and database
portability, particularly as the underlying computer infrastructure continues to
evolve.
SYSTEM HARDWARE
The Company's products incorporate industry standard hardware, utilizing
the UNIX operating system, for the central system and application processing
functions for both the Hotwatch and Blackbird Platforms. The Interactive Voice
Response hardware incorporated in certain Hotwatch products contains industry
standard components, which the Company integrates at its Seattle facilities.
While the cell site processors deployed with the Blackbird Platform contain
industry standard computer components, the Company designs and contracts
manufacturing for certain proprietary printed circuit boards and other
subassemblies. The standard components and custom manufactured subassemblies are
then integrated by the Company and its subcontractors for delivery to the
Company's customers.
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THE BLACKBIRD PLATFORM
The Blackbird Platform was designed as a strong underlying infrastructure
from which to launch PreTect, as well as future applications and services under
development. The Blackbird Platform provides technological solutions utilizing
various forms of 'pre-call' verification data. PreTect utilizes RF signature
analysis to detect and automatically interdict unauthorized devices before they
are able to make a call on the wireless network. This product captures a
cellular telephone's unique electronic signal characteristics (the RF
fingerprint) and verifies this information against subscriber information stored
in its database. The Company is in the early stages of commercial deployment of
the Blackbird Platform.
PRETECT
The Blackbird Platform, combined with PreTect, is designed to proactively
prevent 'cloning' fraud both within a carrier's home market and in a roaming
situation when used in both the roaming and home markets. The Cellular
Telecommunications Industry Association has estimated that in 1995 cloning fraud
has resulted in costs and lost revenues to the cellular industry of an amount in
excess of $650 million. The Company believes that in 1996 cloning fraud will
result in an increased amount of such costs and lost revenues. PreTect utilizes
the information captured by the Blackbird Platform, in parallel with a call
being connected to the carrier's switch, to determine if a call originates from
a legitimate subscriber's telephone or from a telephone whose number
identification has been cloned. If PreTect determines that a call is not
legitimate, the system is capable of terminating the call before connection is
completed. PreTect enables proactive pre-call fraud prevention rather than
post-call fraud detection. The Company believes that such pre-call fraud
prevention is a major technological step forward for the industry. In 1995, the
Blackbird Products were tested in four domestic markets and one international
market. In March 1996, the Company consummated its first commercial sales
agreement with AirTouch and an interim system deployment agreement with BANM.
Enhancement of the Blackbird Products is expected to continue during 1996 and
beyond. Additionally, the Company is actively developing other applications
utilizing the pre-call data that is collected by the Blackbird Platform.
REAL-TIME ROAMING FRAUD PREVENTION SERVICE
The Company offers existing customers of the Blackbird Platform and PreTect
its Real-Time Roaming Fraud Prevention Service. The underlying technology of the
Blackbird Platform is utilized to effectively prevent roaming-based cloning
fraud in real-time between markets using both the Blackbird Platform and
PreTect. The Company believes this is the industry's first commercially
available real-time RF based roaming fraud prevention solution.
THE HOTWATCH PLATFORM
The Hotwatch Platform provides technological solutions primarily in the
'service metering' area, which involves various forms of 'post-call'
verification to ensure that a wireless communications subscriber has proper
account status to make additional calls. The applications that the Company
currently offers in this area are Accountlink, which provides a prepaid-based
solution for real-time credit limit monitoring, and Accountvue'tm'
('Accountvue'), which provides a solution for real-time usage metering. These
real-time 'post-call' products support call data acquisition and rating features
for the purpose of 'service metering.' Real-time 'rating' means the ability to
calculate, on a real-time basis, local and long distance toll charges and
cellular air time charges for each call made on a cellular telephone system. The
Company's real-time rating supports multiple long distance rating and multiple
airtime price plans. The Company believes that real-time data acquisition and
rating on a call by call basis will enable carriers and resellers to improve
cash flow, more effectively manage their credit, collection, and billing
functions, and increase their subscriber base by allowing them to provide
service to certain subscribers who might otherwise be deemed unacceptable credit
risks.
The Hotwatch Platform runs on a multi-tasking computer system, which, when
connected to the Company's proprietary switch interfaces, collects all
subscriber (or call) data for each call made or received from the switch within
minutes of its recordation. As soon as the call data is acquired, the Hotwatch
Platform rates the airtime and toll component of the call and distributes such
real-time information for use to the Hotwatch Products. In addition, such
information is also stored for data
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retrieval purposes and can be used to distribute information to cellular carrier
or third party applications.
In connection with the Hotwatch Platform, the Company has developed
real-time interfaces for most major cellular switches, including those
manufactured by Lucent Technologies, Inc. (formerly a division of AT&T),
Ericsson Radio Systems, Inc., Motorola, Inc., and Northern Telecom, Inc. The
Company's software applications employ a distributed, high-speed, intelligent
networking approach which serves to enable interconnection, on a nationwide
basis, of all Hotwatch Platforms, thereby making possible the direct
system-to-system communication utilized by several of the Company's current
software application products.
MAJOR CUSTOMER AGREEMENTS
AIRTOUCH CELLULAR AGREEMENT
In March 1996, the Company signed an agreement with AirTouch under which
the Company will be the exclusive provider of cellular fraud prevention systems
using RF technology to AirTouch and its affiliates. AirTouch's cellular licenses
include both 'A Band' and 'B Band' markets. The Company and AirTouch have begun
installation of the Company's Blackbird Products in AirTouch's Atlanta (A Band)
and Los Angeles (B Band) markets. In addition, AirTouch's New Par and Bay Area
Cellular Telephone Company affiliates have agreed to deploy the Blackbird
Products in certain of their markets, including their Detroit and San Francisco
A Band markets, respectively. The exclusive five year contract, which calls for
the purchase of the Company's products in at least 1,000 cell sites, schedules
minimum deployment in the majority of the cell sites during 1996 and 1997,
subject to the Blackbird Products' compliance with contractual requirements.
Concurrently, contracts were signed for support and maintenance services and the
Real-Time Roaming Fraud Prevention Service.
BANM AGREEMENT
In March 1996, the Company signed an interim agreement with BANM, which
holds cellular licenses for both 'A Band' and 'B Band' markets. Under the
interim agreement, the Company and BANM are currently deploying the Blackbird
Products in BANM's New York (B Band) market. Concurrently, both parties are
negotiating a definitive license agreement which will ultimately determine the
size and scope of what the Company believes will be a greater deployment
providing for installation of the Company's products in a large number of BANM's
cell sites, and also including provisions for the Company's support and
maintenance services and the Real-Time Roaming Fraud Prevention Service.
GTE MOBILNET LETTER OF INTENT
In June 1996, the Company signed a Letter of Intent with GTE Mobilnet of
California, L.P. ('GTE') to deploy at least 150 units of the Blackbird Platform
and PreTect in GTE's San Francisco market. The Company and GTE are currently
negotiating a definitive agreement and expect deployment of such units to begin
in the second half of 1996.
AWS AXYS AGREEMENTS
In August 1994, the Company entered into two agreements with AWS (formerly
McCaw Cellular Communications, Inc. ('McCaw')) (the 'Axys Agreements') for the
design and support of the AWS real-time information management system Axys
Version 3.0 ('Axys 3.0'). The Axys Agreements consist of a software license
('SWL') and a five year technical services agreement ('TSA'). The SWL provided
AWS with a nonexclusive worldwide perpetual license for the Company's real-time
post-call data collection platform, and the rating, credit monitoring and credit
card billing application functions of that platform. The Company's fraud
prevention products were not included in the SWL. Under the terms of the TSA,
the Company receives hourly compensation for the development, deployment and
servicing of the Axys 3.0 products. The two parties also signed an agreement for
the license and marketing of derivatives of Axys 3.0 products (the 'MA')
granting the Company marketing and other rights for certain software
applications derived from Axys 3.0. The MA and the SWL provide for additional
potential revenue for the Company based upon sales of Axys 3.0 and related
software products made by either the Company or AWS to third parties as well as
to additional future AWS markets.
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Initially, the Company estimated that revenues from the Axys Agreements
could exceed $20 million, most of which was expected to be realized through
1996, assuming AWS deployed Axys in three major installations of its current
markets and certain affiliated markets under the SWL and utilized the maximum
number of hours under the TSA. Through March 31, 1996, the Company has
recognized cumulative revenues totaling approximately $9.5 million from the SWL
and TSA agreements of which approximately $4.9 million were recorded in 1995.
Revenues from the SWL and TSA began in the third quarter of 1994 and are
expected to continue through at least 1996 and possibly through 1999. Following
the AWS acquisition of McCaw in 1995, AWS changed the scope of its development
and deployment of Axys products, including the reduction of its reliance on
outside vendors and contractors. As a result, the Company is not currently
providing services under the TSA.
The Company believes there could be additional potential revenue from the
sale of Axys 3.0 products by the Company and/or AWS under the SWL and/or MA to
future domestic and international markets including acquired affiliates of AWS
or other third parties who implement the Axys system. The Company believes that
such revenues, if realized, would most likely occur in the latter half of the
contract terms through 1999. Total expected revenues under the SWL, TSA, and MA
agreements cannot be determined at this time but the Company expects such
revenues to be less than originally anticipated.
AWS HOTWATCH PRODUCTS AGREEMENT
In November 1994, the Company signed a contract with AWS to license its
Accountlink and Accountvue application products under the Hotwatch Platform and
to provide support services for those products during the interim period while
Axys 3.0 is being fully developed and deployed. Approximately $2 million in
revenues was recorded in 1995 under the AWS Hotwatch Products Agreement. As a
result of a change in its business strategy, AWS ceased using the Hotwatch
Products in June 1996.
360[D] CC AGREEMENTS
In November 1994, the Company signed a contract with 360[d] CC to deploy
Hotwatch Products, throughout 360[d] CC's U.S. markets. This contract followed
an agreement signed in late 1993 to install the Company's products in 360[d]
CC's Las Vegas market. These contracts include software licenses, hardware sales
and support services covering a system-wide roll-out that was completed during
1995. Recurring support services continue on an annual renewal basis. Revenues
from these contracts in 1995 totaled approximately $1.8 million.
AMERITECH AGREEMENT
In November 1994 the Company signed a contract with Ameritech for the
Company's Hotwatch Platform and its Accountvue application product. This
contract included software licenses, hardware sales and support services and
resulted in modest recurring revenue during 1995 and is also expected to result
in modest recurring support services revenue during 1996.
LIN/ACC AGREEMENTS
The LIN/ACC Agreement originally called for the installation of the
Hotwatch Products in four major markets owned or operated by LIN or LIN/ACC Los
Angeles, New York, Dallas and Houston. The original term of the LIN/ACC
Agreement expired in July, 1993, was renewed for one year and subsequently
renegotiated to continue on a month-to-month basis. During 1994, the LIN New
York market completed the replacement of the Company's Hotwatch Products with
its own internally developed products. During 1995, the Company licensed its
Accountvue product to the Houston market for a one-time license fee plus
recurring support service fees which license is renewable on an annual basis.
The remaining markets covered under the agreement -- Los Angeles and
Dallas -- have continued to use certain of the Company's Hotwatch Products on a
month-to-month basis. The Dallas market is expected to cease use of the
Company's Hotwatch Products during the third quarter of 1996, when AWS's Axys
product is expected to be installed. The Company anticipates that revenues under
the LIN/ACC agreement will continue on a month-to-month basis for the Los
Angeles market. Revenues from the LIN/ACC markets totaled approximately $1.5
million during 1995.
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REVENUE GENERATION
OVERVIEW AND SYSTEM REVENUES
The Company's revenues historically have been derived primarily from
initial license fees, fixed or variable monthly software license fees and, to a
lesser extent, non-recurring computer equipment sales for its Hotwatch Platform
and related products. For the Blackbird Platform and related products, initial
revenues are anticipated to be categorized as: system revenues, which will
primarily include software and hardware products; and service revenues, which
will primarily include roaming fraud prevention services, maintenance, software
subscription services, and system monitoring services.
Revenue recognition for the Company's systems is based upon various
performance criteria and varies from customer to customer and product to
product. Physical hardware and software delivery and definitions of system
delivery and customer acceptance are generally the significant factors used in
determining revenue recognition. Maintenance and service revenues are recognized
ratably over the period of coverage and/or as services are performed.
Computer equipment sales for the Hotwatch Products, which traditionally
have been of a non-recurring nature, are normally made in connection with the
initial licensing of the Company's software products, or the upgrading of
previously installed systems. The Company consistently has incurred negative
margins from computer equipment sales due to fixed engineering and installation
overhead costs that have not been recovered from equipment sales and
installation revenues. The Company does not anticipate that computer equipment
sales will generate significant profits from Hotwatch Products equipment sales,
if any, in future periods after applying the burden of engineering and
installation costs. Customers may also purchase their own computer equipment
from third parties. The Company is now having proprietary hardware manufactured
for use in the Blackbird Platform and application products. Contracts for sales
of the Blackbird Platform and its first application product, PreTect, were
initially entered into in 1996 with hardware and software bundled as a part of a
complete system.
During the three years ended December 31, 1995 and the three months ended
March 31, 1996, five customers or their affiliates accounted for substantially
all of the Company's revenues. Such customers are ACC, LIN, AWS, Sprint and
Shared Technologies Cellular, Inc. (which acquired PTC Cellular, Inc., the
Company's largest customer for its former rental phone products). The LIN/ACC
and AWS agreements are with entities that share common ownership in some of the
markets in which the Company's products have been deployed. Each of these
customers accounted for 10% or more of the Company's revenues during the quarter
ended March 31, 1996, or one or more of the three years ended December 31, 1995.
The high percentage of revenues derived from a limited number of customers is
principally attributable to the Company's relatively small number of customers
during these periods and the fact that certain of these customers made
significant non-recurring purchases of computer equipment. The Company's
targeted customer base is limited due to the concentrated nature of ownership
and/or operational control of the most populated wireless communications markets
in the United States and limited to a lesser extent in the international
markets. The Company expects that certain of its cellular carrier customers
operating in multiple cellular markets will continue to account for a relatively
high percentage of the Company's total revenues. Revenues originating from the
recent contract signings for the Company's Blackbird Products are expected to
decrease the Company's reliance on the AWS and LIN/ACC Agreements.
RECURRING HARDWARE AND SOFTWARE SUPPORT SERVICES
Hardware maintenance, software maintenance, software subscription services
(new releases), and system monitoring are the primary recurring services
provided by the Company to its customers. Support personnel diagnose and resolve
problems, dispatch third party hardware vendors, forward enhancement requests to
the Company's research and development staff, and coordinate with customers on
upgrades. Software troubleshooting, maintenance, and upgrades are conducted
either via the Company's public data network or via modem over a standard
telephone line. An on-line customer management system tracks problems and
resolutions. Support is available 24 hours per day, seven days per week.
Research and development personnel assist in software support activities to the
extent required.
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INSTALLATION
Currently, the Company arranges to receive certain third-party vendor
system equipment at its facilities where it integrates its proprietary software
with such equipment and performs preliminary testing prior to shipment to the
customer. Typically, the Company, its third-party vendors, and/or the customer
jointly perform installation services, with each bearing responsibility for
different aspects of installation. The installation process, which commences
upon delivery of the computer equipment at the customer's site, generally is
completed within 60 to 90 days following execution of a customer's purchase
order. The costs of installation may be separately charged or added into system
pricing.
TRAINING AND DOCUMENTATION.
The Company's personnel provide system training on-site or at the Company's
facilities in Seattle. The training program consists primarily of presentation
materials, hands-on exercises, and group demonstrations. All of these training
costs are factored into system pricing. Refresher training subsequent to
completion of the installation training is provided at hourly rates. User
manuals relating to the Company's application software and other materials and
documentation produced by the Company are provided to training participants and
supervisory personnel. Computer equipment documentation is provided by the
computer equipment vendor.
CUSTOM PROGRAMMING
The Company provides custom software development work upon customer
request. Customers are charged hourly rates for such services or may contract
with the Company for fixed fees where appropriate.
PROFESSIONAL SUPPORT SERVICES
The Company provides system project planning and implementation services in
connection with sales of its systems and products. Customers are charged hourly
rates for such services or may contract with the Company for fixed fees where
appropriate.
MARKETING
To date, the Company has primarily focused its marketing efforts on
cellular carriers operating in the 50 most heavily populated MSAs. Accordingly,
although the Company has, in the past, had limited marketing capabilities and
resources, the Company expanded these efforts in 1995 and will continue to
expand these efforts to further penetrate significant wireless communications
markets, both domestic and international. The Company has in the past marketed
its products directly to cellular carriers through proposals and presentations.
In 1995, the Company began marketing more aggressively at selected trade shows,
conferences and industry events. In addition, it began to selectively advertise
and use direct marketing. The Company also meets regularly with wireless
industry consultants to obtain leads and referrals. Achieving wide-spread market
acceptance and penetration of the Company's products will require, in addition
to enhancing and improving such products, increased marketing efforts and the
expenditure of significant funds to increase customer awareness of the Company
and to inform potential customers of the benefits of the Company's products. At
June 28, 1996, the Company employed 20 sales, sales support, marketing and
product management personnel. In 1996 and beyond, the Company intends to expand
its product management functions and personnel for both the current product
lines and future product definitions.
PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to protect its
technology, processes, trade secrets and other proprietary rights from
unauthorized disclosure and use and to operate without infringing the
proprietary rights of third parties. The Company's strategy is to protect its
technology and other proprietary rights through patents, copyrights, trademarks,
nondisclosure agreements, license agreements, and other forms of protection. The
Company has been active in pursuing patent protection for technology and
processes involving its Hotwatch Products and Blackbird Products that it
believes to be proprietary and that offer a potential competitive advantage for
the Company's products and services. To date, the Company has been granted
patents on certain features of the Hotwatch Products
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and has patents pending for certain features of the Hotwatch Products and
Blackbird Products. In addition, the Company has also licensed patents from
third parties in an effort to maintain flexibility in the development and use of
its technology, including exclusive and non-exclusive rights to use patents in
connection with the Blackbird Products. There can be no assurance, however, that
any pending or future patent application of the Company or its licensors will
result in issuance of a patent, that the scope of protection of any patent of
the Company or its licensors will be held valid if subsequently challenged, or
that third parties will not claim rights in or ownership of the products and
other proprietary rights held by the Company or its licensors. In addition, the
laws of certain foreign countries do not protect the Company's intellectual
property rights to the same extent as the laws of the United States.
Although the Company believes that its technology has been independently
developed and that its products do not infringe patents known to be valid or
violate other proprietary rights of third parties, it is possible that such
infringement of existing or future patents or violation of proprietary rights
may occur. There can be no assurance that third parties will not assert
infringement claims in the future with respect to the Company's current or
future products or that any such claims will not result in litigation or
regulatory proceedings or require the Company to modify its products or enter
into licensing arrangements, regardless of the merits of such claims. No
assurance can be given that any necessary licenses can be obtained in a timely
manner, upon commercially reasonable terms, or at all, and no assurance can be
given that third parties will not assert infringement claims with respect to any
current licensing arrangements.
In addition to the foregoing methods of protection, the Company employs
various physical security measures to protect its software source codes,
technology and other proprietary rights. However, such measures may not afford
complete protection and there can be no assurance that others will not
independently develop similar source codes, technology or other proprietary
rights or obtain access to the Company's software codes, technology, or other
proprietary rights. Furthermore, although the Company has and expects to
continue to have internal nondisclosure agreements with its employees and
consultants, and license agreements with customers, which contain restrictions
on disclosure, use and transfer of proprietary information, there can be no
assurance that such arrangements will adequately protect the Company's
proprietary rights or that the Company's proprietary rights will not become
known to third parties in such a manner that the Company has no practical
recourse. See 'Risk Factors -- Proprietary Rights.'
RESEARCH AND DEVELOPMENT
For the three months ended March 31, 1996 and for the years ended December
31, 1995, 1994 and 1993, the Company incurred gross research and development
expenditures of $1,397,000, $5,724,000, $4,021,000 and $2,019,000, respectively,
prior to capitalization of software development costs during each period in the
amounts of $434,000, $1,726,000, $1,725,000 and $750,000, respectively. The
Company's research and development efforts are focused on new hardware and
software products, enhancing and improving existing hardware and software
products, including developing new software applications and additional computer
equipment interfaces, principally associated with the Hotwatch and Blackbird
platforms. These enhancements and/or new products may, when and if developed,
enable the Company to expand the use of its existing products and perform a
broad variety of services and functions not presently being offered by the
Company. Costs included in the Company's gross research and development
expenditures include costs for research, design, development, tests, preparation
of training and user documentation, and fixing and refining new and existing
features (i.e., software maintenance) for inclusion in its product line. At June
28, 1996, the Company employed 48 full-time research and development personnel
and had contracted with a number of consultants engaged in research and
development activities. The Company anticipates that development expenditures
will continue to increase in 1996 and beyond in response to increased market
demand for new and enhanced products as technology in the telecommunications
industry moves forward at a rapid pace.
COMPETITION
The market for the Company's products and services is characterized by
intense competition among numerous nationally recognized companies. The Company
believes, based upon its discussions with major cellular carriers, as well as
upon its general knowledge of the industry, that it: (i) has developed
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<PAGE>
innovative software technology which enables it to be one of the few vendors
that have successfully commercially deployed billing and data processing
software products in large markets incorporating post-call real-time rating,
analysis and networking technology, (ii) is one of the few vendors prepared to
deploy pre-call real-time collection, analysis and distribution systems to major
cellular carriers; and (iii) is the only vendor prepared to deploy a pre-call
real-time roaming fraud prevention service. However, there can be no assurance
that other companies do not have or are not currently developing functionally
equivalent or superior products, or that functionally equivalent or superior
products will not become available in the near future.
The Company is aware of competitors which have indicated that they have
developed, marketed and installed commercially available products with respect
to post-call real-time software technology. These companies include, among
others, IBM, I-NET, Inc., GTE Telecommunications, Services, Inc., Boston
Communications Group, EDS Personal Communications Corporation, Cincinnati Bell
Information Systems, Inc., Lightbridge, Inc., Subscriber Computing, Inc., CSC
Intellicom, and Systems/Link Corporation as well as cellular carriers operating
in the most populated cellular markets. In addition, there are numerous
companies, including wireless communications carriers, hardware and software
development companies and others, which have or may develop the expertise which
would encourage them to attempt to develop and market products (such as A-Key)
which could render the Company's products obsolete or less marketable.
The Company is aware of at least four competitors, including Corsair
Communications, Inc., Coral Systems, Inc. (in connection with a joint venture
with Applied Signal Technology), Authentix Network, Inc. and GTE
Telecommunications Services, Inc. that compete directly with the Company in the
user/device authentication area. Two of these competitors, Corsair
Communications, Inc. and Coral Systems, Inc. compete directly with the Company's
RF-based fingerprinting fraud protection products. The Company believes that
Corsair Communications, Inc. has agreements pursuant to which Corsair
Communications, Inc. has installed or will install its RF-based fingerprinting
fraud protection product in four major markets. The Company has no knowledge of
any such agreements or installations by Coral Systems, Inc.
The Company believes that the principal competitive factors affecting a
prospective customer's choice of software systems are the number and nature of
functions available on the system, price, performance, ease of use, reliability,
technical support, customer service, the availability of real-time information
and the financial stability of the vendor. The ability of the Company to compete
successfully will depend in large measure on its ability to maintain a
technically competent research and development staff and to adapt to
technological changes and advances in the industry, including ensuring
continuing compatibility with evolving generations of computer equipment.
SUPPLIERS
The Company has been and will continue to be dependent on third-party
vendors for the computer equipment and certain software that is incorporated in
its products. While these are available from multiple sources, the Company
currently obtains or licenses certain equipment and software, including
proprietary database software incorporated in a number of the Company's
products, from a limited number of sources of supply. The Company's software
programs were specifically designed to adhere to the UNIX operating systems
standard which can operate on standard computer equipment sold by numerous
manufacturers and vendors. The Company currently purchases hardware from
Hewlett-Packard ('HP'), its primary system hardware supplier, under a Value
Added Business Program ('VAB'). As an HP Value Added Reseller ('VAR') within the
VAB program, the Company qualifies for a number of services under HP's
marketing, support and financial programs. The Company also maintains
relationships with other hardware vendors. The Company currently purchases
hardware components from its vendors at discounts from list prices. These
hardware components then become a cost component as the Company's systems are
generally priced as bundled turnkey products (system, components, installation
and training). The Company also currently maintains various software license
arrangements with several suppliers. All of these licenses allow the Company to
use the software in perpetuity, with the result that the loss of a particular
source would not affect any product already in use.
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With the introduction of the Blackbird Platform and related application
products, the Company has manufactured to its proprietary specifications a cell
site processor which operates in connection with the system hardware described
above. While the parts and components of this processor are industry standard
and available from many suppliers, the design of the custom manufactured
subassemblies is performed by both the Company's personnel and third-party
design firms. The Company generally does not subject itself to single source
suppliers.
EMPLOYEES
As of June 28, 1996, the Company had 114 full-time employees. Of such
employees, 16 are in corporate and administrative positions, 14 are in sales and
related support functions, 6 are in marketing and product management functions,
17 provide customer support, 13 are in manufacturing and system installation
functions, and 48 are engaged in research and development. From time to time,
the Company contracts with consultants and other independent contractors on its
development projects. None of the Company's employees are covered by a
collective bargaining agreement. The Company believes that its relations with
its employees are good.
FACILITIES
The Company has committed to leasing approximately 46,000 square feet of
general office space at 2401 Fourth Avenue, Seattle, Washington for its
corporate offices under a five year non-cancelable operating lease that expires
in September 2000. Presently, the Company occupies approximately 29,000 square
feet of space at an annual base rent of $381,000. The terms of the lease provide
that the Company take possession of and begin paying for the remaining committed
space at various time periods extending through September 1997, at which time
the annual base rent will be $658,000. The Company also leases approximately
1,200 square feet of space at 2001 Sixth Avenue, Seattle, Washington, which it
uses for computer operations, at a current base annual rent of $21,800, pursuant
to a lease that is to expire in 2000. Both of these leases contain five year
renewal options and provide for the pass-through to the Company of increases in
operating and other costs. Although the space is adequate for its current
activities, the Company believes that additional space, if needed, will be
readily available.
LEGAL PROCEEDINGS
The Company has received a request for indemnification from a former
customer who utilized the Company's discontinued phone rental products, pursuant
to a contract between the Company and the former customer which includes a
limited warranty against infringement. The Company has demanded arbitration to
resolve whether it has any obligation under the contract to indemnify the former
customer against a claim of patent infringement brought against the former
customer by a third party. The Company has conducted a review of the underlying
matter and, based upon the information currently available to the Company, but
subject to the inherent uncertainties involved in legal proceedings, the Company
believes that the outcome of the claim will not be material to the Company.
There are no other material, pending legal proceedings to which the Company
is a party or of which any of its property is subject which, if adversely
decided, would have a material adverse effect on the Company's business,
financial condition and results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company, their ages and present
positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- -------------------- --- --------------------------------------------------------------------
<S> <C> <C>
Stephen Katz........ 52 Chairman of the Board of Directors and Chief Executive Officer
Robert P. Dahut..... 58 President, Chief Operating Officer and Director
Michael E.
McConnell......... 46 Vice President and Chief Financial Officer
Kyle R. Sugamele.... 34 Vice President, General Counsel and Corporate Secretary
David N.
Hoogerwerf........ 49 Vice President, Engineering
Heidi P. Adkisson... 38 Vice President, Operations
Douglas F.
Anderson.......... 43 Vice President, Sales
Jay Goldberg........ 55 Director
</TABLE>
Stephen Katz, Chairman of the Board of Directors and Chief Executive
Officer, had been Acting Chief Executive Officer and Acting President from
November 1992 until February 1994. Mr. Katz has been Chairman of the Board and a
director of the Company since its inception and a member of the Management
Committee of the predecessor partnership during the entire period of its
existence. From September 1984 until September 1995, Mr. Katz was Chairman of
the Board, Chief Executive Officer and until September 1993, President of
Nationwide Cellular Service, Inc. ('Nationwide') which was the Company's
majority stockholder until May 1992 and its largest stockholder, owning 34% of
its outstanding shares, until September 1995. At that time such shares were
distributed to Nationwide's stockholders, immediately prior to Nationwide's
merger with MCI Communications Corp. ('MCI'). In May 1996, Mr. Katz was
appointed Vice-Chairman of the Board and Chief Executive Officer of Coin Bill
Validator, Inc. whose business is currency and coin authentication.
Robert P. Dahut has been President and Chief Operating Officer and a
director of the Company since February 1994. For more than five years prior
thereto, Mr. Dahut held senior management positions with various subsidiaries of
Bell Atlantic as follows: from February 1993 to February 1994 he was Vice
President of Operations and Engineering of C&P Telephone, from November 1990 to
February 1993 he was Vice President of Marketing and Sales of C&P Telephone,
from August 1988 to November 1990 he was Chief Executive Officer of Bell
Atlantic Mobile Systems, and from June 1986 to August 1988 he was Vice President
Sales & Marketing of Bell Atlantic Directory Publishing. Prior thereto he held
progressively responsible positions in Operations, Engineering, Planning, Human
Resources and Budgets for C&P Telephone and AT&T.
Michael E. McConnell has been Vice President and Chief Financial Officer of
the Company since January 1992. Prior to joining the Company, from April 1991 to
December 1991, Mr. McConnell engaged in personal investment activities. From
1986 to March 1991, Mr. McConnell was the Chief Financial Officer of Delphi
Information Systems, Inc., a public company engaged in the development of
software systems for the insurance field. Mr. McConnell is a certified public
accountant.
Kyle R. Sugamele joined the Company in July 1995 as Vice President and
General Counsel. In October 1995, Mr. Sugamele was appointed Assistant
Secretary, and in June 1996, Mr. Sugamele was appointed Corporate Secretary.
From April 1991 to July 1995, Mr. Sugamele was associated with the law firm of
Mundt, MacGregor, Happel, Falconer, Zulauf & Hall in Seattle. From August 1987
to March 1991, Mr. Sugamele was associated with the law firm of Graham & Dunn in
Seattle. His practice has involved a wide range of commercial, corporate,
banking and general business matters, with particular emphasis on the protection
and licensing of intellectual property and trade secrets, commercial finance and
business transactions.
David N. Hoogerwerf joined the Company in December 1991 as Director of
Software Engineering and was named Vice President, Engineering in January 1994.
Prior to joining the Company, from March 1978 to December 1991, Mr. Hoogerwerf
held various management positions with GTE including
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General Manager and Director, Engineering and Development for GTE Telecom, Inc.
Mr. Hoogerwerf is a registered professional electrical engineer.
Heidi P. Adkisson has been with the Company since its inception and was
named Vice President, Operations in September 1994. From May 1991 to September
1994 Ms. Adkisson was Director of Support Services. Ms. Adkisson joined the
Company as Manager of Training and Documentation in September 1988.
Douglas F. Anderson has been with the Company since July 1, 1994 and was
named Vice President, Sales and Marketing on August 1, 1994. From 1991 to July
1994, Mr. Anderson had been Director of North American Operations of Saros
Corporation, a company engaged in the business of developing systems software.
For five years prior thereto Mr. Anderson had been Director of North American
Sales for Lotus Development Corporation.
Jay Goldberg has served as a director of the Company since August 1991. Mr.
Goldberg had been Chairman of the Board since November 1990 and President and
Chief Executive Officer from August 1990 until January 1994, of Image Business
Systems Corporation, a company previously engaged in image processing, inactive
since August 1994. In June 1989, Mr. Goldberg formed Zeitech, Inc., a computer
software firm of which he served as Chairman of the Board until that company was
sold to Career Horizons in January 1996. Currently, Mr. Goldberg serves as a
consultant to Zeitech, Inc. From May 1986 until February 1990, Mr. Goldberg was
Chief Executive Officer of Money Management Systems, Inc., a company also
engaged in the computer software business, which was sold to SunGuard Data
Systems, Inc. in 1989.
The Company currently intends to expand the Board of Directors to include
up to three new directors within approximately 90 days of the date of this
Prospectus, although it has not yet identified individuals to fill these
positions.
The Company's officers are elected annually and serve at the discretion of
the Board of Directors for one year subject to any rights provided by employment
agreements including those described below under 'Executive
Compensation -- Employment Agreements.'
COMMITTEES OF THE BOARD OF DIRECTORS
The Compensation and Stock Option Committee, composed of Mr. Goldberg, has
authority over officer compensation and the administration of the Company's
stock option plans. The Audit Committee, composed of Mr. Goldberg, has various
functions including oversight and review of accounting matters. Both the
Compensation and Stock Option Committee and the Audit Committee were composed of
Mr. Goldberg and Lawrence Howard until Mr. Howard's resignation in June 1996.
The Company expects that at least one additional new director will be added to
each of such committees upon the appointment of new directors to the Board of
Directors. See 'Directors and Executive Officers of the Company.'
DIRECTORS' COMPENSATION
Each director who is not an officer or employee of the Company receives
$1,000 per Board meeting attended and $500 per Committee meeting attended and is
reimbursed for his out-of-pocket expenses incurred in connection with attendance
at meetings or other Company business.
In December 1993 the Board of Directors adopted the 1993 Non-Employee
Director Stock Option Plan ('Director Plan') pursuant to which each person who
is not a salaried employee of the Company who first becomes a director after
December 29, 1993 shall be granted on the date he first becomes a director an
option to purchase 20,000 shares of Common Stock and on January 2 of each year
beginning with January 2, 1994, each person who is not a salaried employee of
the Company and is then a director shall be granted an option to purchase an
additional 12,000 shares of Common Stock. The exercise price of each share of
Common Stock under any option granted under the Director Plan shall be equal to
the fair market value of a share of Common Stock on the date the option is
granted.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning annual and long-term
compensation, paid or accrued, for the Chief Executive Officer and the four
other most highly compensated executive officers of the Company (the 'Named
Executive Officers') for services in all capacities to the Company during the
last three fiscal years.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2) OPTIONS COMPENSATION(3)
- ------------------------------ ---- -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Stephen Katz ................. 1995 $ 0 $ 0 $ 0 0 $ 0
Chairman of the Board of 1994 0 100,000 0 212,000 0
Directors and Chief 1993 0 0 0 400,000 0
Executive Officer(4)
Robert P. Dahut .............. 1995 150,000 0 0 0 16,392
President and Chief 1994 132,403(5) 110,000 76,267 600,000 13,343
Operating Officer
Michael E. McConnell ......... 1995 115,500 0 0 3,820 6,160
Vice President and Chief 1994 110,000 55,000 0 40,000 4,094
Financial Officer 1993 100,000 0 0 170,000 1,333
Douglas F. Anderson .......... 1995 115,000 0 0 3,820 1,150
Vice President, Sales 1994 52,340(6) 56,338 0 70,000 0
David N. Hoogerwerf .......... 1995 105,000 0 0 3,820 0
Vice President, Engineering 1994 100,000 30,000 0 40,000 0
1993 83,333 0 0 110,000 0
</TABLE>
- ------------
(1) None of the Named Executive Officers received any Restricted Stock Awards or
LTIP Payouts in 1993, 1994 or 1995. Does not include grants made or other
compensation paid in 1996.
(2) On January 31, 1994, Mr. Dahut joined the Company as President and Chief
Operating Officer. In connection with his employment, the Company made
payments to Mr. Dahut or on his behalf related to his relocation, which were
deemed to be compensation in the amount of $44,959 and for the payment of
related taxes in the amount of $31,308. In addition, the Company made
payments to Mr. Dahut or on his behalf related to his relocation which were
not deemed to be compensation in the amount of $20,123. Other than Mr.
Dahut, none of the Named Executive Officers received perquisites or other
personal benefits in excess of the lesser of $50,000 or 10% of the total of
his salary and bonus for 1993, 1994 or 1995 as reported in the above table.
(3) Represents contributions by the Company to the Named Executive Officers'
accounts under a 401(k) plan and includes for Mr. Dahut life insurance
premiums paid by the Company on his behalf in the amount of $2,075 in 1995
and $1,556 in 1994 and automobile allowances given him in the amount of
$8,157 in 1995 and $6,454 in 1994.
(4) Stephen Katz, Chairman of the Board and a Director of the Company since its
inception, served as Acting Chief Executive Officer and President of the
Company from November 21, 1992 until February 2, 1994 and as Chief Executive
Officer from February 3, 1994 to date. Nationwide received $25,000 per month
under a four year Management Services Agreement which expired in August 1995
under which Mr. Katz and other Nationwide personnel provided management,
financial and administrative services to the Company. See 'Executive
Compensation -- Certain Transactions.' Amounts paid to Nationwide under said
Agreement were $178,000 in 1995 and $300,000 in each of 1994 and 1993.
(5) Represents compensation paid to Mr. Dahut from January 31, 1994 when he
became an officer of the Company.
(footnotes continued on next page)
41
<PAGE>
<PAGE>
(footnotes continued from previous page)
(6) Represents compensation paid to Mr. Anderson from July 1, 1994 when he
became employed by the Company. Such compensation includes salary of $52,340
and performance incentives of $56,338 which, effective December 31, 1994,
were discontinued.
STOCK OPTION PLANS
1991 QUALIFIED STOCK OPTION PLAN AND 1991 NON-QUALIFIED STOCK OPTION PLAN
The Company has adopted a 1991 Qualified Stock Option Plan ('1991 Qualified
Plan') and a 1991 Non-Qualified Stock Option Plan ('1991 Non-Qualified Plan')
(collectively the 'Stock Option Plans' or the 'Plans'). Pursuant to the 1991
Qualified Plan, as amended in 1993, the Company was authorized to grant options
to purchase shares of Common Stock to its officers and key employees, at a price
which may not be less than the fair market value per share of Common Stock on
the date of the granting of the option. Pursuant to the 1991 Non-Qualified Plan,
the Company was authorized to grant options to purchase shares of Common Stock
to its directors, officers, key employees and others who render services to the
Company at a price which may not be less than 85% of the fair market value per
share of Common Stock on the date of the granting of the option. All options
under the 1991 Qualified Plan are in the form of incentive stock options and
options under the 1991 Non-Qualified Plan are options which do not qualify for
treatment as incentive stock options.
The Stock Option Plans are administered by the Stock Option Committee of
the Board of Directors (the 'Committee') which will satisfy requirements for an
exemption from the short swing profits rule of Section 16(b) under the
Securities Exchange Act of 1934, as amended (the 'Exchange Act').
Options granted under the Plans are nontransferable by the optionee during
his lifetime, and will expire if not exercised within ten years from the date of
the grant and terminate upon an optionee's termination of employment or service
with the Company or a subsidiary, except that, under certain circumstances,
options are exercisable for a period of 90 days after retirement or termination
of employment and for a period of one year after death or disability for options
granted under the Stock Option Plans. Incentive stock options are also subject
to the following limitations: (i) the aggregate fair market value (determined at
the time an option is granted) of stock with respect to which incentive stock
options are exercisable for the first time by an optionee during any calendar
year (under all such plans of the Company, or its subsidiaries) shall not exceed
$100,000 and (ii) if the individual to whom the incentive stock options were
granted is considered as owning stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company, then (A) the
option price at the time of grant may not be less than 110% of the fair market
value per share for such Common Stock and (B) the option period must be no more
than five years from the date of grant.
Unless otherwise determined by the Committee administering the Stock Option
Plans or by other provisions of such Plans, options will be exercisable at a
rate of 20% per year and vest fully after five years.
Without giving effect to the exercise of options by the Selling
Shareholders to purchase 226,000 shares of Common Stock, as of the date of this
Prospectus, options to purchase an aggregate of 2,044,160 shares of Common Stock
at a weighted average exercise price of $6.04 per share were outstanding
including options to purchase 690,000, 201,820, 59,820, and 181,820 shares held
by Messrs. Katz, McConnell, Anderson and Hoogerwerf respectively. All executive
officers and directors as a group (nine persons) hold options to purchase
1,291,300 shares at exercise prices ranging from $1.00 to $10.94 per share. As
of the date of this Prospectus, 1,074,000 options have been exercised under the
Stock Option Plans since the inception of such Plans.
There are no shares presently available for grant of non-qualified stock
options under the Company's 1991 Non-Qualified Stock Option Plan. In addition,
pursuant to action taken by the Company's Board and approved by a majority of
the Company's Shareholders, no new options will be granted under either the
Company's 1991 Non-Qualified Plan or under the 1991 Qualified Plan.
42
<PAGE>
<PAGE>
1993 NON-EMPLOYEE DIRECTOR PLAN
The Company has adopted the 1993 Non-Employee Director Stock Option Plan
(the 'Director Plan'). The purpose of the Director Plan is to provide an
additional incentive to attract and retain as directors qualified and competent
persons whose judgment is vital to the success of the Company. The Company may
grant to non-employee directors and directors who are non-salaried employees of
the Company ('Outside Directors') options to purchase up to 300,000 shares of
the Company's Common Stock under the Director Plan at a price equal to the fair
market value of a share of Common Stock on the date an option is granted.
Payment of the option price shall be made in cash. In the event any option
granted under the Director Plan shall expire, be canceled or terminate for any
reason without having been exercised in full or shall cease for any reason to be
exercisable in whole or in part, the unpurchased shares subject thereto shall
again be available for grant thereunder. The options granted under the Director
Plan will not qualify for treatment as incentive stock options.
The Director Plan is administered by the Board of Directors. Subject to the
express provisions of the Director Plan, the Board shall grant options under the
Director Plan; correct any defect and, in general, make determinations necessary
or advisable for Director Plan administration. Under the terms of the Director
Plan, each individual who became or becomes an Outside Director after December
29, 1993, the effective date of the Director Plan, has been or will be granted,
as the case may be, on the date he first becomes an Outside Director, an option
to purchase 20,000 shares of Common Stock. In addition, on January 2 of each
year beginning with January 2, 1994, each Outside Director then in office has
been or will be granted, as the case may be, an option to purchase 12,000 shares
of Common Stock. No option granted under the Director Plan shall be exercisable
for a period of one year after the date of the grant, at which time the option
shall become exercisable as to the full number of shares subject to the option.
Notwithstanding the foregoing, an option may become immediately exercisable upon
(i) the death or disability of the holder or (ii) upon a change in control of
the Company which occurs while a holder is an Outside Director. No option may be
exercised under the Director Plan after the expiration of ten years from the
date of grant and no option may be granted under the Director Plan after
December 29, 2003.
In the event that an Outside Director to whom an option has been granted
under the Director Plan (i) shall cease to serve on the Board for any reason
(including as a result of not being reelected to the Board) other than by reason
of his disability, retirement after age 65 or death, such option may be
exercised, to the extent that the Outside Director was entitled to do so at the
time of his cessation of service, at any time within three months after such
cessation of service but not thereafter, and in no event after the date on which
the option would otherwise expire; provided, however, that if his service on the
Board shall have been terminated for cause, his options shall terminate
immediately; (ii) shall cease to serve on the Board by reason of his disability,
the option may be exercised at any time within three years after such cessation
of service on the Board but not thereafter, and in no event after the date on
which the option would otherwise expire; (iii) shall cease to serve on the Board
as a result of his retirement after attaining age 65, the option may be
exercised to the extent that the Outside Director was entitled to do so at the
time of his cessation of service, at any time within three years after such
cessation of service but not thereafter, and in no event after the date on which
the option would otherwise expire; (iv) shall die (x) while he is serving on the
Board, (y) within three years after cessation of service on the Board by reason
of disability or retirement after age 65 or (z) within three months after
cessation of service on the Board for any other reason except cause, such option
may be exercised in whole or in part by his personal representative or other
person entitled by law to his rights under such option to the same extent as it
could have been exercised by the decedent had he lived, at any time within one
year after the date of his death, but in no event after the date on which the
option would otherwise expire.
As of the date of this Prospectus, options to purchase 48,000 shares of
Common Stock at a weighted average exercise price of $7.84 per share were
outstanding including options to purchase 36,000 shares granted to Mr. Goldberg,
at a weighted average exercise price of $8.42 per share, and 12,000 shares
granted to Mr. Katz, at a weighted average exercise price of $6.13 per share,
when he was a non-employee director. As of the date of this Prospectus, 60,000
options have been exercised since the inception of the Director Plan.
43
<PAGE>
<PAGE>
1996 STOCK OPTION PLAN
The Company has adopted the 1996 Stock Option Plan (the '1996 Plan') which
is designed to provide an incentive to employees of the Company and to offer an
additional inducement in obtaining the services of such persons. The 1996 Plan
covers both incentive stock options and non-qualified stock options. Pursuant to
action taken by the Company's Board and approved by a majority of the Company's
Shareholders, no new options will be granted under either the Company's 1991
Non-Qualified Plan or under the 1991 Qualified Plan.
The 1996 Plan authorizes the grant of options to purchase a maximum of
1,100,000 shares of the Company's Common Stock (subject to adjustment as
described below) to employees (including officers and directors who are
employees) of and consultants to the Company. Upon expiration, cancellation or
termination of unexercised options, the shares of the Company's Common Stock
subject to such options will again be available for the grant of options under
the 1996 Plan. Options to purchase 160,000 shares of Common Stock were granted
in June 1996 under the 1996 Plan at an exercise price of $17.875 per share of
which 50,000 options were granted to Mr. Anderson, 30,000 options were granted
to Mr. McConnell, 20,000 options were granted to Mr. Hoogerwerf, 25,000 options
were granted to Mr. Sugamele and 20,000 options were granted to Ms. Adkisson.
Approximately 120 employees of the Company are currently eligible to receive
grants of options under the 1996 Plan.
Options granted under the Plan may either be incentive stock options
('ISOs'), within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the 'Code'), or non-qualified stock options which do not
qualify as ISOs ('NQSOs').
The 1996 Plan is administered by the Committee which will satisfy the
requirements for an exemption from the short swing profits rule of Section 16(b)
under the Exchange Act for grants and exercises of options. It is intended that
each member of the Committee will be an 'outside director' within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as amended.
Among other things, the Committee is empowered to determine, within the
express limits contained in the Plan: the employees and consultants to be
granted options, the times when options shall be granted, whether an option is
to be an ISO or a NQSO, the number of shares of Common Stock to be subject to
each option, the exercise price of each option, the term of each option, the
date each option shall become exercisable as well as any terms, conditions or
installments relating to the exercisability of each option, whether and under
what conditions to accelerate the date of exercise of any option or installment,
the form of payment of the exercise price, the amount, if any, required to be
withheld with respect to an option, and with the consent of the optionee, to
modify an option. The Committee is also authorized to prescribe, amend and
rescind rules and regulations relating to the Plan and to make all other
determinations necessary or advisable for administering the Plan and to construe
the Plan.
Options granted under the 1996 Plan will be subject to, among other things,
the following terms and conditions: (a) the exercise price of each option will
be determined by the Committee; provided, however, that the exercise price of an
ISO may not be less than the fair market value of the Company's Common Stock on
the date of grant (110% of such fair market value if the optionee owns (or is
deemed to own) more than 10% of the voting power of the Company); (b) options
may be granted for terms determined by the Committee; provided, however, that
the term of an ISO may not exceed 10 years (5 years if the optionee owns (or is
deemed to own) more than 10% of the voting power of the Company); (c) the
maximum number of shares of the Company's Common Stock for which options may be
granted to an employee in any calendar year is 400,000; (d) the aggregate fair
market value of shares with respect to which ISOs may be granted to an employee
which are exercisable for the first time during any calendar year may not exceed
$100,000; (e) the exercise price of each option is payable in full upon exercise
or, if the applicable stock option contract ('Contract') entered into by the
Company with an optionee permits, in installments (payment of the exercise price
of an option may be made in cash, certified check, or, if the applicable
Contract permits, in shares of the Company's Common Stock or any combination
thereof); (f) options may not be transferred other than by will or by the laws
of descent and distribution, and may be exercised during the optionee's lifetime
only by the optionee or his or her legal representatives; (g) except as may
otherwise be provided in the applicable Contract, if the optionee's relationship
with the Company as an employee or consultant is terminated for any reason
44
<PAGE>
<PAGE>
(other than the death or disability of the optionee), the option may be
exercised, to the extent exercisable at the time of termination of such
relationship, within three months thereafter but in no event after the
expiration of the term of the option (however, if the relationship was
terminated either for cause (as defined in the 1996 Plan) or without the consent
of the Company, the option will terminate immediately); in the case of the death
of an optionee while an employee or consultant (or, generally, within three
months after termination of such relationship, or within one year after
termination of such relationship by reason of disability), except as otherwise
provided in the Contract, his or her legal representative or beneficiary may
exercise the option, to the extent exercisable on the date of death, within one
year after such date, but in no event after the expiration of the term of the
option; except as otherwise provided in the Contract, an optionee whose
relationship with the Company was terminated by reason of his or her disability
may exercise the option, to the extent exercisable at the time of such
termination, within one year thereafter, but not after the expiration of the
term of the option (options are not affected by a change in the status of an
optionee so long as he or she continues to be an employee of, or a consultant
to, the Company); and (h) the Company may withhold cash and/or shares of the
Company's Common Stock having an aggregate value equal to the amount which the
Company determines is necessary to meet its obligations to withhold any federal,
state and/or local taxes or other amounts incurred by reason of the grant or
exercise of an option, its disposition or the disposition of shares acquired
upon the exercise of the option (alternatively, the Company may require the
optionee to pay the Company such amount, in cash, promptly upon demand).
Appropriate adjustments will be made in the number and kind of shares
available under the 1996 Plan, in the number and kind of shares subject to each
outstanding option and the exercise prices of such options, as well as the
limitation on the number of shares that may be granted to any employee in any
calendar year, in the event of any change in the Company's Common Stock by
reason of any stock dividend, split-up, spin off, combination, reclassification,
recapitalization, merger, in which the Company is not the surviving corporation,
exchange of shares or the like. In the event of (a) the liquidation or
dissolution of the Company, or (b) a merger in which the Company is not the
surviving corporation or a consolidation, any outstanding options shall
terminate upon the earliest of any such event, unless other provision is made
therefor on the transaction. The Company shall give each optionee at least 20
days prior notice of any such transaction, advising the optionee of the impact
of the transaction on his option.
No option may be granted under the 1996 Plan after April 23, 2006. The
Board of Directors may at any time terminate or amend the Plan; provided,
however, that, without the approval of the Company's stockholders, no amendment
may be made which would (a) except as a result of the anti-dilution adjustments
described above, increase the maximum number of shares available for the grant
of options or increase the maximum number of options that may be granted to an
employee in any calendar year, (b) prior to August 15, 1996, materially increase
the benefits accruing to participants under the 1996 Plan, or (c) change the
eligibility requirements for persons who may receive options. No termination or
amendment may adversely affect the rights of an optionee with respect to an
outstanding option without the optionee's consent.
STOCK OPTIONS
The following table sets forth information as to all grants of stock
options to the Named Executive Officers during 1995.
45
<PAGE>
<PAGE>
OPTION GRANTS IN 1995(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(3)
OPTIONS EMPLOYEES EXERCISE EXPIRATION --------------------
NAME GRANTED(2) IN 1995 PRICE DATE AT 5%
- ---------------------------------------- ---------- ---------- ---------- -------- --------------------
<S> <C> <C> <C> <C> <C>
Stephen Katz............................ 0 0 $ 0 -- $ 0
Robert P. Dahut......................... 0 0 0 -- 0
Michael E. McConnell.................... 3,820 .97 10.94 12/22/05 26,276
Douglas F. Anderson..................... 3,820 .97 10.94 12/22/05 26,276
David N. Hoogerwerf..................... 3,820 .97 10.94 12/22/05 26,276
<CAPTION>
NAME AT 10%
- ---------------------------------------- --------------------
<S> <C>
Stephen Katz............................ $ 0
Robert P. Dahut......................... 0
Michael E. McConnell.................... 66,588
Douglas F. Anderson..................... 66,588
David N. Hoogerwerf..................... 66,588
</TABLE>
- ------------
(1) No stock appreciation rights ('SARs') were granted to any of the Named
Executive Officers during 1995.
(2) The options become exercisable in cumulative annual installments of 20% per
year on each of the first five anniversaries of the grant date. The options
are exercisable over a ten year period.
(3) The dollar amounts set forth under these columns are the result of
calculations at the 5% and 10% rates established by the SEC and are not
intended to forecast future appreciation of the Company's stock price. The
Company did not use an alternative formula for a grant date valuation as it
is unaware of any formula which would determine with reasonable accuracy a
present value based upon future unknown factors. In order to realize the
potential values set forth under the columns headed 'At 5%' and 'At 10%',
the price per share of the Company's Common Stock at the end of the ten-year
option term would be $35.63 and $56.74, respectively.
The following table sets forth information with respect to the exercise of
stock options during 1995 by the Named Executive Officers and unexercised
options held by them on December 31, 1995.
AGGREGATED OPTION EXERCISES IN 1995
AND DECEMBER 31, 1995 OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE DECEMBER 31, 1995 DECEMBER 31, 1995
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)
- ---------------------------------- ----------- -------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Stephen Katz...................... 0 $ 0 432,000/400,000 $ 3,426,000/$2,020,000
Robert P. Dahut................... 60,000 446,250 60,000/480,000 330,000/ 2,640,000
Michael E. McConnell.............. 48,000 265,500 76,000/185,820 637,125/ 1,504,813
Douglas F. Anderson............... 0 0 14,000/ 59,820 73,750/ 297,626
David N. Hoogerwerf............... 26,000 307,062 66,000/115,820 536,937/ 826,188
</TABLE>
- ------------
(1) There were no SAR exercises during 1995 and no SARs were outstanding at
December 31, 1995.
(2) The closing price for the Company's Common Stock as reported on the NASDAQ
National Market on December 31, 1995 was $11.63 per share. Value is
calculated by multiplying (a) the difference between $11.63 and the option
exercise price by (b) the number of shares of Common Stock underlying the
option.
EMPLOYMENT AGREEMENTS
Effective January 31, 1994, the Company entered into an employment
agreement with Robert P. Dahut to serve as President and Chief Operating Officer
of the Company. The agreement expires on December 31, 1996. Mr. Dahut's annual
base salary is $150,000 and he is eligible to receive, at the discretion of the
Company, an annual bonus in an aggregate amount of up to $150,000 for each
calendar
46
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<PAGE>
year of employment based upon the Company meeting performance criteria
established from time to time by the Company. Under the terms of the agreement,
Mr. Dahut is entitled to the use of an automobile to be provided by the Company,
a $500,000 term life insurance policy and an accidental death and travel
insurance policy.
In the event of the termination of Mr. Dahut's employment due to a 'Change
of Control' of the Company (i) if the Payment Condition (as defined below) is
satisfied, the Company shall pay him an amount equal to 2.9 times his annual
base salary; and (ii) if the Payment Condition is not satisfied, then the
Company shall pay him an amount equal to one year's annual salary. For this
purpose, the 'Payment Condition' shall be deemed to be satisfied if the Value
Per Share (as defined below) is (i) at least $17.25, if the Change of Control
occurs during 1996 and (ii) at least such other price as may be agreed to by the
Company and Mr. Dahut, if the Change of Control occurs after 1996. The foregoing
prices shall be appropriately adjusted to give effect to any stock split or
similar event. The 'Value Per Share' shall mean the total consideration received
in respect of one share of Common Stock in connection with the transaction
constituting the Change of Control; provided, however, that if the Change of
Control occurs other than as the result of a transaction in which stockholders
of the Company receive value, then the 'Value Per Share' shall be deemed to be
the last reported sale price, regular way, prior to the Change of Control date
on the principal national securities exchange upon which such stock is regularly
traded on such date. 'Change of Control' is deemed to occur upon (i) the
acquisition of 25% or more of the outstanding Common Stock or voting power of
the Company (by other than any acquisition directly from the Company, any
acquisition by the Company, any acquisition by a Company employee benefit plan
or any acquisition by any corporation pursuant to a reorganization, merger or
consolidation), (ii) the Incumbent Directors, as defined, becoming less than a
majority of the Board of Directors, or (iii) a reorganization, merger,
consolidation, liquidation or dissolution of the Company or a sale of
substantially all of its assets unless, among other things, at least 60% of the
shares of the successor in said reorganization, merger or consolidation or
transferee of such assets are owned by the owners of the Company's Common Stock
prior to such transaction.
Effective January 1, 1993, the Company entered into an employment agreement
with Michael E. McConnell to serve as Vice President and Chief Financial Officer
of the Company. The agreement expires on December 31, 1996. Mr. McConnell's
annual base salary is currently $122,500 and he is a further eligible to
receive, at the discretion of the Company, an annual bonus in an aggregate
amount of up to fifty percent (50%) of his annual base salary based upon the
Company meeting certain operating goals and objectives, including financial
performance, as established from time to time by the Company. In the event of a
'Change of Control' of the Company, Mr. McConnell will be entitled to a lump sum
severance payment equal to the sum of (i) his annual base salary and highest
annual bonus paid during the term of the agreement and (ii) the sum of his
unpaid base salary through the date of termination and a pro rata portion of the
highest annual bonus awarded him during the term of the employment agreement. A
'Change in Control' is deemed to occur upon (i) the acquisition of 20% or more
of the outstanding Common Stock or voting power of the Company (by other than
Mr. McConnell or a Company employee benefit plan or pursuant to a purchase
directly from the Company), (ii) the Incumbent Directors, as defined, becoming
less than a majority of the Board of Directors, or (iii) a reorganization,
merger, consolidation, liquidation or dissolution of the Company or a sale of
substantially all of its assets unless, among other things, at least 60% of the
shares of the successor in said reorganization, merger or consolidation or
transferee of such assets are owned by the owners of the Company's Common Stock
prior to such transaction.
47
<PAGE>
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of July 1, 1996 (except as otherwise
indicated in footnotes 3 and 4), information with respect to the beneficial
ownership of the Company's Common Stock by (i) each Selling Shareholder, (ii)
each person known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (iii) each director of the Company, (iv)
each of the Named Executive Officers (as such term is herein defined) and (v)
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING
AMOUNT AND SHARES TO SHARES
NATURE OF BE SOLD IN ----------------------------
NAME AND ADDRESS BENEFICIAL THIS BEFORE THE FOLLOWING
OF BENEFICIAL OWNER(1) OWNERSHIP(2) OFFERING OFFERING THE OFFERING
- ------------------------------------------------------------ ------------ ----------------- ---------- --------------
<S> <C> <C> <C> <C>
President and Fellows of Harvard College ................... 2,141,400(3) -- 9.7% 9.1%
c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston, MA 02210
Terren S. Peizer ........................................... 1,430,000(4) -- 6.5% 6.1%
1999 Avenue of the Stars
Los Angeles, CA 90067
Stephen Katz................................................ 842,614(5) -- 3.9% 3.6%
Robert P. Dahut............................................. 180,000(6) 150,000 * *
Jay Goldberg................................................ 60,000(6) -- * *
Michael E. McConnell........................................ 64,000(6) -- * *
David N. Hoogerwerf......................................... 78,000(6) 60,000 * *
Douglas F. Anderson......................................... 0 -- * *
Heidi P. Adkisson........................................... 16,800(6) 16,000 * *
All directors and executive officers as a group (8
persons).................................................. 1,253,014(7) 226,000 5.5% 4.4%
</TABLE>
- ------------
* Less than 1%.
(1) Pursuant to the rules of the Securities and Exchange Commission (the 'SEC'),
addresses are only given for holders of 5% or more of the outstanding Common
Stock of the Company.
(2) Unless otherwise indicated, each person or group has sole voting and
investment power with respect to such shares. For purposes of computing the
percent of outstanding shares held by each person or group named above as of
a given date, any shares which such person or group has the right to so
acquire are deemed to be outstanding, but are not deemed to be outstanding
for the purpose of computing the percentage owned by any other person or
group.
(3) Represents 2,100,794 shares as to which the President and Fellow of Harvard
College have sole voting and dispositive power and 25,660 shares as to which
the Harvard Yenching Institute, with an address at 2 Divinity Avenue,
Cambridge, Massachusetts 02138 has sole voting and dispositive power. The
information is based on a Schedule 13G dated February 13, 1996 filed with
the SEC by the President and Fellow of Harvard College and the Harvard
Yenching Institute as a group. Also represents an additional 15,006 shares
(which information is based on 13(f) institutional filings for the week
ended May 26, 1996, reporting as of March 31, 1996, as reported in the CDA
Bullseye Ownership Report).
(4) Information based on a Schedule 13D dated February 5, 1993, as amended
through June 27, 1994, filed with the SEC by Terren S. Peizer.
(5) Includes 302,000 shares subject to currently exercisable options.
(6) Consists of shares subject to currently exercisable options.
(7) Represents an aggregate of 712,200 shares subject to currently exercisable
options.
48
<PAGE>
<PAGE>
CERTAIN TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1995, the Compensation and Stock
Option Committee of the Board of Directors of the Company (the 'Committee')
consisted of Jay Goldberg (all year), Joseph Esposito (until his death in August
1995) and Lawrence Howard (from October 1995).
DESCRIPTION OF CAPITAL STOCK
The following summary description of the Company's capital stock is
qualified in its entirety by reference to the Company's Certificate of
Incorporation.
COMMON STOCK
The Company is authorized to issue up to 30,000,000 shares of Common Stock,
par value $.001 per share. As of June 14, 1996, the Company had 177 shareholders
of record and the Company believes its Common Stock is beneficially owned by in
excess of 5,000 holders.
Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of shareholders. There is no
cumulative voting for election of directors. Subject to the prior rights of any
series of preferred stock which may from time to time be outstanding, if any,
holders of Common Stock are entitled to receive ratably dividends when, as, and
if declared by the Board of Directors out of funds legally available therefore
and, upon the liquidation, dissolution or winding up of the Company, are
entitled to share ratably in all assets remaining after payment of liabilities
and payment of accrued dividends and liquidation preferences on the preferred
stock, if any. Holders of Common Stock have no preemptive rights and have no
rights to convert their Common Stock into any other securities. The outstanding
Common Stock is, and the Common Stock to be outstanding upon completion of this
Offering will be, duly authorized and validly issued, fully paid and
nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of preferred
stock, par value $.01 per share. The preferred stock may be issued in one or
more series, the terms of which may be determined at the time of issuance by the
Board of Directors, without further action by shareholders, and may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights
and sinking fund provisions.
No shares of preferred stock will be outstanding as of the closing of this
offering, and the Company has no present plans for the issuance thereof. The
issuance of any such preferred stock could adversely affect the rights of the
holders of Common Stock and therefore, reduce the value of the Common Stock. The
ability of the Board of Directors to issue preferred stock could discourage,
delay or prevent a takeover to the Company. See 'Risk Factors -- Anti-Takeover
Provisions.'
ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation and By-laws of the Company contain various
provisions which may have the effect of discouraging, delaying or preventing
future changes of control or takeover attempts, which the Company's stockholders
may deem to be in their best interests, and perpetuating the Company's existing
management. Among other things, such provisions: (i) provide the Board of
Directors with broad discretion to issue serial preferred stock; (ii) provide
for three-year terms for the directors of the Company and the election of such
directors on a staggered basis; (iii) prohibit repurchases by the Company from a
stockholder owning 5% or more or the Company's voting securities (other than
those stockholders meeting such description as of May 30, 1991) who have held
their securities for less than two years, unless approved by a majority of the
disinterested stockholders; and (iv) require the approval of two-thirds of all
shares eligible to vote for any proposed amendment to the Certificate of
Incorporation or By-laws that seeks to modify or remove the foregoing
provisions. In addition, in certain circumstances, Delaware law requires the
approval of two-thirds of all shares eligible
49
<PAGE>
<PAGE>
to vote for certain business combinations involving a stockholder owning 15% or
more of the Company's voting securities (other than stockholders currently
meeting such description), excluding the voting power held by such stockholder.
The existence of all of the above provisions may have the effect of
discouraging, delaying or preventing a future change of control or takeover
attempt of the Company, which could have an adverse effect on the market price
of the Common Stock. See 'Description of Capital Stock -- Anti-Takeover
Provisions.'
ELECTION OF DIRECTORS
The Certificate of Incorporation and By-laws of the Company set the number
of directors at a minimum of three and a maximum of fifteen and provide for
three-year terms of office on a staggered basis.
REMOVAL OF DIRECTORS
The Certificate of Incorporation of the Company permits stockholders to
remove a director with or without cause by an affirmative vote of two-thirds of
the total votes eligible to be cast at a duly constituted meeting called
expressly for that purpose.
APPROVAL OF REPURCHASES
The Certificate of Incorporation of the Company prohibits repurchases by
the Company from a stockholder owning more than 5% of the Company's voting
securities (a 'Significant Stockholder') (other than those stockholders meeting
such description as of May 30, 1991) who has owned such securities of the
Company for less than two years, unless approved by an affirmative vote of at
least a majority of the total votes entitled to vote generally in the election
of directors other than the voting power held by the Significant Stockholder.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BY-LAWS
The Certificate of Incorporation provides that in addition to the general
requirements to amend a certificate of incorporation, an affirmative vote of the
holders of at least two-thirds of the total votes eligible to be cast is
required to amend the anti-takeover provisions described above.
The Certificate of Incorporation of the Company provides that either the
Board of Directors or the stockholders may alter, amend or repeal the By-laws of
the Company. The Board of Directors may take such action by an affirmative vote
of at least a majority of the directors at a meeting expressly called for that
purpose. Such action by stockholders requires an affirmative vote of at least
two-thirds of the total votes eligible to be cast at a meeting called expressly
for that purpose.
TRANSFER AGENT
Continental Stock Transfer & Trust Company, New York, New York as Transfer
Agent for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Shares Eligible for Future Sale. Upon completion of this offering, the
Company will have outstanding 23,669,748 (including 237,280 shares issued for
option exercises from April 1, 1996 to the date of this prospectus) shares of
Common Stock, of which the 1,726,000 shares sold in this offering (1,984,900
shares if the Underwriters' over-allotment option is exercised in full) and the
4,600,000 shares sold in the Company's initial public offering in August 1991
and all other shares will be freely tradeable without restriction or further
registration under the Securities Act, except for those shares held by
'affiliates' (as defined in the Securities Act) of the Company. There are no
restricted shares currently outstanding. Affiliates are able to sell shares
pursuant to Rule 144 ('Rule 144') under the Securities Act, subject to
compliance with certain requirements set forth in Rule 144. In addition,
5,400,000 shares of Common Stock are authorized under the Company's 1991
Qualified Stock Option Plan, 1991 Non-
50
<PAGE>
<PAGE>
Qualified Stock Option Plan, as amended, 1993 Non-Employee Directors Stock
Option Plan and 1996 Stock Option Plan. Of these shares, 2,176,160 shares are
issuable upon the exercise of outstanding stock options granted by the Company,
of which options to purchase 513,100 shares are currently exercisable (assuming
the exercise by certain Selling Stockholders of options to purchase 76,000
shares of Common Stock). Registration statements on Form S-8 have been filed
with the Securities and Exchange Commission (the 'Commission') registering all
of the shares of Common Stock that may be issued under these plans, other than
the 1996 Stock Option Plan, and registering 600,000 shares of Common Stock
issued to Robert Dahut which were not issued in connection with any stock option
plan of the Company. Of these shares, 390,000 are issuable upon exercise of
certain options to purchase shares of Common Stock (which are in addition to the
150,000 shares being sold by Mr. Dahut in connection with this Prospectus and
which include 30,000 options currently exercisable by Mr. Dahut. The Company and
each of its executive officers and directors have agreed with the Underwriters,
subject to limited exceptions, not to offer, sell, pledge, contract to sell,
grant any other option to purchase or otherwise dispose of any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for, or
warrants, rights or options to acquire shares of Common Stock, for a period of
180 days from the date of this Prospectus without the prior written consent of
the Representative. The Company estimates that 540,434 shares of outstanding
Common Stock and 838,820 shares of Common Stock that are issuable upon the
exercise of outstanding options will be subject to such agreements. No new
options will be granted under either the Company's 1991 Non-Qualified Stock
Option Plan, or under the Company's 1991 Qualified Stock Option Plan. Sales of
substantial amounts of shares of Common Stock in the public market, or the
availability of such shares for future sale, could adversely affect the market
price of the Common Stock and could impair the Company's future ability to raise
additional capital through an offering of its equity securities. See 'Shares
Eligible for Future Sale' and 'Underwriting.'
51
<PAGE>
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Gerard Klauer Mattison & Co., LLC is
acting as the representative (the 'Representative'), have severally agreed,
subject to the terms and conditions of an underwriting agreement (the
'Underwriting Agreement'), to purchase on a 'firm commitment' basis, the
respective numbers of shares of Common Stock set forth opposite their names
below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ---------
<S> <C>
Gerard Klauer Mattison & Co., LLC................................................
---------
Total....................................................................... 1,726,000
---------
---------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions. The Underwriters are obligated to take and pay for
all the shares of Common Stock if any are taken.
The Representative has advised the Company that the Underwriters propose to
offer the shares of Common Stock offered hereby initially at the public offering
price per share set forth on the cover page of this Prospectus and in part,
through the Representative, to certain other dealers at such prices less a
concession not in excess of $ per share; that the Underwriters may
allow, and such dealers may reallow, a discount not in excess of $ per
share on sales to other dealers; and that after the initial public offering, the
public offering price, concession and the discount selling terms may be changed
by the Representative. The Underwriters have informed the Company that they do
not intend to confirm sales to any accounts over which they exercise
discretionary authority.
The Company and certain of the Selling Shareholders have granted the
Underwriters an option, exercisable for 45 days from the date of this
Prospectus, to purchase, in the aggregate, up to an additional 258,900 shares of
Common Stock, at the public offering price less underwriting discounts. The
Underwriters may exercise such option only for the purpose of covering
over-allotments, if any, incurred in connection with the sale of Common Stock
offered hereby. To the extent that the Underwriters exercise such option, each
Underwriter will become obligated, subject to certain conditions, to purchase
the same percentage of such additional shares as the number of other shares of
Common Stock to be purchased by that Underwriter shown on the foregoing table
bears to the total number of shares initially offered hereby.
The Company and each of its executive officers and directors have agreed
with the Underwriters, subject to limited exceptions, not to offer, sell,
pledge, contract to sell, grant any other option to purchase or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for, or warrants, rights or options to acquire
shares of Common Stock, for a period of 180 days from the date of this
Prospectus without the prior written consent of the Representative.
The Company also has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Act, or to contribute to payments
that may be required to make in respect thereof.
In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified market makers
on the Nasdaq National Market may have engaged
52
<PAGE>
<PAGE>
in passive market making transactions in the Common Stock of the Company on the
Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act,
during the two business day period before commencement of offers or sales of the
Common Stock. Passive market making transactions must comply with applicable
volume and price limits and be identified as such. In general, a passive market
maker may display its bid at a price not in excess of the highest independent
bid for such security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon for
the Company by Parker Chapin Flattau & Klimpl, LLP, New York, New York. Certain
legal matters will be passed upon for the Underwriters by Andrews & Kurth L.L.P.
New York, New York.
EXPERTS
The financial statements of the Company as at December 31, 1994 and 1995
and for each of the three years in the period ended December 31, 1995 appearing
in this prospectus and registration statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports therein, appearing
elsewhere herein, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder, and in accordance therewith files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information filed by the Company with the Commission, including the Registration
Statement on Form S-1 of which this Prospectus is a part, and the exhibits and
schedules thereto, may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington
D.C. 20549, and at the Commission's regional offices located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511
and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of
such material can also be obtained at prescribed rates by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Upon written or oral request, the Company will provide, without charge,
to each person who receives a copy of this Prospectus, a copy of any of the
information that is incorporated by reference herein. Electronic registration
statements made through the Electronic Data Gathering Analysis and Retrieval
System are publicly available through the Commission's Web Site
(http://www.sec.gov).
The Company has filed a Registration Statement on Form S-1 under the
Securities Act with the Commission with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
that Registration Statement and the exhibits, as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and its Common Stock, reference is hereby made to such Registration
Statement and exhibits. Statements contained in this Prospectus as to the
contents of any contract or any other document are not necessarily complete and
where such contract or other document is an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provision of
such exhibit, to which reference is made for a full statement of the provisions
thereof.
53
<PAGE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................................................... F-2
Balance Sheets.......................................................................................... F-3
Statements of Operations................................................................................ F-4
Statements of Stockholders' Equity...................................................................... F-5
Statements of Cash Flows................................................................................ F-6
Notes to Financial Statements........................................................................... F-7
</TABLE>
F-1
<PAGE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CELLULAR TECHNICAL SERVICES COMPANY, INC.
We have audited the accompanying balance sheets of Cellular Technical
Services Company, Inc. as of December 31, 1995 and 1994, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cellular Technical Services
Company, Inc. at December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Seattle, Washington
March 1, 1996, except for the first paragraph of Note K as to which the date is
June 24.
F-2
<PAGE>
<PAGE>
CELLULAR TECHNICAL SERVICES COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- -----------
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...................................... $ 9,041,985 $ 9,448,255 $ 5,720,399
Accounts receivable, net of allowances of $177,658 in 1994,
$70,000 in 1995 and $80,000 in 1996.......................... 1,746,801 508,238 480,309
Inventories, net............................................... 454,516 1,947,060 2,783,130
Prepaid expenses and other current assets...................... 290,668 827,712 1,289,477
----------- ----------- -----------
Total Current Assets...................................... 11,533,970 12,731,265 10,273,315
PROPERTY AND EQUIPMENT, net......................................... 1,336,915 2,292,632 2,257,209
SOFTWARE DEVELOPMENT COSTS, net..................................... 2,605,835 3,346,748 3,500,605
----------- ----------- -----------
TOTAL ASSETS.............................................. $15,476,720 $18,370,645 $16,031,129
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities....................... $ 892,697 $ 1,154,396 $ 912,989
Payroll-related liabilities.................................... 506,314 223,222 296,526
Taxes (other than payroll and income).......................... 131,307 197,843 28,825
Deferred revenue and customers' deposits....................... 220,631 61,973 195,421
----------- ----------- -----------
Total Current Liabilities................................. 1,750,949 1,637,434 1,433,761
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value per share, 5,000,000 shares
authorized, none issued and outstanding
Common Stock, $.001 par value per share, 30,000,000 shares
authorized, 19,741,268 shares issued and outstanding in 1994,
21,602,768 in 1995 and 21,706,468 in 1996.................... 19,741 21,603 21,707
Additional paid-in capital..................................... 17,395,481 20,337,872 20,702,484
Retained deficit............................................... (3,689,451) (3,626,264) (6,126,823)
----------- ----------- -----------
Total Stockholders' Equity................................ 13,725,771 16,733,211 14,597,368
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $15,476,720 $18,370,645 $16,031,129
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
F-3
<PAGE>
<PAGE>
CELLULAR TECHNICAL SERVICES COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
License and service fees........ $ 3,875,353 $ 8,691,036 $10,944,788 $ 2,736,768 $ 645,622
Equipment sales................. 1,215,738 1,040,863 1,164,536 612,812 89,164
Interest income................. 176,594 280,181 475,512 118,984 107,493
----------- ----------- ----------- ----------- -----------
Total Revenues............. 5,267,685 10,012,080 12,584,836 3,468,564 842,279
COSTS AND EXPENSES
Cost of license and service
fees.......................... 1,574,521 2,619,435 3,330,801 922,539 785,200
Cost of equipment sales......... 1,329,276 1,112,254 1,485,952 611,731 278,405
Sales and marketing............. 738,068 789,578 2,141,853 507,607 822,873
General and administrative...... 1,563,794 2,269,170 2,115,991 601,783 510,611
Research and development........ 1,268,361 1,661,772 3,445,052 576,777 945,749
----------- ----------- ----------- ----------- -----------
Total Costs and Expenses... 6,474,020 8,452,209 12,519,649 3,220,437 3,342,838
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.... (1,206,335) 1,559,871 65,187 248,127 (2,500,559)
PROVISION FOR INCOME TAXES........... -- 10,000 2,000 5,000 --
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS).................... $(1,206,335) $ 1,549,871 $ 63,187 $ 243,127 $(2,500,559)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) PER SHARE.......... $(0.07) $0.08 $0.00 $0.01 $(0.12)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING........................ 17,363,680 20,297,326 22,026,150 22,158,686 21,608,900
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
F-4
<PAGE>
<PAGE>
CELLULAR TECHNICAL SERVICES COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993......................... 17,216,000 $17,216 $13,472,691 $(4,032,987) $ 9,456,920
Exercise of common stock warrants................ 320,976 321 395,551 395,872
Exercise of stock options........................ 292,000 292 372,552 372,844
Other............................................ 33,000 33,000
Net loss......................................... (1,206,335) (1,206,335)
---------- ------- ----------- ----------- -----------
Balance, December 31, 1993....................... 17,828,976 17,829 14,273,794 (5,239,322) 9,052,301
Exercise of common stock warrants................ 1,628,772 1,629 2,764,671 2,766,300
Exercise of stock options........................ 283,520 283 357,016 357,299
Net income....................................... 1,549,871 1,549,871
---------- ------- ----------- ----------- -----------
Balance, December 31, 1994....................... 19,741,268 19,741 17,395,481 (3,689,451) 13,725,771
Exercise of stock options........................ 1,861,500 1,862 2,942,391 2,944,253
Net income....................................... 63,187 63,187
---------- ------- ----------- ----------- -----------
Balance, December 31, 1995....................... 21,602,768 21,603 20,337,872 (3,626,264) 16,733,211
Exercise of stock options (unaudited)............ 103,700 104 364,612 364,716
Net loss (unaudited)............................. (2,500,559) (2,500,559)
---------- ------- ----------- ----------- -----------
Balance, March 31, 1996 (unaudited).............. 21,706,468 $21,707 $20,702,484 $(6,126,823) $14,597,368
---------- ------- ----------- ----------- -----------
---------- ------- ----------- ----------- -----------
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
F-5
<PAGE>
<PAGE>
CELLULAR TECHNICAL SERVICES COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. $(1,206,335) $1,549,871 $ 63,187 $ 243,127 $(2,500,559)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization of property and
equipment.................................... 433,062 433,718 609,755 127,401 180,651
Amortization of software development costs...... 556,942 550,257 984,977 241,775 279,972
Other........................................... 33,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable...... (289,689) (315,949) 1,238,563 (1,528,363) 27,929
(Increase) decrease in inventories.............. (437,223) 114,663 (1,492,544) (209,194) (836,070)
(Increase) in prepaid expenses and other current
assets....................................... (168,138) (59,122) (537,044) (204,007) (461,765)
Increase (decrease) in accounts payable and
accrued liabilities.......................... 52,982 370,975 261,699 119,575 (241,407)
Increase (decrease) in payroll-related
liabilities.................................. 16,711 379,835 (283,092) (134,552) 73,304
Increase (decrease) in taxes (other than payroll
and income).................................. 143,627 (30,427) 66,536 2,120 (169,018)
Increase (decrease) in deferred revenue and
customers' deposits.......................... (1,613) 219,436 (158,658) 331,408 133,448
----------- ---------- ---------- ---------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.... (866,674) 3,213,257 753,379 (1,010,710) (3,513,515)
INVESTING ACTIVITIES
Purchase of property and equipment................ (439,495) (727,690) (1,565,472) (597,204) (145,228)
Capitalization of software development costs...... (750,277) (1,724,722) (1,725,890) (413,857) (433,829)
----------- ---------- ---------- ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES.................. (1,189,772) (2,452,412) (3,291,362) (1,011,061) (579,057)
FINANCING ACTIVITIES
Proceeds from exercise of common stock warrants... 395,872 2,766,300
Proceeds from exercise of stock options........... 372,844 357,299 2,944,253 268,399 364,716
----------- ---------- ---------- ---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 768,716 3,123,599 2,944,253 268,399 364,716
----------- ---------- ---------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... (1,287,730) 3,884,444 406,270 (1,753,372) (3,727,856)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......... 6,445,271 5,157,541 9,041,985 9,041,985 9,448,255
----------- ---------- ---------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR............... $ 5,157,541 $9,041,985 $9,448,255 $7,288,613 $ 5,720,399
----------- ---------- ---------- ---------- -----------
----------- ---------- ---------- ---------- -----------
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
F-6
<PAGE>
<PAGE>
CELLULAR TECHNICAL SERVICES COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE UNAUDITED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations and Organization -- Cellular Technical Services
Company, Inc. (the 'Company') is primarily engaged in the design, development,
marketing, installation and support of integrated data processing systems for
the wireless communications industry. Although the Company's current customer
base is comprised of domestic U.S. cellular service providers, management
believes that demand for the Company's products extends worldwide. The Company
was incorporated in Delaware on August 19, 1988. Prior to September 14, 1995,
the Company's single largest stockholder had been Nationwide Cellular Service,
Inc. ('Nationwide').
Interim Financial Information -- The financial information at March 31,
1996 and for the three months ended March 31, 1996 and 1995 and the related
notes thereto are unaudited, but include all adjustments (consisting of normal
recurring accruals) that the Company considers necessary for a fair presentation
of the financial position at such date and the operating results and cash flows
for those periods. Operating results for the three months ended March 31, 1996
are not necessarily indicative of results that may be expected for the entire
year.
Cash and Cash Equivalents -- The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Diversification of Credit Risk -- The Company is subject to concentrations
of credit risk primarily from cash investments and accounts receivable. Credit
risk from cash investments is managed by diversification of cash investments
among institutions and by the purchase of investment-grade commercial paper
securities which are held to maturity. The estimated fair values of the
securities approximate cost. Credit risk associated with trade receivables is
subject to ongoing credit evaluations. Reserves for potential losses, if any,
are maintained where appropriate.
Inventories -- Inventories, which primarily consist of raw materials, work
in process, finished components, and data processing and telecommunication
equipment, are stated at the lower of cost or market value, with cost determined
on a first-in, first-out basis. Inventories are integrated for delivery to
customers by either the Company or its third-party integrators.
Property and Equipment -- Property and equipment, including leasehold
improvements, are stated at costs, less accumulated depreciation and
amortization. Depreciation and amortization commences at the time assets are
placed in service and is computed using the straight-line method over the
estimated useful lives of the assets of two to five years or terms of the
associated operating lease. The Company capitalizes expenditures that
significantly increase the life of the related assets, while maintenance and
repairs are charged to operations. Gain or loss is reflected in results of
operations upon the retirement or sale of assets.
Software Development Costs -- Software development costs, consisting of
purchased and internally developed software, have been capitalized in accordance
with Financial Accounting Standards Board Statement No. 86, 'Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed.'
Capitalization of software development costs begins upon the establishment of
technological feasibility. The ongoing assessment of the recoverability of these
costs considers external factors including, but not limited to, anticipated
future net product revenues, estimated economic life and changes in software and
hardware technology. Amortization of capitalized software development costs is
the greater of the amount computed using (a) the ratio that current gross
revenues for a product bear to the total of current and anticipated future gross
revenues for that product or (b) the straight-line method over the remaining
estimated economic life of the product. Amortization begins when products are
available for general release.
Revenue Recognition -- Software license fees are recognized in accordance
with contractual agreements entered into between the Company and its customers
and typically provide for (a) single fee license sales whereby the purchaser
receives unlimited usage of the software product for the duration of
F-7
<PAGE>
<PAGE>
CELLULAR TECHNICAL SERVICES COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE UNAUDITED)
the contract, (b) fixed monthly payments over the term of the contract, or (c)
the monthly payment of fees based upon usage levels, which may be subject to
predetermined minimums. Revenues from services and equipment sales are
recognized at the time the Company has completed its material obligations with
respect to each sales transaction. Maintenance revenues, which are included with
service fees, are recognized ratably over the period that maintenance coverage
is provided.
Income Taxes -- The Company follows the deferred method of accounting for
income taxes whereby deferred tax assets and liabilities are determined based on
differences between financial reporting basis and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse. The
Company provides a valuation allowance for deferred tax assets that cannot be
currently recognized due to the cumulative losses incurred by the Company.
Net Income (Loss) Per Share -- The computation of net income (loss) per
share is based upon the weighted average number of common shares outstanding
during the period plus (in periods in which they have a dilutive effect) the
weighted average effect of common shares contingently issuable upon the exercise
of stock options and warrants (using the treasury stock method). Fully diluted
earnings per common and common equivalent share are not presented since dilution
is less than 3%.
Stock-Based Compensation -- In October 1995, the Financial Accounting
Standards Board issued Statement No. 123, 'Accounting for Stock-Based
Compensation.' The Statement is effective for fiscal years beginning after
December 15, 1995. Under Statement No. 123, stock-based compensation expense is
measured using either the intrinsic-value method as prescribed by Accounting
Principles Board Opinion No. 25 or the fair value method described in Statement
No. 123. Companies choosing the intrinsic-value method will be required to
disclose the pro forma impact of the fair value method on net income and
earnings per share. The Company plans to implement the Statement in 1996 using
the intrinsic-value method; accordingly, there will be no effect of adopting the
Statement on the Company's financial position and results of operations.
Risks and Uncertainties -- Effective for fiscal years ending after December
15, 1995, the Company is required to disclose, among other items, certain
significant risks and uncertainties in accordance with the AICPA Statement of
Position ('SOP') No. 94-6. Management of the Company believes that the risks and
uncertainties discussed below, whether viewed individually or combined, will not
result in a significant unfavorable impact to the Company. However, there can be
no assurance that any unfavorable outcome of the risks and uncertainties
discussed below will not have a material adverse effect on the Company's
financial position, results of operations or liquidity.
Competition in selling the Company's products continues to grow as cellular
software vendors, cellular carriers and other technology-oriented companies have
developed or are developing products that do or will compete against the
Company's products. In connection with developing the Company's software
products, significant amounts of software development costs have been
capitalized. Additionally, the Company has purchased inventories that are
intended to support future product sales. In the event that the Company is not
successful in generating sufficient future product revenues, the carrying value
of capitalized software, inventories, and other assets could be significantly
impaired.
The nature of the Company's business is such that a single customer will
account for more than 10% of the Company's product and service revenues during a
given fiscal period. Sales to customers aggregating 10% or more, either
individually or combined as affiliates due to common ownership, were
concentrated as follows: four customers with sales of 34%, 17%, 16% and 11%
during the quarterly period ended March 31, 1996, three customers with sales of
12%, 15% and 59% in 1995, three customers with sales of 11%, 22% and 54% in 1994
and two customers with sales of 24% and 56% in 1993. The aggregate sales to
these customers (only one of which has accounted for more than 10% during all
periods presented) represented 83%, 86%, 87% and 80% of the Company's total
product and service revenues during the 1996, 1995, 1994 and 1993 periods,
respectively. There can be no assurances
F-8
<PAGE>
<PAGE>
CELLULAR TECHNICAL SERVICES COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE UNAUDITED)
that such customers will continue to maintain business relationships with the
Company. Accordingly, the loss of one or more major customers could have a
material adverse effect on the Company.
Should the Company's recent contract signings and expanded sales efforts
lead to additional sales of its Blackbird'r' Products, the Company may need to
obtain additional financing to fund this growth. Factors impacting the need will
be timing of contract signings, negotiated payment terms, manufacturing and
inventory lead times and others. Debt or equity financing could be obtained from
currently identified or new sources.
From time to time, the Company could be subject to involvement with legal
actions and claims arising in the ordinary course of business. The Company has
received a request for indemnification from a former customer who utilized the
Company's discontinued phone rental products, pursuant to a contract between the
Company and the former customer which includes a limited warranty against
infringement. The Company has demanded arbitration to resolve whether it has any
obligation under the contract to indemnify the former customer against a claim
of patent infringement brought against the former customer by a third party. The
Company has conducted a review of the underlying matter and, based upon the
information currently available to the Company, but subject to the inherent
uncertainties involved in legal proceedings, believes that the outcome of the
claim will not be material to the Company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications -- Certain reclassifications have been made to the prior
year financial statements to conform to the current period's presentation.
NOTE B -- INVENTORY:
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------- ----------
1994 1995 1996
-------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................................... $ 78,901 $ 704,641 $ 923,515
Work in process and finished components......................... 464,387 1,460,211 2,107,407
-------- ---------- ----------
543,288 2,164,852 3,030,922
Less inventory reserves......................................... (88,772) (217,792) (247,792)
-------- ---------- ----------
$454,516 $1,947,060 $2,783,130
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
NOTE C -- PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------ ----------
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and software............................... $2,226,661 $2,917,070 $3,041,959
Furniture, fixtures and office equipment...................... 558,588 1,220,404 1,240,743
Leasehold improvements........................................ 61,166 222,904 222,904
---------- ---------- ----------
2,846,415 4,360,378 4,505,606
Less accumulated depreciation and amortization................ (1,509,500) (2,067,746) (2,248,397)
---------- ---------- ----------
$1,336,915 $2,292,632 $2,257,209
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-9
<PAGE>
<PAGE>
CELLULAR TECHNICAL SERVICES COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE UNAUDITED)
NOTE D -- SOFTWARE DEVELOPMENT COSTS:
Software development costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------ ----------
1994 1995 1996
---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Purchased software............................................ $1,008,167 $1,008,167 $1,008,167
Developed software............................................ 3,549,746 5,275,636 5,709,465
---------- ---------- ----------
4,557,913 6,283,803 6,717,632
Less accumulated amortization................................. (1,952,078) (2,937,055) (3,217,027)
---------- ---------- ----------
$2,605,835 $3,346,748 $3,500,605
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NOTE E -- COMMITMENTS AND CONTINGENCIES:
Leases -- The Company leases office space under separate non-cancelable
operating leases that expire in 2000 and contain renewal options for additional
five-year terms. The Company also leases equipment and telecommunication lines
and services under non-cancelable operating leases with initial terms ranging
from three to five years expiring through 1999. In addition, the Company leases
office space, equipment and telecommunication lines and services under various
rental agreements with initial terms ranging from one to twelve months. Amounts
charged to operations under all lease and rental agreements totaled $754,000,
$536,000 and $555,000 in 1995, 1994 and 1993, respectively. Future minimum
annual lease payments at December 31, 1995, under those agreements with initial
terms greater than one year are as follows:
<TABLE>
<S> <C>
1996.............................. $ 482,000
1997.............................. 631,000
1998.............................. 684,000
1999.............................. 692,000
2000.............................. 503,000
----------
Total........................ $2,992,000
----------
----------
</TABLE>
Royalty Agreements -- The Company has entered into three separate third-party
agreements that provide for the payment of royalties based on future product
sales. The agreements, some of which contain minimum royalty provisions, have
varying expiration dates.
Employment Agreements -- The Company has employment agreements with four
officers and one senior employee with varying expiration dates extending through
1997.
NOTE F -- RELATED-PARTY TRANSACTIONS:
In 1994 and 1993, the Company licensed certain of its software products,
provided services and sold equipment to an affiliate that had common
shareholders and management with the Company. Sales to the related party
amounted to $422,000 and $1,205,000 for the years ended December 31, 1994 and
1993, respectively. Related-party receivables associated with such sales
amounted to $448,000 as of December 31, 1993. Since February 1994, the Company
has not been an affiliate of the entity to which such products and services were
provided.
During 1991, the Company entered into a management advisory service
agreement with Nationwide at $25,000 per month for a four-year period expiring
in 1995. Amounts charged to general and administrative expenses under this
agreement totaled $178,000, $300,000 and $300,000 during 1995, 1994 and 1993,
respectively.
F-10
<PAGE>
<PAGE>
CELLULAR TECHNICAL SERVICES COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE UNAUDITED)
NOTE G -- EMPLOYEE RETIREMENT SAVINGS PLAN:
The Company has adopted an Employee Retirement Savings Plan (the 'Plan')
covering substantially all employees who have been employed for at least six
months and meet certain age and eligibility requirements. Each eligible employee
may contribute up to 15% of his or her compensation per year, subject to a
maximum limit imposed by federal tax law, into various funds. Under current plan
provisions, matching contributions are made by the Company equal to two-thirds
of the employee's contribution, subject to a maximum of 6% of compensation
contribution by the employee. Company contributions charged to costs and
expenses totaled $97,000, $57,000 and $38,000 during 1995, 1994 and 1993,
respectively.
NOTE H -- INCOME TAXES:
The Company had available for federal income tax purposes net operating
loss carry forwards of approximately $27,500,000 and $31,200,000 at December 31,
1995 and March 31, 1996, respectively, which begin to expire in 2003. The
federal income tax net operating loss carryforwards exceed the retained deficit,
primarily due to the differences between financial reporting and tax treatment
of software development costs and deductibility of certain amounts on exercise
of stock options. A portion of the net operating loss carryforwards
(approximately $21,000,000 and $22,000,000 at December 31, 1995 and March 31,
1996, respectively) are attributed to the stock option deduction, the tax effect
of which will be credited to additional paid-in capital when realized. The net
operating loss carryforwards of the Company have been and will continue to be
subject to limitations imposed by Section 382 of the Internal Revenue Code since
there has been an ownership change of greater than 50% in the Company.
Additionally, the Company had research and development tax credits of
approximately $688,000 at December 31, 1995 and March 31, 1996 respectively,
which begin to expire in 2003.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------- -----------
1993 1994 1995 1996
---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $2,346,000 $2,822,000 $9,363,000 $10,604,000
Research and development tax credits............... 273,000 450,000 688,000 688,000
Reserves and allowances on financial statements in
excess of tax returns............................ 62,000 139,000 98,000 144,000
---------- ---------- ---------- -----------
Total deferred tax assets..................... 2,681,000 3,411,000 10,149,000 11,436,000
Valuation allowance for deferred tax assets... (2,260,000) (2,547,000) (8,988,000) (10,215,000)
---------- ---------- ---------- -----------
Net deferred tax assets....................... 421,000 864,000 1,161,000 1,221,000
---------- ---------- ---------- -----------
Deferred tax liabilities:
Depreciation on tax returns in excess of financial
statements....................................... 35,000 38,000 54,000 55,000
Capitalized software development costs............. 386,000 826,000 1,107,000 1,166,000
---------- ---------- ---------- -----------
Total deferred tax liabilities................ 421,000 864,000 1,161,000 1,221,000
---------- ---------- ---------- -----------
Net..................................................... $ -- $ -- $ -- $ --
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
F-11
<PAGE>
<PAGE>
CELLULAR TECHNICAL SERVICES COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE UNAUDITED)
The reconciliation of income tax computed at the U.S. federal statutory tax
rate to income tax expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- -----------
1993 1994 1995 1996
--------- --------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income tax provision (benefit) at statutory rate of 34%....... $(410,154) $ 530,356 $ 22,164 $(850,190)
Losses producing no current tax benefit....................... 410,154 850,190
Utilization of net operating loss carryforward................ (530,356) (22,164)
Alternative minimum tax -- current............................ 10,000 2,000
--------- --------- -------- -----------
Provision for income taxes.................................... $ -- $ 10,000 $ 2,000 $ --
--------- --------- -------- -----------
--------- --------- -------- -----------
</TABLE>
NOTE I -- STOCKHOLDERS' EQUITY: Stock Split -- On January 10, 1994, the Company
declared a two-for-one split of its Common Stock, $.001 par value per share,
effected by a 100% stock dividend whereby each holder of Common Stock received
one additional share of Common Stock for each share held. The additional shares
were distributed on February 15, 1994. All outstanding common shares and per
share amounts in the accompanying financial statements have been retroactively
adjusted to give effect to the two-for-one stock split.
Class A Warrant Redemption -- On January 28, 1994, the Company exercised its
right to redeem, at a price of $.25 per Warrant, all 287,500 Class A Warrants
issued in 1992. Each Class A Warrant had entitled the registered holder to
purchase, at a price of $8.00 per Warrant, four shares of Common Stock for a
period of three years ending May 12, 1995. As of March 18, 1994 (the termination
date of the Warrant exercise period), substantially all of the outstanding Class
A Warrants had been exercised in exchange for 1,149,748 shares of Common Stock.
Proceeds to the Company, net of expenses of $176,885 associated with the
issuance of the Common Stock, amounted to $2,122,611.
Underwriter's Warrants -- In connection with the initial public offering of its
securities in 1991, the Company sold to its underwriter, at a nominal price,
Underwriter's Warrants to purchase 100,000 units at an exercise price of $5.75
per unit. Each unit consisted of four shares of Common Stock and one underlying
warrant to purchase for $5.00 four additional shares of Common Stock. As of
December 31, 1994, the Company had issued 800,000 shares of Common Stock
associated with the exercise of all Underwriter's Warrants and Warrants
underlying the Underwriter's Warrants. Proceeds to the Company amounted to
$643,689 in 1994 and $395,872, net of registration expenses of $35,440, in 1993.
Nationwide Cellular Service, Inc. -- Prior to September 14, 1995, Nationwide
owned 6,680,000 shares of the Company's Common Stock and was the holder of an
option to purchase an additional 1,280,000 shares. On September 14, 1995, in
conjunction with the merger between Nationwide and MCI Communications
Corporation, Nationwide exercised its option and distributed the combined total
of 7,960,000 shares to its stockholders. As a result of the exercise of the
option, the Company received $1,600,000 and issued 1,280,000 shares of Common
Stock.
Stock Options -- The Company has adopted a 1991 Qualified Stock Option Plan and
a 1991 Non-Qualified Stock Option Plan. Pursuant to the 1991 Qualified Plan, as
amended, the Company may grant options to purchase up to 2,800,000 shares of
Common Stock to its officers and key employees, at a price which may not be less
than the fair market value per share of Common Stock on the date of grant and
have a term of ten years. Pursuant to the 1991 Non-Qualified Plan, as amended,
the Company may grant options to purchase up to 1,200,000 shares of Common Stock
to its directors, officers, key employees and others who render services to the
Company at such price as fixed by the Compensation and Stock Option Committee.
Options granted under both the 1991 Qualified Plan and 1991 Non-Qualified Plan
generally vest to the respective option holders at the rate of 20% per year
commencing
F-12
<PAGE>
<PAGE>
CELLULAR TECHNICAL SERVICES COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE UNAUDITED)
on the first anniversary date of the grant. In December 1993, the Company
adopted the 1993 Non-E mployee Director Stock Option Plan which allows the
Company to grant options to purchase up to 300,000 shares of Common Stock.
Pursuant to the 1993 Non-Employee Director Plan, each non-employee director is
to be granted options to purchase 20,000 shares of Common Stock upon initial
appointment as a director of the Company and an additional 12,000 options, in
recurring annual increments, at a price equal to the fair market value per share
of Common Stock on the date of grant. Options under the Non-Employee Director
Plan vest to the respective option holder after one year and have a term of ten
years.
The Company has also granted options to purchase 920,000 shares of Common Stock
at fair market value to certain directors and officers of the Company at
exercise prices ranging from $1.25 to $6.13 per share. These options are in
addition to those granted under the 1991 Qualified and Non-Qualified Plans, the
1993 Non-Employee Director Plan, and the options previously granted to and
subsequently exercised by Nationwide (as discussed above). The options have
terms ranging from five to ten years and vest to the respective option holder
over periods ranging from two to five years.
Information with respect to the Company's stock options is as follows:
<TABLE>
<CAPTION>
SHARES UNDER
OPTION OPTION PRICES
------------ -----------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992....................................... 2,846,000 $ 1.00 - $ 2.11
Granted.......................................................... 1,897,200 1.67 - 6.13
Exercised........................................................ (292,000) 1.00 - 2.11
Canceled......................................................... (269,600) 1.00 - 5.41
------------
Balance, December 31, 1993....................................... 4,181,600 1.00 - 6.13
------------
Granted.......................................................... 724,000 6.00 - 7.25
Exercised........................................................ (283,520) 1.00 - 5.41
Canceled......................................................... (92,000) 1.67 - 5.41
------------
Balance, December 31, 1994....................................... 4,530,080 1.00 - 7.25
------------
Granted.......................................................... 462,900 7.13 - 12.38
Exercised........................................................ (1,861,500) 1.00 - 7.25
Canceled......................................................... (116,820) 1.00 - 8.25
------------
Balance, December 31, 1995....................................... 3,014,660 1.00 - 12.38
Granted (unaudited).............................................. 33,000 12.00 - 12.56
Exercised (unaudited)............................................ (103,700) 1.67 - 8.25
Canceled (unaudited)............................................. (4,920) 7.25 - 10.94
------------
------------
Balance, March 31, 1996 (unaudited).............................. 2,939,040 1.00 - 12.56
------------
------------
Exercisable at December 31, 1995................................. 844,680 1.00 - 7.25
------------
------------
Exercisable at March 31, 1996 (unaudited)........................ 904,780 1.00 - 8.25
------------
------------
Available for grant at December 31, 1995......................... 1,032,320
------------
------------
Available for grant at March 31, 1996 (unaudited)................ 1,004,240
------------
------------
Reserved for future issuance at December 31, 1995................ 4,046,980
------------
------------
Reserved for future issuance at March 31, 1996 (unaudited)....... 3,943,280
------------
------------
</TABLE>
F-13
<PAGE>
<PAGE>
CELLULAR TECHNICAL SERVICES COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE UNAUDITED)
NOTE J -- RECENT CONTRACTS:
In March 1996, the Company signed a five-year agreement with AirTouch
Cellular ('AirTouch'), under which the Company will be the exclusive provider of
cellular fraud prevention systems using radio frequency technology to AirTouch
and its affiliates. Under the terms of the agreement, the Company and AirTouch
will begin installation of the Blackbird Platform and PreTect fraud prevention
software application in AirTouch's Atlanta and Los Angeles markets immediately.
The exclusive five-year agreement, which calls for the purchase of these
products for at least 1,000 cell sites, schedules minimum deployment in
approximately half of the cell sites during 1996 and 1997. In addition, the
Company and AirTouch signed five-year agreements for the Company's support
services and real-time roaming fraud prevention service. The real-time roaming
fraud prevention service will provide seamless protection initially between
AirTouch's controlled and affiliated markets and subsequently between these
markets and the markets of other cellular carriers who contract with the Company
for its real-time fraud prevention roaming services.
In March 1996, the Company signed an interim agreement with Bell Atlantic
NYNEX Mobile ('BANM') whereby the Company and BANM are currently deploying its
Blackbird Platform and PreTect products in BANM's New York market. Concurrently
both parties are negotiating a definitive Master Purchase and License Agreement,
which will ultimately determine the size and scope of an anticipated greater
deployment. The Company believes that the definitive agreement will include
installation of the Company's products in a large percentage of BANM's cell
sites, and will also include provisions for the Company's support and
maintenance services and the Company's real-time roaming fraud prevention
service.
NOTE K -- SUBSEQUENT EVENTS:
On June 14, 1996 the Company declared a two-for-one split of its Common
Stock, $.001 par value per share, effected by a 100% stock dividend whereby each
holder of Common Stock will receive one additional share of Common Stock for
each share held. Distribution of the shares is to take place on June 27, 1996
for shareholders of record on June 24, 1996. All outstanding Common Shares and
per share amounts in the accompanying financial statements have been
retroactively adjusted to give effect to the two for one stock split.
In June 1996, the Company signed a Letter of Intent with GTE Mobilnet of
California, L.P. ('GTE') to deploy at least 150 units of the Company's Blackbird
Platform and PreTect in GTE's San Francisco market. The Company and GTE are
currently negotiating a definitive agreement and expect deployment of such units
to begin in the second half of 1996.
In June 1996, the Company's stockholders approved the 1996 Stock Option
Plan ('the 1996 Plan') which is designed to provide an incentive to employees of
the Company and to offer an additional inducement in obtaining the services of
such persons. The 1996 Plan covers both incentive stock options and
non-qualified stock options. As a result of this adoption, no shares are
available for grant under either the 1991 Qualified Stock Option Plan and the
1991 Non-Qualified Stock Option Plan. The 1996 Plan authorizes the grant of
options to purchase a maximum of 1,100,000 shares of the Company's Common Stock.
Options to purchase an aggregate of 160,000 shares of Common Stock were granted
subsequent to the plan adoption.
During April through June 30, 1996 the Company granted 160,000 shares under
its option plans. Additionally, 237,280 options were exercised and 69,600
options were cancelled during the same period.
In June 1996, the Company's Board of Directors authorized management to
file a Registration Statement with the Securities and Exchange Commission to
sell up to 1,758,900 Shares of its Common Stock to the public.
F-14
<PAGE>
<PAGE>
_____________________________ _____________________________
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................................................................................... 3
Risk Factors................................................................................................................ 8
Use of Proceeds............................................................................................................. 16
Dilution.................................................................................................................... 16
Price Range of Common Stock................................................................................................. 17
Dividend Policy............................................................................................................. 17
Capitalization.............................................................................................................. 18
Selected Financial Data..................................................................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of Operation........................................ 20
Business.................................................................................................................... 27
Management.................................................................................................................. 39
Principal and Selling Shareholders.......................................................................................... 48
Certain Transactions........................................................................................................ 49
Description of Capital Stock................................................................................................ 49
Shares Eligible for Future Sale............................................................................................. 50
Underwriting................................................................................................................ 52
Legal Matters............................................................................................................... 53
Experts..................................................................................................................... 53
Additional Information...................................................................................................... 53
Index to Financial Statements............................................................................................... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED
HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION
OF THE DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR ALLOTMENTS OR SUBSCRIPTIONS.
CELLULAR TECHNICAL
SERVICES COMPANY, INC.
1,726,000 SHARES
COMMON STOCK
---------------------------------
PROSPECTUS
---------------------------------
GERARD KLAUER MATTISON & CO. , LLC
, 1996
_____________________________ _____________________________
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
All of the expenses listed below are estimated except for the SEC
registration fee and the NASD filing fee. The itemized statement below includes
all expenses in connection with the distribution of the securities being
registered, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............................ $ 12,320.07
NASD filing fee................................................................ 4,073.00
Blue Sky fees and expenses (including attorneys' fees and expenses)............ 16,625.00
Printing and engraving expenses................................................ 80,000.00
Transfer Agent's fees and expenses............................................. 2,500.00
Accounting fees and expenses................................................... 65,000.00
Legal fees and expenses........................................................ 100,000.00
Miscellaneous expenses......................................................... 19,481.93
-----------
TOTAL..................................................................... $300,000.00
-----------
-----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware ('Section
145') provides that a Delaware corporation may indemnify any persons who are, or
are threatened to be made, parties to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person was a director, officer, employee or agent
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was unlawful. A Delaware corporation may indemnify
any persons who are, or are threatened to be made, a party to any threatened,
pending or completed action or suit by or in the right of the corporation by
reason of the fact that such person was a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise.
The indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the corporation's best
interests except that no indemnification is permitted without judicial approval
if the director, officer, employee or agent is adjudged to be liable to the
corporation. Where a director, officer, employee or agent is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which he has actually and
reasonably incurred.
The Company's certificate of incorporation provides for the indemnification
of directors and officers of the Company to the fullest extent permitted by
Section 145.
The Underwriting Agreement contains, among other things, provisions whereby
the Underwriters agree to indemnify the Company, each officer and director of
the Company who has signed the Registration Statement and each person who
controls the Company within the meaning of Section 15 of the Securities Act
against any losses, liabilities, claims or damages arising out of the alleged
untrue statements or alleged omissions of material facts with respect to
information furnished to the Company by the Underwriters for use in the
Registration Statement or Prospectus. See Item 17 'Undertakings.'
II-1
<PAGE>
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<C> <S>
1.1 -- Form of Underwriting Agreement(11)
3.1 -- Restated Certificate of Incorporation of the Registrant, as amended(1)
3.2 -- By-Laws of the Registrant(1)
3.3 -- Amendment I to By-Laws of the Registrant, dated October 28, 1993(4)
4.1 -- Specimen Certificate for Common Stock of Registrant(1)
5.1 -- Opinion of Parker Chapin Flattan & Klimpl, LLP(12)
7.1 -- 1991 Qualified Stock Option Plan (as amended as of November 30, 1993)(3)(+)
7.2 -- 1991 Non-Qualified Stock Option Plan (as amended as of November 30, 1993)(3)(+)
7.3 -- 1993 Non-Employee Director Stock Option Plan(4)(+)
7.4 -- 1996 Stock Option Plan(11)
10.1 -- Employment Agreement between the Registrant and Robert P. Dahut dated January 31, 1994(4)(+)
10.2 -- Employment Agreement between the Registrant and Michael E. McConnell dated January 1, 1993(4)(+)
10.3 -- Employment Agreement between the Registrant and Kyle R. Sugamele dated June 29, 1995(9)(+)
10.4 -- Agreement of Lease dated May 23, 1994 between the Registrant and Martin Selig Properties(7)
10.4A -- Amendment to Lease dated April 7, 1995 between the Registrant and Martin Selig Properties(9)
10.5 -- Master Purchase and Licensing Agreement dated July 1, 1991 among the Registrant, LIN Broadcasting
Corporation and American Cellular Communications(a)(2)
10.5A -- Amendment I dated July 1, 1993 to Master Purchase and License Agreement: Hotwatch System, between
Registrant and Los Angeles Cellular Telephone Company(b)(4)
10.6 -- Technical Services Agreement dated December 1, 1993, between Registrant and McCaw Cellular
Communications, Inc.(c)(5)
10.7 -- Source Code License Agreement (CTS Software) dated December 1, 1993, between Registrant and McCaw
Cellular Communications, Inc.(c)(5)
10.8 -- Source Code License Agreement (McCaw Software) dated July 15, 1994, between Registrant and McCaw
Cellular Communications, Inc.(c)(5)
10.9 -- Purchase and License Agreement (Metered Billing and Creditwatch) dated November 3, 1994, between
Registrant and McCaw Cellular Communications, Inc.(d)(6)
10.10 -- Master Purchase and Licensing Agreement dated November 30, 1994 among the Registrant and Sprint
Cellular Company(f)(7)
10.11 -- Master Purchase and License Agreement between the Registrant and AirTouch Cellular dated March 6,
1996(10)
10.12 -- Support Services Agreement between the Registrant and AirTouch Cellular dated March 6, 1996(10)
10.13 -- Service Agreement for Real-Time Prevention of Roaming Cloning Fraud between the Registrant and
AirTouch Cellular dated March 6, 1996(10)
10.14 -- Interim Agreement with Bell Atlantic NYNEX Mobile(10)
10.15 -- Patent Sublicense Agreement between Registrant and The Boeing Company dated April 29, 1994(f)(7)
10.16 -- Patent Sublicense Agreement between Registrant and Motron Electronics dated May 24, 1995(e)(8)
10.17 -- Patent License Agreement between Registrant and AirTouch Cellular, dated December 22, 1995(10)
11.1 -- Statement Regarding Computation of Earnings Per Share(11)
23.1 -- Consent of Ernst & Young LLP(11)
</TABLE>
II-2
<PAGE>
<PAGE>
<TABLE>
<C> <S>
23.2 -- Consent of Parker Chapin Flattau & Klimpl, LLP (included in opinion filed as Exhibit 5.1)
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) Confidential treatment granted pursuant to order of the Secretary of the Securities and Exchange Commission
dated April 16, 1992 (File No. 33-46531).
(b) Confidential treatment granted pursuant to order of the Secretary of the Securities and Exchange Commission
dated May 24, 1994 (File No. 0-19437).
(c) Confidential treatment granted pursuant to order of the Secretary of the Securities and Exchange Commission
dated December 1, 1994 (File No. 0-19437).
(d) Confidential treatment granted pursuant to order of the Secretary of the Securities and Exchange Commission
dated April 21, 1995 (File No. 0-19437).
(e) Confidential treatment granted pursuant to order of the Secretary of the Securities and Exchange Commission
dated January 25, 1996 (File No. 0-19437).
(f) Confidential treatment granted pursuant to order of the Secretary of the Securities and Exchange Commission
dated April 21, 1995 (File No. 0-19437).
(+) Management contract or compensation plan or arrangement required to be noted as provided in Item 14(a)(3).
(1) Incorporated by reference to Registration Statement on Form S-1 declared effective on August 6, 1991 (File
No. 33-41176).
(2) Incorporated by reference to Registration Statement on Form S-1 filed on March 19, 1992 (File No. 33-46531).
(3) Incorporated by reference to Registration Statement on Form S-8 filed on March 7, 1994 (File No. 33-76128).
(4) Incorporated by reference to Annual Report on Form 10-K filed on March 30, 1994 for the year ended December
31, 1993 (File No. 0-19437).
(5) Incorporated by reference to Quarterly Report on Form 10-Q filed on August 12, 1994 for the quarter ended
June 30, 1994 (File No. 0-19437).
(6) Incorporated by reference to Quarterly Report on Form 10-Q filed on November 11, 1994 for the quarter ended
September 30, 1994 (File No. 0-19437).
(7) Incorporated by reference to Annual Report on Form 10-K filed on March 28, 1995 for the year ended December
31, 1994 (File No. 0-19437).
(8) Incorporated by reference to Quarterly Report on Form 10-Q filed on August 8, 1995 for the quarter ended June
30, 1995 (File No. 0-19437).
(9) Incorporated by reference to Annual Report on Form 10-K filed on March 29, 1996 for the year ended December
31, 1995 (File No. 0-19437).
(10) Incorporated by reference to Annual Report on Form 10-K filed on March 29, 1996 for the year ended December
31, 1995 (File No. 0-19437) for which a request for confidential treatment was submitted pursuant to Rule
24b-2 of the Securities and Exchange Commission which request is currently pending.
(11) Filed herewith.
(12) To be filed by Amendment.
</TABLE>
- ------------
(b) Financial Statement Schedules:
For the three years ended December 31, 1995:
Report of Ernst & Young LLP
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the 'Act') may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
II-3
<PAGE>
<PAGE>
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining the liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 2nd day of July 1996.
CELLULAR TECHNICAL SERVICES COMPANY,
INC.
By: /S/ STEPHEN KATZ
_________________________________
STEPHEN KATZ, CHAIRMAN OF THE BOARD
OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Stephen Katz and Michael E. McConnell his
true and lawful attorney-in-fact and agent, each with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each said attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite or 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 confirming all that said
attorney-in-fact and agent or either of them or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
<C> <S> <C>
/s/ STEPHEN KATZ Chairman of the Board of Directors and Chief July 2, 1996
- ------------------------------------------ Executive Officer
STEPHEN KATZ
/s/ ROBERT P. DAHUT Director, President and Chief Operating July 2, 1996
- ------------------------------------------ Officer
ROBERT P. DAHUT
/s/ MICHAEL E. MCCONNELL Vice President and Chief Financial July 2, 1996
- ------------------------------------------ Officer (Principal Financial and
MICHAEL E. MCCONNELL Accounting Officer)
/s/ JAY GOLDBERG Director July 2, 1996
- ------------------------------------------
JAY GOLDBERG
</TABLE>
II-5
<PAGE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the financial statements of Cellular Technical Services
Company, Inc. as of December 31, 1994 and 1995, and for each of the three years
in the period ended December 31, 1995, and have issued our report thereon dated
March 1, 1996, except for the first paragraph of Note K as to which the date is
June 24, 1996, (included elsewhere in this Registration Statement). Our audits
also included the financial statement schedule listed in Item 16(b) of this
Registration Statement. That schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Seattle, Washington
March 1, 1996, except for the first paragraph of Note K as to which the date is
June 24, 1996.
<PAGE>
<PAGE>
SCHEDULE II
CELLULAR TECHNICAL SERVICES COMPANY, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF END OF
PERIOD ADDITIONS DEDUCTIONS PERIOD
------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
Inventory Reserves
Year ended December 31, 1993............................. $ 30,066 $ 43,235 $ 18,394 $ 54,907
------------ --------- ---------- ----------
------------ --------- ---------- ----------
Year ended December 31, 1994............................. $ 54,907 $ 136,075 $102,210 $ 88,772
------------ --------- ---------- ----------
------------ --------- ---------- ----------
Year ended December 31, 1995............................. $ 88,772 $ 180,446 $ 51,426 $217,792
------------ --------- ---------- ----------
------------ --------- ---------- ----------
Sales and Receivable Allowances
Year ended December 31, 1993............................. $ 30,450 $ 24,000 $ 9,666 $ 44,784
------------ --------- ---------- ----------
------------ --------- ---------- ----------
Year ended December 31, 1994............................. $ 44,784 $ 152,444 $ 19,570 $177,658
------------ --------- ---------- ----------
------------ --------- ---------- ----------
Year ended December 31, 1995............................. $177,658 $ (58,340) $ 49,318 $ 70,000
------------ --------- ---------- ----------
------------ --------- ---------- ----------
</TABLE>
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as...................... 'tm'
The registered trademark symbol shall be expressed as .......... 'r'
The service mark symbol shall be expressed as .................. SM
The degree symbol shall be expressed as ........................ [d].
<PAGE>
<PAGE>
Draft 7/1/96
__________ Shares
CELLULAR TECHNICAL SERVICES COMPANY, INC.
(a Delaware Corporation)
Common Stock
(Par Value $0.001 Per Share)
UNDERWRITING AGREEMENT
July , 1996
GERARD KLAUER MATTISON & CO., LLC
As Representative of the
several underwriters
named in Schedule I hereto
c/o Gerard Klauer Mattison & Co., LLC
529 Fifth Avenue
New York, New York 10017
Dear Sirs:
Cellular Technical Services Company, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell ____________ shares of its Common Stock,
$0.001 par value (the "Company Shares") to the several underwriters named in
Schedule I hereto (the "Underwriters"). The selling shareholders named in
Schedule II hereto (the "Selling Shareholders") shall also sell to the
Underwriters _____________ shares of the Company's Common Stock, (the
"Shareholder Shares"). Upon your request, as provided in Section 2 hereof,
certain of the Selling Shareholders shall have the right to, and the Company
will be obligated to sell to the Underwriters an aggregate of not more than
_______ additional shares of its Common Stock (the "Additional Shares") solely
for the purposes of covering over-allotments, if any. As used herein, (i) the
"Initial Shares" shall mean the Company Shares and Shareholder Shares and
(ii) the "Shares" shall mean the Company Shares, the Shareholder Shares, and the
Additional Shares.
-1-
<PAGE>
<PAGE>
1. Registration Statement and Prospectus. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively called the
"Act"), a registration statement on Form S-1 including a prospectus relating to
the Shares, which may be amended. The registration statement as amended at the
time when it becomes effective, including a registration statement (if any)
filed pursuant to Rule 462(b) under the Act increasing the size of the offering
registered under the Act and information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A or
Rule 434 under the Act, is hereinafter referred to as the "Registration
Statement"; and the prospectus (including any prospectus subject to completion
taken together with any term sheet meeting the requirements of Rule 434(b) or
Rule 434(c) under the Act) in the form first used to confirm sales of Shares is
hereinafter referred as the "Prospectus".
2. Agreements to Sell and Purchase. On the basis of the representations
and warranties contained in this Agreement, and subject to its terms and
conditions, the Company agrees to issue and sell, and each Underwriter agrees to
purchase, severally and jointly, from the Company at a price per share of
$______ (the "Purchase Price") the number of Company Shares set forth in
Schedule I hereto; the Selling Shareholders agree to sell and each Underwriter
agrees to purchase, severally and jointly, from the Selling Shareholders at the
Purchase Price the number of Shareholder Shares set forth in Schedule II hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Selling Shareholders
have the option to sell in the aggregate up to _______ Additional Shares, and
to the extent the Selling Shareholders exercise their option to sell in the
aggregate less than all of the Additional Shares, the Company agrees to issue
and sell any portion of or all of the Additional Shares, and the Underwriters
shall have the right to purchase, severally and jointly, up to __________
Additional Shares from the Selling Shareholders and the Company at the
Purchase Price. Additional Shares may be purchased solely for the purpose
of covering over-allotments made in connection with the offering of the Company
Shares. The Underwriters may exercise their right to purchase Additional Shares
in whole or in part from time to time by giving written notice thereof through
you to the Company within 30 days after the date of this Agreement. Such
notice shall specify the aggregate number of Additional Shares to be purchased
pursuant to such exercise and the date for payment and delivery thereof. The
date specified in any such notice shall be a business day (i) no earlier than
the Closing Date (as hereinafter defined), (ii) no later than two business days
after such notice has been given and (iii) no earlier than two business days
after such notice has been given. If any Additional Shares are to be purchased,
each Underwriter, severally and not jointly, agrees to purchase the number of
Additional Shares (subject to such adjustments to eliminate fractional shares
as you may determine) which bears the same proportion to the total number of
Additional Shares as the number of Company Shares set forth opposite the
name of such Underwriter in Schedule I bears to the total number of Company
Shares.
The Company hereby agrees and the Company shall, concurrently with the
execution of this Agreement, deliver an agreement executed by (i) each of the
directors and officers of the Company, and (ii) each shareholder listed on Annex
I hereto, pursuant to which each such person agrees, not to offer, sell,
contract to sell, grant any option to purchase, or otherwise dispose of any
Common
-2-
<PAGE>
<PAGE>
Stock of the Company or any securities convertible into or exercisable or
exchangeable for such Common Stock or in any other manner transfer all or a
portion of the economic consequences associated with the ownership of any such
common stock, except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without your prior written
consent. Notwithstanding the foregoing, during such period (i) the Company may
grant stock options pursuant to the Company's existing stock option plan and
(ii) the Company may issue shares of its Common Stock upon the exercise of an
option or warrant outstanding on the date hereof or the conversion of a security
outstanding on the date hereof.
3. Terms of Public Offering. The Company has been advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the effective date of the Registration
Statement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery and Payment. Delivery to the Underwriters of and payment
for the Initial Shares shall be made at 10:00 A.M., New York City time, on the
date (the "Closing Date") that is the third or fourth business day, unless
otherwise permitted by the Commission pursuant to Rule 15c6-1 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), following the date of the
initial public offering, at such place as you shall designate. The Closing Date
and the location of delivery of and the form of payment for the Initial Shares
may be varied by agreement among you, the Company and the Selling Shareholders.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at such place as you shall
designate at 10:00 A.M., New York City time, on the date specified in the
applicable exercise notice given by you pursuant to Section 2 (an "Option
Closing Date"). Any such Option Closing Date and the location of delivery of and
the form of payment for such Additional Shares may be varied by agreement
between you and the Company.
Certificates for the Shares shall be registered in such names and
issued in such denominations as you shall request in writing not later than two
full business days prior to the Closing Date or an Option Closing Date, as the
case may be. Such certificates shall be made available to you for inspection not
later than 9:30 A.M., New York City time, on the business day next preceding the
Closing Date or the applicable Option Closing Date, as the case may be.
Certificates in definitive form evidencing the Company Shares or the Additional
Shares shall be delivered to you on the Closing Date or the applicable Option
Closing Date, as the case may be, with any transfer taxes thereon duly paid by
the Company, for the respective accounts of the several Underwriters against
payment of the Purchase Price therefor on such date by certified or official
bank check or checks to the order of the Company payable in New York Clearing
House Funds or similar next-day funds or by wire transfer of similar funds to
such account as the Company may specify at least two days in advance of payment.
Certificates in definitive form evidencing the Shareholder Shares shall be
delivered to you on the Closing Date, with any transfer taxes thereon duly paid
by the Selling Shareholders, for the respective accounts of the several
Underwriters against payment of the Purchase Price therefor on such date by
certified or official bank check or checks to the order of the
-3-
<PAGE>
<PAGE>
Selling Shareholders' attorney-in-fact (as named herein), as agent for the
Selling Shareholders, in New York Clearing House Funds or similar next-day
funds.
5. Agreements of the Company. The Company agrees with the
Underwriters:
(a) To use its best efforts to cause the Registration
Statement to become effective at the earliest possible time.
(b) To advise you promptly and, if requested by you, to
confirm such advice in writing, (i) when the Registration Statement has become
effective and when any post-effective amendment to it becomes effective, (ii) of
any request by the Commission for amendments to the Registration Statement or
amendments or supplements to the Prospectus or for additional information, (iii)
of the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or of the suspension of qualification of the
Shares for offering or sale in any jurisdiction, or the initiation of any
proceeding for such purposes, and (iv) of the happening of any event during the
period referred to in paragraph (e) below which makes any statement of a
material fact made in the Registration Statement or the Prospectus untrue or
which requires the making of any additions to or changes in the Registration
Statement or the Prospectus in order to make the statements therein not
misleading. If at any time the Commission shall issue any stop order suspending
the effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal or lifting of such order at the
earliest possible time.
(c) To furnish to you and each Underwriter designated by you,
without charge, as many signed copies of the Registration Statement as
originally filed with the Commission and of each amendment to it, including all
exhibits, and such number of conformed copies of the Registration Statement as
so filed and of each amendment thereto (including documents incorporated by
reference into the Prospectus but without exhibits) as you may reasonably
request.
(d) Not to file any amendment or supplement to the
Registration Statement, whether before or after the time when it becomes
effective, or to make any amendment or supplement to the Prospectus (including
the issuance or filings of any term sheet within the meaning of Rule 434) of
which you shall not previously have been advised or to which you shall
reasonably object; and to prepare and file with the Commission, promptly upon
your reasonable request, any amendment to the Registration Statement or
supplement to the Prospectus (including the issuance or filings of any term
sheet within the meaning of Rule 434) which may be necessary or advisable in
connection with the distribution of the Shares by you, and to use its best
efforts to cause the same to become promptly effective.
(e) Promptly after the Registration Statement becomes
effective, and from time to time thereafter for such period as in the opinion of
counsel for the Underwriters a prospectus is required by law to be delivered in
connection with sales by an Underwriter or a dealer, to furnish to each
Underwriter and dealer as many copies of the Prospectus (and of any amendment or
supplement to the Prospectus) as such Underwriter or dealer may reasonably
request.
-4-
<PAGE>
<PAGE>
(f) If during the period specified in paragraph (e) any event
shall occur as a result of which, in the opinion of counsel for the
Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if it is necessary to
amend or supplement the Prospectus to comply with any law, forthwith to prepare
and file with the Commission an appropriate amendment or supplement to the
Prospectus so that the statements in the Prospectus, as so amended or
supplemented, will not in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with law, and to
furnish to each Underwriter and to such dealers as you shall specify such number
of copies thereof as such Underwriters or dealers may reasonably request.
(g) Prior to any public offering of the Shares, to cooperate
with you and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale under state securities or Blue
Sky laws of such jurisdictions as you may request, to continue such
qualification in effect so long as required for distribution of the Shares and
to file such consents to service of process or other documents as may be
necessary in order to effect such registration or qualification.
(h) To mail and make generally available to its stockholders
as soon as reasonably practicable an earnings statement covering a period of at
least twelve months after the effective date of the Registration Statement (but
in no event commencing later than 90 days after such date) which shall satisfy
the provisions of Section 11(a) of the Act, and to advise you in writing when
such statement has been so made available.
(i) During the period of five years after the date of this
Agreement, (i) to mail as soon as reasonably practicable after the end of each
fiscal year to the record holders of its Common Stock a financial report of the
Company, all such financial reports to include a balance sheet, a statement of
operations, a statement of cash flows and a statement of shareholders' equity as
of the end of and for such fiscal year, together with comparable information as
of the end of and for the preceding year, certified by independent certified
public accountants, and (ii) to mail and make generally available as soon as
practicable after the end of each quarterly period (except for the last
quarterly period of each fiscal year) to such holders, a balance sheet, a
statement of operations and a statement of cash flows as of the end of and for
such period, and for the period from the beginning of such year to the close of
such quarterly period, together with comparable information for the
corresponding periods of the preceding year.
(j) During the period referred to in paragraph (i), to furnish
to you as soon as available a copy of each report or other publicly available
information of the Company mailed to the holders of its Common Stock or filed
with the Commission and such other publicly available information concerning the
Company as you may reasonably request.
(k) To pay all costs, expenses, fees and taxes incident
to (i) the preparation, printing, filing and distribution under the Act of the
Registration Statement (including financial statements
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and exhibits), each preliminary prospectus and all amendments and supplements to
any of them prior to or during the period specified in paragraph (e), (ii) the
printing and delivery of the Prospectus and all amendments or supplements to it
during the period specified in paragraph (e), (iii) the printing and delivery of
this Agreement, the Preliminary and Supplemental Blue Sky Memoranda and all
other agreements, memoranda, correspondence and other documents prepared,
printed or delivered in connection with the offering of the Shares (including in
each case any disbursements of counsel for the Underwriters relating to such
preparation, printing or delivery), (iv) the registration or qualification of
the Shares for offer and sale under the securities or Blue Sky laws of the
several states (including in each case the fees and disbursements of counsel for
the Underwriters relating to such registration or qualification and memoranda
relating thereto), (v) the filings and clearance with the National Association
of Securities Dealers, Inc. in connection with the offering, (vi) the inclusion
of the [Company] Shares [and the Additional Shares] on the National Association
of Securities Dealers Automated Quotation ("NASDAQ") National Market System and
(vii) furnishing such copies of the Registration Statement, the Prospectus and
all amendments and supplements thereto as may be requested for use in connection
with the offering or sale of the Shares by the Underwriters or by dealers to
whom Shares may be sold.
(l) To use its best efforts to maintain the inclusion of such
Common Stock in the NASDAQ National Market System (or on a national securities
exchange) for a period of five years after the effective date of the
Registration Statement.
(m) To use its best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by the
Company prior to the Closing Date or any Option Closing Date, as the case may
be, and to satisfy all conditions precedent to the delivery of the Shares.
6. Representations and Warranties of the Company. The Company
represents and warrants you that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in effect
and no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) Each part of the Registration Statement, when such
part became effective, did not contain and each such part, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, (ii) the Registration Statement
and the Prospectus comply and, as amended or supplemented, if applicable, will
comply in all material respects with the Act and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph (b) do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information
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relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment thereto,
or filed pursuant to Rule 424 under the Act, and each Registration Statement
filed pursuant to Rule 462(b) under the Act, if any, complied when so filed in
all material respects with the Act; and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(d) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of its jurisdiction of
incorporation and has the corporate power and authority to carry on its business
as it is currently being conducted and to own, lease and operate its properties,
and is duly qualified to do business in each jurisdiction in which the nature of
its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the Company.
(e) The Company has no subsidiaries.
(f) All the outstanding shares of capital stock of the Company
(including the Shareholder Shares) have been duly authorized and validly issued
and are fully paid, non-assessable and not subject to any preemptive or similar
rights; and the Company Shares and the Additional Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Company Shares and Additional Shares
will not be subject to any preemptive or similar rights.
(g) The authorized capital stock of the Company, including the
Common Stock, conforms as to legal matters to the description thereof contained
in the Prospectus.
(h) The Company is not in violation of its charter or by-laws
or in default in the performance of any obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of indebtedness or
in any other agreement, indenture or instrument to which the Company is a party
or by which it or its property is bound, except for such violations and defaults
which would not reasonably be expected to have a material adverse effect on the
business or condition (financial or otherwise) of the Company.
(i) The execution, delivery and performance of this Agreement,
compliance by the Company with all the provisions hereof and the consummation of
the transactions contemplated hereby will not require any consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body (except as such may be required under the
securities or Blue Sky laws of the various states) and will not conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any
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agreement, indenture or other instrument to which it is a party or by which it
or its property is bound, or violate or conflict with any laws, administrative
regulations or rulings or court decrees applicable to the Company and its
property.
(j) Except as otherwise set forth in the Prospectus, there are
no material legal or governmental proceedings pending to which the Company is a
party or of which any of its property is the subject, and, to the best of the
Company's knowledge, no such proceedings are threatened or contemplated. No
contract or document of a character required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement is not so described or filed as required.
(k) The Company has not violated any foreign, federal, state
or local law or regulation relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes, pollutants
or contaminants ("Environmental Laws"), nor any federal or state law relating to
discrimination in the hiring, promotion or pay of employees nor any applicable
federal or state wages and hours laws, nor any provisions of the Employee
Retirement Income Security Act or the rules and regulations promulgated
thereunder, which in each case might result in any material adverse change in
the business, prospects, financial condition or results of operation of the
Company.
(l) The Company has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits"), including,
without limitation, under any applicable Environmental Laws, as are necessary to
own, lease and operate its respective properties and to conduct its business;
the Company has fulfilled and performed all of its material obligations with
respect to such permits and no event has occurred which allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such permit;
and, except as described in the Prospectus, such permits contain no restrictions
that are materially burdensome to the Company.
(m) In the ordinary course of its business, the Company
conducts a periodic review of the effect of Environmental Laws on the business,
operations and properties of the Company, in the course of which it identifies
and evaluates associated costs and liabilities (including, without limitation,
any capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review, the Company has
reasonably concluded that such associated costs and liabilities would not,
singly or in the aggregate, have a material adverse effect on the Company.
(n) Except as otherwise set forth in the Prospectus or such as
are not material to the business, prospects, financial condition or results of
operation of the Company, the Company has good and marketable title, free and
clear of all liens, claims, encumbrances and restrictions except liens for taxes
not yet due and payable, to all property and assets described in the
Registration Statement as being owned by it. All leases to which the Company is
a party are valid and binding
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and no default has occurred or is continuing thereunder, which might result in
any material adverse change in the business, prospects, financial condition or
results of operation of the Company, and the Company enjoys peaceful and
undisturbed possession under all such leases to which any of them is a party as
lessee with such exceptions as do not materially interfere with the use made by
the Company.
(o) The Company owns or possesses adequate rights to use all
patents, trademarks registrations, service marks, service mark registrations,
trade names, mask works, copyrights, licenses, inventions, trade secrets and
rights necessary for each of the products and technology which the Company has
identified in the Prospectus as having been developed by the Company, and the
Company is not aware of any claims to the contrary or any challenges by any
other person to the rights of the Company with respect to the foregoing. The
Company's business as now conducted does not and will not infringe or conflict
with, in any material respect, patents, trademarks, service marks, mask works,
trade names, copyrights, licenses, inventions, trade secrets or other
intellectual property or franchise rights of any person or entity, except for
such infringements or conflicts which would not reasonably have a material
adverse effect on the business or condition (financial or otherwise) of the
Company. Except as described in the Prospectus, no claim has been made against
the Company alleging the infringement by the Company of any patent, trademarks,
service marks, mask works, trade names, copyrights, licenses, inventions, trade
secrets or other intellectual property or franchise rights of any person or
entity. The Company has duly and properly filed or caused to be filed with the
United States Patent and Trademark (the "PTO") all its United States patent
applications described or referred to in the Prospectus. The Company has clear
title to its patents and patent applications referred to in the Prospectus.
(p) The Company maintains reasonably adequate insurance.
(q) Ernst & Young LLP are independent public accountants
with respect to the Company as required by the Act.
(r) The financial statements, together with related schedules
and notes forming part of the Registration Statement and the Prospectus (and any
amendment or supplement thereto), present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
on the basis stated in the Registration Statement at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; and the other financial and statistical information
and data set forth in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) is, in all material respects, accurately
presented and prepared on a basis consistent with such financial statements and
the books and records of the Company.
(s) The Company is not and, immediately after the Closing Date
will not be, an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
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(t) No holder of any security of the Company has any right to
require registration of shares of Common Stock or any other security of the
Company.
(u) There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens related to
or entitling any person to purchase or otherwise to acquire any shares of the
capital stock of, or other ownership interest in, the Company thereof except as
otherwise disclosed in the Registration Statement.
(v) All material tax returns required to be filed by the
Company in any jurisdiction have been filed, other than those filings being
contested in good faith, and all material taxes, including withholding taxes,
penalties and interest, assessments, fees and other charges due pursuant to such
returns or pursuant to any assessment received by the Company have been paid,
other than those being contested in good faith and for which adequate reserves
have been provided.
(w) The Company has filed a registration statement pursuant to
Section 12(g) of the Exchange Act, to register the Common Stock, has filed an
application to list the [Company] Shares [and the Additional Shares] on the
NASDAQ National Market System, and has received notification that the listing
has been approved, subject to notice of issuance of the [Company] Shares [and
the Additional Shares].
(x) The Company has signed agreements with AT&T Wireless
Services, LIN Broadcasting Company, American Cellular Communications, 360[d]
Communications Company (formerly Sprint Cellular Company), Ameritech Mobile
Communications, Inc., AirTouch Cellular, and Bell Atlantic NYNEX Mobile. These
agreements, as described in the Prospectus, have been duly executed and
delivered and are valid, binding and in full force and effect.
(y) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida).
(z) There are no business relationships or related party
transactions required to be disclosed therein by Item 404 of Regulation S-K of
the Commission.
[Additional representations may be added after consultation with
representatives of Gerard Klauer Mattison & Co., LLC]
7. Representations and Warranties of the Selling Shareholders.
Each Selling shareholder severally and not jointly represents and warrants to
the Underwriters that:
(a) Such Selling Shareholder is the lawful owner of the
Shareholder Shares which may be sold by such Selling Shareholder pursuant to
this Agreement and has, and on the Option Closing Date, if applicable, will
have, good and clear title to such Shares, free of all restrictions on transfer,
liens, encumbrances, security interests and claims whatsoever.
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(b) Upon delivery of and payment for such Shares pursuant to
this Agreement, good and clear title to such Shares will pass to the
Underwriters, free of all restrictions on transfer, liens, encumbrances,
security interests and claims whatsoever except as set forth in this Agreement
or in the Custody Agreement (as defined herein).
(c) Such Selling Shareholder has full legal right, power and
authority to enter into this Agreement and the Custody Agreement between the
Selling Shareholders and _____________, as Custodian (the "Custody Agreement"),
and to sell, assign, transfer and deliver such Shareholder Shares in the manner
provided herein and therein, and this Agreement and the Custody Agreement have
been duly authorized, executed and delivered by such Selling Shareholder and
each of this Agreement and the Custody Agreement is a valid and binding
agreement of such Selling Shareholder enforceable in accordance with its terms,
except as rights to indemnity and contribution hereunder may be limited by
applicable law or equitable principles, and except as may be limited by
bankruptcy, reorganization or moratorium or similar laws affecting the
enforceability of creditors' rights generally and rules of law governing
specific performance, injunctive relief and other equitable remedies.
(d) The power of attorney signed by such Selling Shareholder
appointing Stephen Katz and Michael E. McConnell or either one of them as
his or its attorney-in-fact ("Selling Shareholders' attorney-in-fact") to the
extent set forth therein with regard to the transaction contemplated hereby and
by the Registration Statement and the Custody Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling Shareholder
and is a valid and binding instrument of such Selling Shareholder enforceable in
accordance with its terms except as may be limited by bankruptcy,
reorganization, moratorium or similar laws affecting the enforceability of
creditors' rights generally and rules of law governing specific performance,
injunctive relief and other equitable remedies, and, pursuant to such power of
attorney, such Selling Shareholder has authorized and or either one of them, to
execute and deliver on his or its behalf this Agreement and any other document
necessary or desirable in connection with transactions contemplated hereby and
to deliver the Shares which may be sold by such Selling Shareholder pursuant to
this Agreement.
(e) Such Selling Shareholder has not taken, and will not take,
directly or indirectly, any action designed to, or which might reasonably be
expected to, cause or result in stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Shares
pursuant to the distribution contemplated by this Agreement and, other than as
permitted by the Act, the Selling Shareholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(f) The execution, delivery and performance of this Agreement
by such Selling Shareholder, compliance by such Selling Shareholder with all the
provisions hereof and the consummation of the transactions contemplated hereby
will not require any consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental body (except
such as may be required under the Act or state securities or Blue Sky
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laws), and will not conflict with or constitute a breach of any agreement,
indenture or other instrument to which such Selling Shareholder is a party or by
which such Selling Shareholder or any property of such Selling Shareholder is
bound, or violate or conflict with any law, administrative regulation or ruling
or court decree applicable to such Selling Shareholder or property of such
Selling Shareholder.
(g) Such parts of the Registration Statement under the caption
"Principal and Selling Shareholders" which specifically relate to such Selling
Shareholder do not, and will not on the Closing Date (and any Option Closing
Date, if applicable), contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of circumstances under which they were made, not
misleading.
(h) At any time during the period described in paragraph 5(e)
hereof, if there is any change in the information referred to in paragraph 7(g)
above with respect to such Selling Shareholder, such Selling Shareholder will
immediately notify you of such change.
8. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
from and against any and all losses, claims, damages, liabilities and judgments
(i) caused by any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) or caused by
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or
(ii) caused by any untrue statement or alleged untrue statement of material fact
contained in the Prospectus or any preliminary prospectus or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except insofar as such
losses, claims, damages, liabilities or judgments are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished in writing to the Company by
or on behalf of any Underwriter through you expressly for use therein; provided,
however, that the foregoing indemnity agreement with respect to any preliminary
prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any such losses, claims, damages and liabilities and judgments
purchased Shares, or any person controlling such Underwriter, if a copy of the
Prospectus (as then amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) was not sent or given by or on behalf of
such Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Shares to such
person, and if the Prospectus (as so amended and supplemented) would have cured
the defect giving rise to such loss, claim, damage, liability or judgment.
(b) In case any action shall be brought against any Underwriter or any
person controlling such Underwriter, based upon any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment or supplement thereto
and with respect to which indemnity may be
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sought hereunder, such Underwriter shall promptly notify the Company in writing
and the Company shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to such indemnified party and payment of all
fees and expenses. Any Underwriter or any such controlling person shall have the
right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Underwriter or such controlling person unless (i) the employment
of such counsel shall have been specifically authorized in writing by the
Company, (ii) the Company shall have failed to assume the defense and employ
counsel within a reasonable time after notice of commencement of the action or
(iii) the named parties to any such action (including any impleaded parties)
include both such Underwriter or such controlling person and the Company and
such Underwriter or such controlling person shall have been advised by such
counsel that there may be one or more legal defenses available to it which
involve a conflict of interest with the interests of the Company (in which case
the Company shall not have the right to assume the defense of such action on
behalf of such Underwriter or such controlling person, it being understood,
however, that the Company shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (in addition to
any local counsel) for all such Underwriters and controlling persons, which firm
shall be designated in writing by you and that all such fees and expenses shall
be reimbursed as they are incurred). The Company shall not be liable for any
settlement of any such action effected without its written consent, provided
that such consent shall not be unreasonably withheld, but if settled with the
written consent of the Company, the Company agrees to indemnify and hold
harmless any Underwriter and any such controlling person from and against any
loss or liability by reason of such settlement. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(c) Each Selling Shareholder agrees, severally and not jointly, to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act from and against any and all losses, claims, damages,
liabilities and judgments (including, without limiting the foregoing, the fees
and expenses of counsel incurred in connection with any action, suit or
governmental or regulatory proceeding) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) caused by any
untrue statement or alleged untrue statement of a material fact contained in the
Prospectus or any preliminary prospectus or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (but, in the case of any such Registration
Statement or Prospectus, only insofar as such statement
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or omission was made in reliance upon written information furnished by such
Selling Shareholder to the Company or an Underwriter specifically for inclusion
therein), except insofar as (i) such losses, claims, damages, liabilities or
judgments are caused by any such untrue statement or omission or alleged untrue
statement or omission based upon information relating to any Underwriter
furnished in writing to the Selling Shareholder by or on behalf of such
Underwriter through you expressly for use therein or (ii) such losses, claims,
damages, liabilities or judgments arise out of or are based upon any action or
alleged untrue statement or omission made in or from any preliminary prospectus
but corrected in the Prospectus, as amended or supplemented, if the person
asserting any such loss, claim, damage or liability purchased such securities
from such Underwriter, but was not sent or given, at or prior to the written
confirmation of such sale, a copy of the Prospectus (or of the Prospectus as
then amended or supplemented), in any case where such delivery is required under
the Act, and where the Prospectus (as amended or supplemented) would have cured
the defect giving rise to such loss, claim, damage, liability or judgment.
Notwithstanding the foregoing, the aggregate liability of any Selling
Shareholder pursuant to the provisions of this paragraph shall be limited to an
amount equal to the aggregate purchase price received by such Selling
Shareholder from the sale of such Selling Shareholder's Shareholder Shares
hereunder.
(d) In case any action shall be brought against any Underwriter or any
person controlling such Underwriter, based upon any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment or supplement thereto
and with respect to which indemnity may be sought against a Selling Shareholder,
such Underwriter or such person controlling an Underwriter shall promptly notify
such Selling Shareholder in writing and such Selling Shareholder shall assume
the defense thereof, including the employment of counsel reasonably satisfactory
to such indemnified party and payment of all fees and expenses of such counsel.
Any Underwriter or any such controlling person shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Underwriter or such controlling person, other than the Selling Shareholder,
unless (i) the employment of such counsel has been specifically authorized in
writing by such Selling Shareholder, (ii) such Selling Shareholder has failed to
assume the defense thereof and employ counsel within a reasonable time after
notice of commencement of the action or (iii) the named parties to any such
action (including any impleaded parties) include both such Underwriter or such
controlling person and such Selling Shareholder, and such Underwriter or such
controlling person shall have been advised by such counsel that there may be one
or more legal defenses available to it which involve a conflict of interest with
the interests of the Company (in which case, such Selling Shareholder shall not
have the right to assume the defense of such action on behalf of such
Underwriter or such controlling person, it being understood, however, that such
Selling Shareholder shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (in addition to
any local counsel) for all such Underwriters and controlling persons, which firm
shall be designated in writing by you, and that all such fees and expenses shall
be reimbursed as they are incurred). Such Selling Shareholder shall not be
liable for any settlement of any such action effected without the written
consent of such Selling Shareholder, provided that such consent shall not be
unreasonably withheld. Such Selling
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Shareholder shall not, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all liability
on claims that are the subject matter of such proceeding.
(e) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, any Selling Shareholder who sells Shareholder
Shares, the Company's directors and officers who sign the Registration Statement
and any person controlling the Company within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, to the same extent as the foregoing
indemnity from the Company to each Underwriter but only with reference to
information relating to such Underwriter furnished in writing by or on behalf of
such Underwriter through you expressly for use in the Registration Statement,
the Prospectus or any preliminary prospectus. In case any action shall be
brought against the Company, any of the Selling Shareholders who sell
Shareholder Shares, any of the Company's directors, any such officer or any
person controlling the Company based on the Registration Statement, the
Prospectus or any preliminary prospectus and in respect of which indemnity may
be sought against any Underwriter, the Underwriter shall have the rights and
duties given to the Company (except that if the Company shall have assumed the
defense thereof, such Underwriter shall not be required to do so, but may employ
separate counsel therein and participate in the defense thereof but the fees and
expenses of such counsel shall be at the expense of such Underwriter), and the
Company, its directors, any such officers and any such person controlling the
Company and any such Selling Shareholder shall have the rights and duties given
to the Underwriter, by Section 8(b) hereof.
(f) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party in respect of any losses, claims, damages,
liabilities or judgments referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities and judgments (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company, such Selling Shareholders and the Underwriters in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company, the
Selling Shareholders and the Underwriters shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and you Selling Shareholders, respectively,
and the total underwriting discounts and commissions received by the
Underwriters, bear to the total price to the public of the Shares, in each case
as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company, the Selling Shareholders and the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Company, the Selling Shareholders or
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<PAGE>
the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 8(f)
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or judgments referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 8, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Shares underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8(f) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
9. Conditions of Underwriters' Obligations. The several obligations of
the Underwriters to purchase the Initial Shares under this Agreement are subject
to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company and
the Selling Shareholders contained in this Agreement shall be true and correct
on the Closing Date with the same force and effect as if made on and as of the
Closing Date.
(b) The Registration Statement shall have become effective not
later than 5:00 P.M. (and in the case of a Registration Statement filed under
Rule 462(b) of the Act, not later than 10:00p.m.), New York City time, on the
date of this Agreement or at such later date and time as you may approve in
writing, and at the Closing Date no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been commenced or shall be pending before or contemplated by
the Commission.
(c) (i) Since the date of the latest balance sheet included in
the Registration Statement and the Prospectus, there shall not have been any
material adverse change, or any development involving a prospective material
adverse change, in the condition, financial or otherwise, or in the earnings,
affairs or business prospects, whether or not arising in the ordinary course of
business, of the Company, (ii) since the date of the latest balance sheet
included in the Registration Statement and the Prospectus there shall not have
been any change, or any development involving a prospective material adverse
change, in the capital stock or in the long-term debt of the Company from that
set
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<PAGE>
forth in the Registration Statement and Prospectus, (iii) the Company shall have
no liability or obligation, direct or contingent, which is material to the
Company, other than those reflected in the Registration Statement and the
Prospectus and (iv) on the Closing Date you shall have received a certificate
dated the Closing Date, signed by _______________ and _______________, in their
capacities as the _______________ and _______________ of the Company, confirming
the matters set forth in paragraphs (a), (b), and (c) of this Section 9.
(d) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Parker Chapin Flattau & Klimpl LLP, counsel for the Company, to the effect
that:
(i) the Company is in good standing as a Delaware
corporation and is duly qualified to do business in each jurisdiction
in which the nature of its business or its ownership or leasing of
property requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the Company;
(ii) all the outstanding shares of Common Stock,
including the Shareholder Shares, have been duly authorized and validly
issued and are fully paid, non-assessable and not subject to any
preemptive or similar rights;
(iii) the Company Shares and the Additional Shares
have been duly authorized, and when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement,
will have been validly issued and will be fully paid and
non-assessable, and the issuance of such Shares is not subject to any
preemptive or similar rights;
(iv) this Agreement has been duly authorized,
executed and delivered by the Company and is a valid and binding
agreement of the Company enforceable in accordance with its terms
(except as rights to indemnity and contribution hereunder may be
limited by applicable law);
(v) the authorized capital stock of the Company,
including the Common Stock, conforms as to legal matters to the
description thereof contained in the Prospectus;
(vi) the Registration Statement has become effective
under the Act, no stop order suspending its effectiveness has been
issued and no proceedings for that purpose are, to the knowledge of
such counsel, pending before or contemplated by the Commission;
(vii) the statements under the captions "_______",
"_______________", "_______________", "_______________", "___________",
"_______________", "Description of Capital Stock" and "Underwriting" in
the Prospectus and Items 13 and 14 of Part II of the Registration
Statement insofar as such statements constitute a summary of legal
matters documents or proceedings referred to therein, fairly present
the information called for with respect to such legal matters,
documents and proceedings;
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(viii) the Company is not in violation of its charter
or by-laws and, to the best of such counsel's knowledge after due
inquiry, the Company is not in default in the performance of any
obligation, agreement or condition contained in any bond, debenture,
note or any other evidence of indebtedness or in any other agreement,
indenture or instrument material to the conduct of the business of the
Company, to which the Company is a party or by which its property is
bound;
(ix) the execution, delivery and performance of this
Agreement by the Company and each Selling Shareholder, compliance by
each of them with all the provisions hereof and the consummation of the
transactions contemplated hereby will not require any consent,
approval, authorization or other order of or filing with any United
States federal or state court, regulatory body, administrative agency
or other governmental body (except as such may be required under the
Act, the Exchange Act, by the rules, regulations or by-laws of the
National Association of Securities Dealers, Inc. and the NASDAQ
National Market System or other securities or Blue Sky laws) and, to
the best of such counsel's knowledge, will not conflict with or
constitute a breach of any of the terms or provisions of, or a default
under, any agreement, indenture or other instrument to which the
Company is a party, or by which it or its properties are bound, or
violate or conflict with any United States federal or state laws,
administrative regulations or rulings or court decrees applicable to
the Company or its properties, except for such conflicts, breaches and
defaults which would not reasonably be expected to have a material
adverse effect on the business or condition (financial or otherwise) of
the Company;
(x) after due inquiry, such counsel does not know of
any legal or governmental proceeding pending or threatened to which the
Company is a party or to which any of its property is subject which is
required to be described in the Registration Statement or the
Prospectus and is not so described, or of any contract or other
document which is required to be described in the Registration
Statement or the Prospectus or is required to be filed as an exhibit to
the Registration Statement which is not described or filed as required;
(xi) to the best of such counsel's knowledge, after
due inquiry, the Company any has not violated any Environmental Laws,
nor any federal or state law relating to discrimination in the hiring,
promotion or pay of employees nor any applicable federal or state wages
and hours laws, nor any provisions of the Employee Retirement Income
Security Act or the rules and regulations promulgated thereunder, which
in each case might result in any material adverse change in the
business, prospects, financial condition or results of operation of the
Company;
(xii) the Company has such permits, licenses,
franchises and authorizations of governmental or regulatory authorities
("permits"), including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease and operate its
respective properties and to conduct its business in the manner
described in the Prospectus; to the best of such counsel's knowledge,
after due inquiry, the Company has fulfilled and performed all
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of its material obligations with respect to such permits and no event
has occurred which allows, or after notice or lapse of time would
allow, revocation or termination thereof or results in any other
material impairment of the rights of the holder of any such permit,
subject in each case to such qualification as may be set forth in the
Prospectus; and, except as described in the Prospectus, such permits
contain no restrictions that are materially burdensome to the Company;
(xiii) the Company is not and, immediately following
the Closing Date, will not be an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended;
(xiv) to the best of such counsel's knowledge, after
due inquiry, no holder of any security of the Company has any right to
require registration of shares of Common Stock or any other security of
the Company;
(xv) to the best of such counsel's knowledge, after
due inquiry, all leases to which the Company or any of its subsidiaries
is a party are valid and binding and no default has occurred or is
continuing thereunder, which might result in any material adverse
change in the business, prospects, financial condition or results of
operation of the Company, and the Company enjoys peaceful and
undisturbed possession under all such leases to which any of them is a
party as lessee with such exceptions as do not materially interfere
with the use made by the Company;
(xvi) (1) the Registration Statement (including any
Registration Statement filed under 462 (b) of the Act, if any) and the
Prospectus and any supplement or amendment thereto (except for
financial statements as to which no opinion need be expressed) comply
as to form in all material respects with the Act, and (2) such counsel
believes that (except for financial statements, as aforesaid) the
Registration Statement and the prospectus included therein at the time
the Registration Statement became effective did not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and that the Prospectus, as amended or supplemented, if
applicable (except for financial statements, as aforesaid) does not
contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
(xvii) assuming due authorization, execution and
delivery, the Custody Agreement is a valid and binding agreement of
each Selling Shareholder enforceable in accordance with its terms,
except as may be limited by bankruptcy, reorganization or moratorium or
similar laws affecting the enforceability of creditors' rights
generally and rules of law governing specific performance, injunctive
relief and other equitable remedies;
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(xviii) assuming due authorization, execution and delivery of
the power of attorney signed by each Selling Shareholder appointing
Stephen Katz and Michael E. McConnell or either of them, as such
Selling Shareholder's attorney-in-fact to the extent set forth therein
with regard to the transactions contemplated hereby and by the
Registration Statement, such powers of attorney are valid and binding
instruments of each Selling Shareholder enforceable in accordance with
their terms;
(xix ) to the best of such counsel's knowledge, after due
inquiry, no facts exist that would form a basis for the belief that the
Company lacks any rights or licenses to use patents and know-how
necessary for the manufacture, use or sale of those products or
technologies which the Company has identified in the Prospectus as
having been developed; to the best of such counsel's knowledge, no
facts exist that would form a basis for the belief that the Company
lacks any rights or licenses to use patents and know-how necessary for
the manufacture, use or sale of the products proposed to be developed,
as described in the Prospectus;
(xx) after due inquiry, such counsel is not aware of any valid
patents or trademarks of others that would be infringed by the
manufacture, use or sale by the Company of those products or
technologies which the Company has identified in the Prospectus as
having been developed by the Company, and except as disclosed in the
Prospectus, such counsel has no knowledge of any pending or threatened
action, suit, proceeding or claims by others that the Company is
infringing any patent or trademark; and
(xxi) on the basis of the participation of such counsel in
conferences with officers and representatives of the Company at which
the portion of the Registration Statement and the Prospectus dealing
with the Company's patents and patent applications ("Company Patents")
were discussed, but without independent verification by such counsel of
the accuracy, completeness or fairness of the statements contained in
the Registration Statement, the Prospectus or any amendment or
supplement to the Registration Statement or the Prospectus, such
counsel has no reason to believe that the Registration Statement and
the Prospectus included therein at the time that the Registration
Statement became effective contained any untrue statement of a material
fact relating to the Company Patents or omitted to state a material
fact relating to the Company Patents required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
The opinion of Parker Chapin Flattau & Klimpl LLP described in
paragraph (d) above shall be rendered to you at the request of the company and
shall so state therein.
In giving such opinion with respect to the matters covered by
clause (xvi) such counsel may state that their opinion and belief are based upon
their participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and
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discussion of the contents thereof, but are without independent check or
verification except as specified.
(e) You shall have received on the Closing Date an opinion
dated the Closing Date, of Seed & Berry, [ ], patent counsel for the
Company, substantially in the form delivered to you by Seed & Berry, [ ],
on the date of this Agreement.
(f) You shall have received on the Closing Date an opinion
dated the Closing Date, of Andrews & Kurth, counsel for the Underwriters, as to
the matters referred to in clauses (ix) and (x) (but only with respect to the
statements under the caption "Description of Capital Stock" and "Underwriting")
and (xvi) of the foregoing paragraph (d). In giving such opinion with respect to
the matters covered by clause (xvi) such counsel may state that their opinion
and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements thereto
and review and discussion of the contents thereof, but are without independent
check or verification except as specified.
(g) You shall have received a letter on and as of the Closing
Date, in form and substance satisfactory to you, from Ernst & Young LLP,
independent public accountants, with respect to the financial statements and
certain financial information contained in the Registration Statement and the
Prospectus and substantially in the form and substance of the letter delivered
to you by Ernst & Young LLP on the date of this Agreement.
(h) The Company shall have delivered to you the agreements
specified in Section 2 hereof.
(i) The Company and the Selling Shareholders shall not have
failed at or prior to the Closing Date to perform or comply in any material
respect with any of the agreements herein contained and required to be performed
or complied with by the Company or the Selling Shareholders at or prior to the
Closing Date, including, without limitation, the termination of all preemptive
rights.
The several obligations of the Underwriter to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
10. Effective Date of Agreement and Termination. This Agreement shall
become effective upon the later of (i) execution of this Agreement and (ii) when
notification of the effectiveness of the Registration Statement has been
released by the Commission.
This Agreement may be terminated at any time prior to the Closing Date
by you by written notice to the Company if any of the following has occurred:
(i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or
development involving a prospective material adverse change in the condition,
financial or
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otherwise, of the Company, or the earnings, affairs, or business prospects of
the Company, whether or not arising in the ordinary course of business, which
would, in your judgment, make it impracticable to market the Shares on the terms
and in the manner contemplated in the Prospectus, (ii) any outbreak or
escalation of hostilities or other national or international calamity or crisis
or change in economic conditions or in the financial markets of the United
States or elsewhere that, in your judgment, is material and adverse and would,
in your judgment, make it impracticable to market the Shares on the terms and in
the manner contemplated in the Prospectus, (iii) the suspension or material
limitation of trading in securities on the New York Stock Exchange, the American
Stock Exchange or the NASDAQ National Market System or limitation on prices for
securities on any such exchange or National Market System or any suspension of
trading of any securities of the Company on any such exchange, or National
Market System or on any over-the-counter market, (iv) the enactment,
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental authority which
in your opinion materially and adversely affects, or will materially and
adversely affect, the business or operations of the Company, (v) the declaration
of a banking moratorium by either federal or New York State authorities or (vi)
the taking of any action by any federal, state or local government or agency in
respect of its monetary or fiscal affairs which in your opinion has a material
adverse effect on the financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Initial Shares or Additional Shares, as the case may be, which it or they have
agreed to purchase hereunder on such date and the aggregate number of Initial
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused to
purchase is not more than one-tenth of the total number of Shares to be
purchased on such date by all Underwriters, each non-defaulting Underwriter
shall be obligated severally, in the proportion which the number of Firm Shares
set forth opposite its name in Schedule I bears to the total number of Initial
Shares which all the non-defaulting Underwriters, as the case may be, have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Initial Shares or Additional Shares, as the case may be, which such
defaulting Underwriter or Underwriters, as the case may be, agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
Initial Shares or Additional Shares, as the case may be, which any Underwriter
has agreed to purchase pursuant to Section 2 hereof be increased pursuant to
this Section 10 by an amount in excess of one-ninth of such number of Initial
Shares or Additional Shares, as the case may be, without the written consent of
such Underwriter. If on the Closing Date or on an Option Closing Date, as the
case may be, any Underwriter or Underwriters shall fail or refuse to purchase
Initial Shares, or Additional Shares, as the case may be, and the aggregate
number of Initial Shares or Additional Shares, as the case may be, with respect
to which such default occurs is more than one-tenth of the aggregate number of
Shares to be purchased on such date by all Underwriters and arrangements
satisfactory to you and the Company for purchase of such Shares are not made
within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter and the Company. In any
such case which does not result in termination of this Agreement, either you or
the Company shall have the right to postpone the Closing Date or the applicable
Option Closing Date, as the case may be, but in no event for longer than seven
days, in order that the required changes, if any, in the Registration Statement
and the Prospectus or any other documents or
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arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
any such Underwriter under this Agreement.
11. Miscellaneous. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (a) if to the Company, to Stephen Katz,
Chairman of the Board of Chief Executive Officer, Cellular Technical Services
Company, Inc., 2401 Fourth Avenue, Seattle, Washington 98121 with a copy to
Edward R. Mandell, Esq., Parker Chapin Flattau & Klimpl, LLP, (b) if to any
Selling Shareholder, to, Cellular Technical Services Company, Inc., 2401 Fourth
Avenue, Seattle, Washington 98121 98121 with a copy to Edward R. Mandell, Esq.,
Parker Chapin Flattau & Klimpl, LLP, and (c) if to you, Simon Strauss, Gerard
Klauer Mattison & Co., LLC, 529 Fifth Avenue, New York, New York, 10017 with a
copy to Emanuel S. Cherney, Esq., Andrews & Kurth LLP, 425 Lexington Avenue, New
York 10017, or in any case to such other address as the person to be notified
may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, its officers and directors and
of you set forth in or made pursuant to this Agreement shall remain operative
and in full force and effect, and will survive delivery of and payment for the
Shares, regardless of (i) any investigation, or statement as to the results
thereof, made by or on your behalf or by or on behalf of the Company, the
officers or directors of the Company or any controlling person of the Company,
(ii) acceptance of the Shares and payment for them hereunder and (iii)
termination of this Agreement.
If this Agreement shall be terminated by the Underwriters because of
any failure or refusal on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company agrees to reimburse
the several Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) reasonably incurred by them.
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, and any controlling persons referred to herein and their
respective successors and assigns, all as and to the extent provided in this
Agreement, and no other person shall acquire or have any right under or by
virtue of this Agreement. The term "successors and assigns" shall not include a
purchaser of any of the Shares from the several Underwriters merely because of
such purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
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This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
* * * * * *
[SIGNATURES FOLLOW]
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Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
CELLULAR TECHNICAL SERVICES COMPANY, INC.
By:________________________________________
Name:___________________________________
Title:__________________________________
THE SELLING SHAREHOLDERS NAMED IN
SCHEDULE II HERETO
By:________________________________________
Name:___________________________________
Attorney-in-Fact________________________
CONFIRMED AND ACCEPTED, as of the date first written:
GERARD KLAUER MATTISON & CO., LLC
Acting severally on behalf of themselves and
the several Underwriters named in Schedule I hereto
By: GERARD KLAUER MATTISON & CO., LLC
By:_____________________________________
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<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Company Shares Number of Shareholder
Underwriters to be Purchased Shares to be Purchased
------------ ---------------------- ----------------------
<S> <C> <C>
GERARD KLAUER
MATTISON & CO., LLC
[Additional Underwriters to
be specified]
</TABLE>
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SCHEDULE II
<TABLE>
<CAPTION>
Number of Shares Number of Additional
Selling Shareholders to be Sold Shares which may be Sold
-------------------- ---------------- --------------------------
<S> <C> <C>
[Selling Shareholders to be specified]
</TABLE>
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<PAGE>
ANNEX I
Required Officer, Director and Shareholder Lock-ups
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<PAGE>
1996 STOCK OPTION PLAN
of
CELLULAR TECHNICAL SERVICES COMPANY, INC.
1. PURPOSES OF THE PLAN. This stock option plan (the "Plan") is
designed to provide an incentive to employees (including directors and officers
who are employees) of and consultants to Cellular Technical Services Company,
Inc., a Delaware corporation (the "Company") or any of its Subsidiaries (as
defined in Paragraph 19), and to offer an additional inducement in obtaining the
services of such persons. The Plan provides for the grant of "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), and nonqualified stock options which do not
qualify as ISOs ("NQSOs"), but the Company makes no representation or warranty,
express or implied, as to the qualification of any option as an "incentive stock
option" under the Code.
2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Paragraph
12, the aggregate number of shares of common stock, $.001 par value per share,
of the Company ("Common Stock") for which options may be granted under the Plan
shall not exceed 550,000. Such shares of Common Stock may, in the discretion of
the Board of Directors of the Company (the "Board of Directors"), consist either
in whole or in part of authorized but unissued shares of Common Stock or shares
of Common Stock held in the treasury of the Company. Subject to the provisions
of Paragraph 13, any shares of Common Stock subject to an option which for any
reason expires, is canceled or is terminated unexercised or which ceases for any
reason to be exercisable shall again become available for the granting of
options under the Plan. The Company shall at all times during the term of the
Plan reserve and keep available such number of shares of Common Stock as will be
sufficient to satisfy the requirements of the Plan.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by a
committee of the Board of Directors (the "Committee") consisting of not less
than two directors, each of whom shall be a "disinterested person" within the
meaning of Rule 16b-3 (or any successor rule or regulation) promulgated under
the Securities Exchange Act of 1934, as amended (as the same may be in effect
and interpreted from time to time, "Rule 16b-3"). A majority of the members of
the Committee shall constitute a quorum, and the acts of a majority of the
members present at any meeting at which a quorum is present, and any acts
approved in writing by all members without a meeting, shall be the acts of the
Committee.
Subject to the express provisions of the Plan, the Committee shall
have the authority, in its sole discretion, to determine: the employees and
consultants who shall be granted options; the times when options shall be
granted; whether an option granted to an employee shall be an ISO or a NQSO; the
number of shares of Common Stock to be subject to each option; the term
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of each option; the date each option shall become exercisable; whether an option
shall be exercisable in whole, in part or in installments and, if in
installments, the number of shares of Common Stock to be subject to each
installment, whether the installments shall be cumulative, the date each
installment shall become exercisable and the term of each installment; whether
and under what conditions to accelerate the date of exercise of any option or
installment; whether shares of Common Stock may be issued upon the exercise of
an option as partly paid and, if so, the dates when future installments of the
exercise price shall become due and the amounts of such installments; the
exercise price of each option; the form of payment of the exercise price;
whether to restrict the sale or other disposition of the shares of Common Stock
acquired upon the exercise of an option and, if so, whether to waive any such
restriction; whether to subject the exercise of all or any portion of an option
to the fulfillment of contingencies as specified in the contract referred to in
Paragraph 11 hereof (the "Contract"), including without limitation,
contingencies relating to entering into a covenant not to compete with the
Company, any of its Subsidiaries or a Parent (as defined in Paragraph 19), to
financial objectives for the Company, any of its Subsidiaries or a Parent, a
division of any of the foregoing, a product line or other category, and/or the
period of continued employment of the optionee with the Company, any of its
Subsidiaries or a Parent, and to determine whether such contingencies have been
met; whether an optionee is Disabled (as defined in Paragraph 19); the amount,
if any, necessary to satisfy the Company's obligation to withhold taxes or other
amounts; and the fair market value of a share of Common Stock; to construe the
Plan; with the consent of the optionee, to cancel or modify an option, provided,
that the modified provision is permitted to be included in an option granted
under the Plan on the date of the modification, and further, provided, that in
the case of a modification (within the meaning of Section 424(h) of the Code) of
an ISO, such option as modified would be permitted to be granted on the date of
such modification under the terms of the Plan; to prescribe, amend and rescind
rules and regulations relating to the Plan; and to make all other determinations
necessary or advisable for administering the Plan. Any controversy or claim
arising out of or relating to the Plan shall be determined unilaterally by the
Committee in good faith in its sole discretion. The determinations of the
Committee on the matters referred to in this Paragraph 3 shall be conclusive and
binding on the parties. No member or former member of the Committee shall be
liable for any action, failure to act or determination made in good faith with
respect to the Plan or any option hereunder.
4. ELIGIBILITY. The Committee may from time to time, in its sole
discretion, consistent with the purposes of the Plan, grant options to employees
(including officers and directors who are employees) of, and to consultants to,
the Company or any of its Subsidiaries. Such options granted shall cover such
number of shares of Common Stock as the Committee may determine in the
applicable Contract, in its sole discretion; provided, however, that the maximum
number of shares subject to options that may be granted to any employee during
any calendar year under the Plan (the "162(m) Maximum") shall not exceed 200,000
shares; and further, provided, that the aggregate market value (determined at
the time the option is granted in accordance with Paragraph 5) of the shares of
Common Stock for which any eligible employee may be granted ISOs under the Plan
or any other plan of the Company, or of a Parent or a Subsidiary of the Company,
which are exercisable for the first time by such optionee during any calendar
year shall not exceed
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<PAGE>
$100,000. Such limitation shall be applied by taking ISOs into account in the
order in which they were granted. Any option granted in excess of such amount
shall be treated as a NQSO to the extent of such excess.
5. EXERCISE PRICE. The exercise price of the shares of Common Stock
under each option shall be determined by the Committee in the applicable
Contract, in its sole discretion; provided, however, that the exercise price of
an ISO shall not be less than the fair market value of the Common Stock subject
to such option on the date of grant; and further, provided, that if, at the time
an ISO is granted, the optionee owns (or is deemed to own under Section 424(d)
of the Code) stock possessing more than 10% of the total combined voting power
of all classes of stock of the Company, of any of its Subsidiaries or of a
Parent, the exercise price of such ISO shall not be less than 110% of the fair
market value of the Common Stock subject to such ISO on the date of grant.
The fair market value of a share of Common Stock on any day shall be
(a) if the principal market for the Common Stock is a national securities
exchange, the average of the highest and lowest sales prices per share of Common
Stock on such day as reported by such exchange or on a composite tape reflecting
transactions on such exchange, (b) if the principal market for the Common Stock
is not a national securities exchange and the Common Stock is quoted on The
Nasdaq Stock Market ("Nasdaq"), and (i) if actual sales price information is
available with respect to the Common Stock, the average of the highest and
lowest sales prices per share of Common Stock on such day on Nasdaq, or (ii) if
such information is not available, the average of the highest bid and lowest
asked prices per share of Common Stock on such day on Nasdaq, or (c) if the
principal market for the Common Stock is not a national securities exchange and
the Common Stock is not quoted on Nasdaq, the average of the highest bid and
lowest asked prices per share of Common Stock on such day as reported on the OTC
Bulletin Board Service or by National Quotation Bureau, Incorporated or a
comparable service; provided, however, that if clauses (a), (b) and (c) of this
Paragraph are all inapplicable, or if no trades have been made or no quotes are
available for such day, the fair market value of the Common Stock shall be
determined by the Board by any method consistent with applicable regulations
adopted by the Treasury Department relating to stock options.
6. TERM. The term of each option granted pursuant to the Plan shall be
such term as is established by the Committee in the applicable Contract, in its
sole discretion; provided, however, that the term of each ISO granted pursuant
to the Plan shall be for a period not exceeding 10 years from the date of grant
thereof; and further, provided, that if, at the time an ISO is granted, the
optionee owns (or is deemed to own under Section 424(d) of the Code) stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company, of any of its Subsidiaries or of a Parent, the term of the
ISO shall be for a period not exceeding five years from the date of grant.
Options shall be subject to earlier termination as hereinafter provided.
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7. EXERCISE. An option (or any part or installment thereof), to the
extent then exercisable, shall be exercised by giving written notice to the
Company at its principal office stating which option is being exercised,
specifying the number of shares of Common Stock as to which such option is being
exercised and accompanied by payment in full of the aggregate exercise price
therefor (or the amount due on exercise if the Contract permits installment
payments) (a) in cash or by certified check or (b) if the applicable Contract
permits, with previously acquired shares of Common Stock having an aggregate
fair market value on the date of exercise (determined in accordance with
Paragraph 5) equal to the aggregate exercise price of all options being
exercised, or with any combination of cash, certified check or shares of Common
Stock.
The Committee may, in its sole discretion, permit payment of the
exercise price of an option by delivery by the optionee of a properly executed
notice, together with a copy of his irrevocable instructions to a broker
acceptable to the Committee to deliver promptly to the Company the amount of
sale or loan proceeds sufficient to pay such exercise price. In connection
therewith, the Company may enter into agreements for coordinated procedures with
one or more brokerage firms.
A person entitled to receive Common Stock upon the exercise of an
option shall not have the rights of a stockholder with respect to such shares of
Common Stock until the date of issuance of a stock certificate for such shares
or in the case of uncertificated shares, an entry is made on the books of the
Company's transfer agent representing such shares; provided, however, that until
such stock certificate is issued or book entry is made, any optionee using
previously acquired shares of Common Stock in payment of an option exercise
price shall continue to have the rights of a stockholder with respect to such
previously acquired shares.
In no case may a fraction of a share of Common Stock be purchased or
issued under the Plan.
8. TERMINATION OF RELATIONSHIP. Except as may otherwise be expressly
provided in the applicable Contract, any optionee whose relationship with the
Company, its Parent and Subsidiaries as an employee or a consultant has
terminated for any reason (other than the death or Disability of the optionee)
may exercise such option, to the extent exercisable on the date of such
termination, at any time within three months after the date of termination, but
not thereafter and in no event after the date the option would otherwise have
expired; provided, however, that if such relationship is terminated either (a)
for Cause (as defined in Paragraph 19) , or (b) without the consent of the
Company, such option shall terminate immediately.
For the purposes of the Plan, an employment relationship shall be
deemed to exist between an individual and the Company, any of its Subsidiaries
or a Parent if, at the time of the determination, the individual was an employee
of such corporation for purposes of Section 422(a) of the Code. As a result, an
individual on military, sick leave or other bona fide leave of absence shall
continue to be considered an employee for purposes of the Plan during such leave
if the period
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<PAGE>
of the leave does not exceed 90 days, or, if longer, so long as the individual's
right to reemployment with the Company, any of its Subsidiaries or a Parent is
guaranteed either by statute or by contract. If the period of leave exceeds 90
days and the individual's right to reemployment is not guaranteed by statute or
by contract, the employment relationship shall be deemed to have terminated on
the 91st day of such leave.
Except as may otherwise be expressly provided in the applicable
Contract, options granted under the Plan shall not be affected by any change in
the status of the optionee so long as the optionee continues to be an employee
of, or a consultant to, the Company, or any of the Subsidiaries or a Parent
(regardless of having changed from one to the other or having been trans ferred
from one corporation to another).
Nothing in the Plan or in any option granted under the Plan shall
confer on any optionee any right to continue in the employ of, or as a
consultant to, the Company, any of its Subsidiaries or a Parent, or interfere in
any way with any right of the Company, any of its Subsidiaries or a Parent to
terminate the optionee's relationship at any time for any reason whatsoever
without liability to the Company, any of its Subsidiaries or a Parent.
9. DEATH OR DISABILITY OF AN OPTIONEE. Except as may otherwise be
expressly provided in the applicable Contract, if an optionee dies (a) while he
is an employee of, or consultant to, the Company, any of its Subsidiaries or a
Parent, (b) within three months after the termination of such relationship
(unless such termination was for Cause or without the consent of the Company) or
(c) within one year following the termination of such relationship by reason of
his Disability, his option may be exercised, to the extent exercisable on the
date of his death, by his Legal Representative (as defined in Paragraph 19) at
any time within one year after death, but not thereafter and in no event after
the date the option would otherwise have expired.
Except as may otherwise be expressly provided in the applicable
Contract, any optionee whose relationship as an employee of, or consultant to,
the Company, its Parent and Subsidiaries has terminated by reason of such
optionee's Disability may exercise his option, to the extent exercisable upon
the effective date of such termination, at any time within one year after such
date, but not thereafter and in no event after the date the option would
otherwise have expired.
10. COMPLIANCE WITH SECURITIES LAWS. The Committee may require, in its
sole discretion, as a condition to the exercise of any option that either (a) a
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Common Stock to be issued upon
such exercise shall be effective and current at the time of exercise, or (b)
there is an exemption from registration under the Securities Act for the
issuance of the shares of Common Stock upon such exercise. Nothing herein shall
be construed as requiring the Company to register shares subject to any option
under the Securities Act or to keep any Registration Statement effective or
current.
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<PAGE>
The Committee may require, in its sole discretion, as a condition to
the exercise of any option that the optionee execute and deliver to the Company
his representations and warranties, in form, substance and scope satisfactory to
the Committee, which the Committee determines are necessary or convenient to
facilitate the perfection of an exemption from the registration requirements of
the Securities Act, applicable state securities laws or other legal requirement,
including without limitation that (a) the shares of Common Stock to be issued
upon the exercise of the option are being acquired by the optionee for his own
account, for investment only and not with a view to the resale or distribution
thereof, and (b) any subsequent resale or distribution of shares of Common Stock
by such optionee will be made only pursuant to (i) a Registration Statement
under the Securities Act which is effective and current with respect to the
shares of Common Stock being sold, or (ii) a specific exemption from the
registration requirements of the Securities Act, but in claiming such exemption,
the optionee shall prior to any offer of sale or sale of such shares of Common
Stock provide the Company with a favorable written opinion of counsel
satisfactory to the Company, in form, substance and scope satisfactory to the
Company, as to the applicability of such exemption to the proposed sale or
distribution.
In addition, if at any time the Committee shall determine, in its sole
discretion, that the listing or qualification of the shares of Common Stock
subject to such option on any securities exchange, Nasdaq or under any
applicable law, or the consent or approval of any governmental regulatory body,
is necessary or desirable as a condition to, or in connection with, the granting
of an option or the issue of shares of Common Stock thereunder, such option may
not be exercised in whole or in part unless such listing, qualification, consent
or approval shall have been effected or obtained free of any conditions not
acceptable to the Committee.
11. STOCK OPTION CONTRACTS. Each option shall be evidenced by an
appropriate Contract which shall be duly executed by the Company and the
optionee, and shall contain such terms, provisions and conditions not
inconsistent herewith as may be determined by the Committee.
12. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. Not withstanding any
other provision of the Plan, in the event of a stock dividend, split-up, spin
off, combination, reclassification, recapitalization, merger in which the
Company is the surviving corporation, or exchange of shares or the like which
results in a change in the number or kind of shares of Common Stock which are
outstanding immediately prior to such event, the aggregate number and kind of
shares subject to the Plan, the aggregate number and kind of shares subject to
each outstanding option and the exercise price thereof, and the 162(m) Maximum
shall be appropriately adjusted by the Board of Directors, whose determination
shall be conclusive and binding on all parties.
In the event of (a) the liquidation or dissolution of the Company, or
(b) a merger in which the Company is not the surviving corporation or a
consolidation, any outstanding options shall terminate upon the earliest of any
such event, unless other provision is made therefor in the
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transaction. The Company shall give each optionee under the Plan at least 20
days prior notice of any such transaction, advising the optionee of the impact
of the transaction on his options.
13. AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was adopted by
the Board of Directors on April 24, 1996. No option may be granted under the
Plan after April 23, 2006. The Board of Directors, without further approval of
the Company's stockholders, may at any time suspend or terminate the Plan, in
whole or in part, or amend it from time to time in such respects as it may deem
advisable, including, without limitation, in order that ISOs granted hereunder
meet the requirements for "incentive stock options" under the Code, to comply
with the provisions of Rule 16b-3, Section 162(m) of the Code, or any change in
applicable law, regulations, rulings or interpretations of administrative
agencies; provided, however, that no amendment shall be effective without the
requisite prior or subsequent stockholder approval which would (a) except as
contemplated in Paragraph 12, increase the maximum number of shares of Common
Stock for which options may be granted under the Plan or the 162(m) Maximum, (b)
materially increase the benefits accruing to participants under the Plan or (c)
change the eligibility requirements to receive options hereunder. No
termination, suspension or amendment of the Plan shall, without the consent of
the holder of an existing and outstanding option affected thereby, adversely
affect his rights under such option. The power of the Committee to administer
any options granted under the Plan prior to the termination or suspension of the
Plan nevertheless shall continue after such termination or during such
suspension.
14. NON-TRANSFERABILITY OF OPTIONS. No option granted under the Plan
shall be transferable otherwise than by will or the laws of descent and
distribution, and options may be exercised, during the lifetime of the optionee,
only by the optionee or his Legal Representatives. Except to the extent provided
above, options may not be assigned, transferred, pledged, hypothecated or
disposed of in any way (whether by operation of law or otherwise) and shall not
be subject to execution, attachment or similar process, and any such attempted
assignment, transfer, pledge, hypothecation or disposition shall be null and
void ab initio and of no force or effect.
15. WITHHOLDING TAXES. The Company may withhold (a) cash, (b) subject
to any limitations under Rule 16b-3, shares of Common Stock to be issued with
respect thereto having an aggregate fair market value on the exercise date
(determined in accordance with Paragraph 5), or (c) any combination thereof, in
an amount equal to the amount, if any, which the Committee determines is
necessary to satisfy the Company's obligation to withhold Federal, state and
local income taxes or other amounts incurred by reason of the grant or exercise
of an option, its disposition, or the disposition of the underlying shares of
Common Stock. Alternatively, the Company may require the optionee to pay to the
Company such amount, in cash, promptly upon demand. The Company shall not be
required to issue any shares of Common Stock pursuant to any such option until
all required payments have been made.
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16. LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such legend
or legends upon the certificates for shares of Common Stock issued upon exercise
of an option under the Plan and may issue such "stop transfer" instructions to
its transfer agent in respect of such shares as it determines, in its
discretion, to be necessary or appropriate to (a) prevent a violation of, or to
perfect an exemption from, the registration requirements of the Securities Act
and any applicable state securities laws, (b) implement the provisions of the
Plan or any agreement between the Company and the optionee with respect to such
shares of Common Stock, or (c) permit the Company to determine the occurrence of
a "disqualifying disposition," as described in Section 421(b) of the Code, of
the shares of Common Stock issued or transferred upon the exercise of an ISO
granted under the Plan.
The Company shall pay all issuance taxes with respect to the issuance
of shares of Common Stock upon the exercise of an option granted under the Plan,
as well as all fees and expenses incurred by the Company in connection with such
issuance.
17. USE OF PROCEEDS. The cash proceeds from the sale of shares of
Common Stock pursuant to the exercise of options under the Plan shall be added
to the general funds of the Company and used for such corporate purposes as the
Board of Directors may determine.
18. SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CER TAIN CONSTITUENT
CORPORATIONS. Anything in this Plan to the contrary notwithstanding, the Board
of Directors may, without further approval by the stockholders, substitute new
options for prior options of a Constituent Corporation (as defined in Paragraph
19) or assume the prior options of such Constituent Corporation.
19. DEFINITIONS. For purposes of the Plan, the following terms shall
be defined as set forth below:
(a) Cause. The term "Cause" shall mean (i) if there is a
written employment or consulting agreement between the optionee and the Company,
any of its Subsidiaries or a Parent which defines cause for termination of such
relationship, cause as defined in such agreement, or (ii) if there is no such
agreement, cause as defined by applicable state law.
(b) Constituent Corporation. The term "Constituent
Corporation" shall mean any corporation which engages with the Company, any of
its Subsidiaries or a Parent in a transaction to which Section 424(a) of the
Code applies (or would apply if the option assumed or substituted were an ISO),
or any Parent or any Subsidiary of such corporation.
(c) Disability. The term "Disability" shall mean a permanent
and total disability within the meaning of Section 22(e)(3) of the Code.
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(d) Legal Representative. The term "Legal Representative"
shall mean the executor, administrator or other person who at the time is
entitled by law to exercise the rights of a deceased or incapacitated optionee
with respect to an option granted under the Plan.
(e) Parent. The term "Parent" shall have the same definition
as "parent corporation" in Section 424(e) of the Code.
(f) Subsidiary. The term "Subsidiary" shall have the same
definition as "subsidiary corporation" in Section 424(f) of the Code.
20. GOVERNING LAW; CONSTRUCTION. The Plan, such options as may be
granted hereunder and all related matters shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without regard to conflict
of law provisions.
Neither the Plan nor any Contract shall be construed or interpreted
with any presumption against the Company by reason of the Company causing the
Plan or Contract to be drafted. Whenever from the context it appears
appropriate, any term stated in either the singular or plural shall include the
singular and plural, and any term stated in the masculine, feminine or neuter
gender shall include the masculine, feminine and neuter.
21. PARTIAL INVALIDITY. The invalidity, illegality or unenforceability
of any provision in the Plan or any Contract shall not affect the validity,
legality or enforceability of any other provision, all of which shall be valid,
legal and enforceable to the fullest extent permitted by applicable law.
22. STOCKHOLDER APPROVAL. The Plan shall be subject to approval by a
majority of the votes present in person or by proxy at the next duly held
meeting of the Company's stockholders at which a quorum is present. No options
granted hereunder may be exercised prior to such approval; provided, however,
that the date of grant of any option shall be determined as if the Plan had not
been subject to such approval. Notwithstanding the foregoing, if the Plan is not
approved by a vote of the stockholders of the Company on or before April 23,
1997, the Plan and any options granted hereunder shall terminate.
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EXHIBIT 11.1
CELLULAR TECHNICAL SERVICES COMPANY, INC.
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Primary earnings per share:
Net income (loss) for calculation of
primary earnings per share......... $(1,206,335) $ 1,549,871 $ 63,187 $ 243,127 $(2,500,559)
----------- ----------- ----------- ----------- -----------
Weighted average number of shares
outstanding........................ 17,363,680 19,091,036 20,398,272 19,752,808 21,608,900
Dilutive effect of outstanding
warrants and stock options -- based
upon the Treasury Stock Method
using average market price(1)...... 1,206,290 1,627,878 2,405,878
----------- ----------- ----------- ----------- -----------
Weighted average number of shares, as
adjusted, for calculation of
primary earnings per share......... 17,363,680 20,297,326 22,026,150 22,158,686 21,608,900
----------- ----------- ----------- ----------- -----------
Primary earnings (loss) per
share(2)........................... $(.07) $.08 $.00 $.01 $(.12)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
- ------------
(1) Common Stock equivalent shares have not been considered in the calculation
for the year ended December 31, 1993 and the quarterly period ended March
31, 1996, because the effect would be antidilutive.
(2) Fully diluted earnings per share computations are not included since they
would not materially change results presented on a primary earnings per
share basis.
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CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions 'Selected
Financial Data' and 'Experts' and to the use of our reports dated March 1, 1996,
except for the first paragraph of Note K, as to which the date is June 24, 1996,
in the Registration Statement on Form S-1 and the related Prospectus of Cellular
Technical Services Company, Inc. for the registration of 1,725,000 shares of its
common stock.
/s/ ERNST & YOUNG LLP
Seattle, Washington
July 1, 1996
