As filed with the Securities and Exchange Commission on January 27, 1997.
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CELLULAR TECHNICAL SERVICES COMPANY, INC.
(Exact name of registrant as specified in its charter)
------------
Delaware 4812 11-2962080
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification No.)
or organization) Code Number)
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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)
---------------------
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)
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Copy of communications to:
Edward R. Mandell, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036-8701
Tel: (212) 704-6000
Fax: (212) 704-6288
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Approximate date of proposed sale to the public: From time to time after
the effective date of this Registration Statement as determined by market
conditions.
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. [X]
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. [_]
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================
Proposed
Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Per Aggregate Offering Registration Fee
Securities to be Registered Registered Share (1) Price (1) (2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock,
par value $.001 per share.......400,000 Shares $17.0625 $6,825,000 $2,068.18
====================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Estimated solely for the purpose of calculating the registration fee,
pursuant to Rule 457(c).
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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>
================================================================================
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.
================================================================================
SUBJECT TO COMPLETION -- DATED JANUARY 27, 1997
PROSPECTUS
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400,000 Shares
CELLULAR TECHNICAL SERVICES COMPANY, INC.
Common Stock
This Prospectus relates to an aggregate of 400,000 shares of common
stock (the "Common Stock") of Cellular Technical Services Company, Inc., a
Delaware corporation (the "Company"), which may be offered and sold from time to
time by the Selling Shareholders named herein. The Company will not receive any
of the proceeds from the sale of the shares of Common Stock being sold by the
Selling Shareholders. See "Selling Shareholders."
The shares of Common Stock may be offered for sale by the Selling
Stockholders from time to time in the over-the-counter market, in privately
negotiated transactions or otherwise at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. The shares of Common Stock may be sold directly by the Selling
Stockholders or through underwriters, brokers or dealers. In connection with any
such sales, the Selling Stockholders and brokers or dealers participating in
such sales may be deemed "underwriters" within the meaning of the Securities Act
or 1933, as amended ("Securities Act"), and any discounts, commissions,
concessions and any profits realized by them on the sale of the Shares may be
deemed to be underwriting compensation under the Securities Act. At such time as
Rule 144 ("Rule 144") promulgated under the Securities Act becomes available for
the sale of such shares, such shares may be sold under Rule 144 instead of under
this Prospectus, subject to compliance with the volume and manner of sale
limitations, as well as the other requirements, of Rule 144. See "Plan of
Distribution".
The Common Stock is included in The Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "CTSC." On January 22,
1997, the last reported sales price for the Common Stock on the Nasdaq National
Market was $16.625 per share.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 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.
---------------------
The date of this Prospectus is , 1997
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and, in accordance therewith files reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information filed by the
Company can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located
at 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material can also be obtained at prescribed rates from the Public
Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
electronically filed through the Commission's Electronic Data Gathering,
Analysis and Retrieval system ("EDGAR"). The Common Stock is currently quoted on
The Nasdaq Stock Market and such reports and other information can also be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C. 20006.
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement (No. 333- ) under the Securities Act with respect to the
shares of Common Stock (the "Registration Statement"). As permitted by the rules
of the Commission, this Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto. For further
information with respect to the Company and the shares of Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits filed
therewith. Statements contained in this Prospectus, and in any document
incorporated herein by reference, as to the contents of any contract or any
other document referred to are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such document, each such statement
being qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of all or any part of the Registration Statement may be obtained from
such office upon the payment of the fees prescribed by the Commission. The
Registration Statement has been filed through EDGAR and is also publicly
available through the Commission's Web site (http://www.sec.gov).
INFORMATION INCORPORATED BY REFERENCE
The following documents heretofore filed by the Company with the
Commission are incorporated herein by reference: (1) the Company's Annual Report
on Form 10-K for the year ended December 31, 1995; (2) the Company's Quarterly
Reports on Form 10-Q under the Exchange Act for the quarters ended March 31,
1996, June 30, 1996, and September 30, 1996, (3) the description of the
Company's Common Stock contained in the Company's Registration Statement on Form
8-A and any amendment or report filed by the Company for the purpose of updating
such description. Each document filed pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act by the Company subsequent to the date of this
Prospectus but prior to the termination of this offering shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of the filing of such documents. Any statement contained in this Prospectus
or in a document incorporated or deemed to be incorporated herein by reference
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
THE COMPANY WILL PROVIDE, WITHOUT CHARGE, TO EACH PERSON, INCLUDING
ANY BENEFICIAL OWNER, TO WHOM A COPY OF THIS PROSPECTUS IS DELIVERED, UPON THE
WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY DOCUMENT INCORPORATED
BY REFERENCE IN THIS PROSPECTUS (OTHER THAN EXHIBITS UNLESS SUCH EXHIBITS ARE
EXPRESSLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS). REQUESTS SHOULD BE
DIRECTED TO CELLULAR TECHNICAL SERVICES COMPANY, INC., 2401 FOURTH AVENUE,
SEATTLE, WASHINGTON 98121, ATTENTION: MICHAEL E. MCCONNELL, VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER.
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<PAGE>
THE COMPANY
The mission of 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 ("CTIA") has estimated that in
1995 cloning fraud has resulted in costs and lost revenues to the domestic
cellular industry of an amount in excess of $650 million. The Company believes
that in 1996 cloning fraud will result in even greater 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.
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").
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 the further development,
marketing and deployment of the Blackbird Platform, the PreTect fraud prevention
application and other related products 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 offers its No Clone ZoneSM service ("No Clone Zone
Service"), a seamless real-time roaming fraud prevention service between markets
that use the Blackbird Platform and PreTect. During 1996, the Company entered
into agreements with AirTouch Cellular ("AirTouch"), Bell Atlantic NYNEX Mobile
("BANM"), GTE Mobilnet of California, L.P. ("GTE-California") and Ameritech
Mobile Communications, Inc. ("Ameritech"), establishing terms for the use of
Blackbird Products in their markets. The Company believes that as of the end of
1996 there were in excess of 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.
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<PAGE>
During the last ten years, wireless communications service has been
one of the fastest growing segments of the telecommunications industry. The CTIA
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 exceeded 100 million subscribers at 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
(the "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.
RECENT DEVELOPMENTS
On November 8, 1996, the Company entered into an agreement with the
Selling Shareholders (the "Stock Purchase Agreement") pursuant to which the
Company sold an aggregate of 400,000 shares of Common Stock to the Selling
Shareholders for a total purchase price of $6,500,000. Pursuant to the terms of
the Stock Purchase Agreement, the Company agreed to file the Registration
Statement with respect to the resale of such Common Stock by the Selling
Shareholders. The Company also agreed to use its best efforts to cause the
Registration Statement to become effective as soon as practicable and to cause
the Registration Statement to remain effective until the earlier of the sale by
the Selling Shareholders of all shares registered under the Registration
Statement or 360 days after the effective date of the Registration Statement.
The Stock Purchase Agreement also provided that the Company would pay
all costs and expenses incurred in connection with the registration of the
Common Stock registered pursuant to the Registration Statement, except that the
Company would not be responsible for paying the Selling Shareholders' legal
costs or brokerage commissions incurred in connection with such offering.
The Company recognizes revenues for its products according to
accounting methods in which operating costs (system development, installation,
training and testing) are expensed in the period in which they were incurred
while revenues and product costs associated with product shipments are deferred
and recorded when contract milestones are met, as defined in customer contracts.
Using this accounting method, the Company expects to recognize revenue on only
about half of the total number of Blackbird(R) Platform units that were deployed
during the fourth quarter of 1996, or approximately $6 million to $7 million,
while a similar amount of revenue will be deferred with recognition expected
during the first quarter of 1997 as contract criteria are met. The estimated
revenue for the fourth quarter of 1996 compares with $3.2 million reported in
the same period in 1995. Based on estimated expenses for the fourth quarter of
1996, the
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<PAGE>
Company expects to report a loss ranging from approximately $0.09 to $0.14 per
share for the period as compared to a net profit of $0.02 per share in the
fourth quarter of 1995.
In January 1997, the Company signed a Letter of Intent with GTE
Mobilnet of Virginia ("GTE-Virginia") to deploy Blackbird Products for use in
GTE-Virginia's "B-Band" cellular markets throughout Virginia. The Company and
GTE-Virginia are currently negotiating a definitive agreement and the Company
expects that deployment of its products will begin in the first quarter of 1997.
In an action brought against the Company by Reon International Corp.
and Reon Corp. in the Superior Court of King County, Washington, the plaintiffs
allege breach of contract, misappropriation of trade secrets, and breach of
other obligations by the Company. The action was filed in late July 1996 and,
since that time, a significant number of the plaintiffs' initial claims have
been dismissed. The plaintiffs have amended their complaint three times, most
recently in January 1997, and now allege that certain transactions between the
parties constitute a joint venture partnership. The plaintiffs seek dissolution
of the alleged joint venture partnership, damages in excess of $10 million, and
other relief. The Company has formally denied all of the plaintiffs' claims and
is vigorously defending this action. It is the opinion of the Company's
management that this action is without merit and will be resolved without a
material adverse effect on the Company.
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); the results of financing efforts;
uncertainties with respect to the Company's business strategy; general economic
conditions; and other risks described in this Prospectus and the Company's other
filings with the Commission.
-5-
<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 [90%] of domestic 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.
Limited Product Line; Uncertainty of Widespread 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 signing of certain contracts in 1996, the
Company commenced the commercial installation of the Blackbird Products in a
number of major cellular markets. Such installations are subject to the
Blackbird Products' compliance with contractual requirements, including
acceptance testing to ensure that the Blackbird Products are properly installed
and performing in accordance with contractual specifications. Given the early
stage of commercial use, however, there can be no assurance that any given
installation of Blackbird Products will satisfy contractual requirements.
Additionally, achieving widespread market acceptance and penetration of the
Blackbird Products and the Company's other products and services will, in some
cases, require additional enhancements and improvements to those products and
services and increased marketing efforts to effectively compete and increase
customer awareness of the Company's products and services. There can be no
assurance, however, that such additional enhancements and improvements or
increased marketing and sales efforts will result in a more successful
commercialization and increased market penetration of the Company's products and
services.
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
-6-
<PAGE>
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 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 have been and are expected to
continue to be greater than those encountered with Hotwatch Products due to the
expanded customer base for Blackbird 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.
Risk of New Hardware Manufacturing Activities. For the most part, the
Company's engineering resources historically have been devoted to software
design and development. As a result, only a limited number of such resources
were initially used in the design and prototype production of the Company's
proprietary hardware. In recent quarters the Company has added significantly to
its hardware design and development process. In addition, the Company continues
to utilize a number of 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 continue to 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. 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
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<PAGE>
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.
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 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 Chief Financial Officer (which expires in December
1997), Vice President, Engineering (which expires in July 1998) and General
Counsel (which expires in August, 1997). 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.
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 historically have represented and are likely for the
foreseeable future to continue to represent a significant percentage, in any
given period, of the Company's total revenues. Sales to customers aggregating
10% or more, either individually or combined as affiliates due to common
ownership, were concentrated as follows: three customers with sales of 40%, 32%
and 13% during the nine months ended September 30, 1996; and three customers
with sales of 59%, 15% and 12%, three customers with sales of 54%, 22% and 11%
and two customers with sales of 56% and 24% in the years ended December 31,
1995, 1994 and 1993, respectively. The aggregate sales to these customers
represented 85%, 86%, 87% and 80% of the Company's total product and service
revenues during the nine months ended September 30, 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.
-8-
<PAGE>
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 or with new competitors. The
Company's principal competitors in the service metering field include IBM,
I-NET, Inc., GTE Telecommunications Services, Inc. ("GTE-TSI"), Boston
Communications Group, EDS Personal Communications Corporation, Cincinnati Bell
Information Systems, Inc., Lightbridge, Inc., Subscriber Computing, Inc., CSC
Intellicom, Systems/Link Corporation, Brite Voice Systems, Inc. and Orga Card
Systems Inc. The Company's principal competitors in the user/device
authentication field include Corsair Communications, Inc. ("Corsair"), Coral
Systems, Inc. ("Coral") (in connection with a joint venture with Applied Signal
Technology), Authentix Network, Inc., GTE-TSI and Signal Science Incorporated
("Signal Science"). The Company believes that Corsair has agreements pursuant to
which Corsair has installed or will install its RF-based fingerprinting fraud
protection product in a number of major markets. The Company has no knowledge of
any such agreements or installations by others, although others may be testing
or developing such products. 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.
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 net income of $54,230 for the quarter
ended September 30, 1996, had a net loss of $4,436,767 for the nine months ended
September 30, 1996, and, at September 30, 1996, had an accumulated deficit of
$8,063,031. 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 "Recent Developments."
International Operations. The Company is 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".
In certain international markets,
-9-
<PAGE>
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.
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 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 "Recent Developments."
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.
Possible Need for Additional Financing. In the event of unanticipated
technical or other problems, or if the funds currently available to the Company
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.
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
-10-
<PAGE>
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 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.
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
-11-
<PAGE>
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."
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 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. Additionally, media reports and certain interest
groups have suggested that certain RF emissions from portable cellular
telephones might be linked to various health concerns, including cancer, and may
cause interference with hearing aids, pacemakers and other medical devices.
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. 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 such reports and the findings of such study 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.
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.
Outstanding Options. As of January 23, 1997, there were outstanding
stock options to purchase an aggregate of 2,378,020 shares of Common Stock at a
weighted average exercise price of approximately $7.12 per share. 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.
Shares Eligible for Future Sale. As of the date of this Prospectus,
the Company has outstanding 22,638,468 shares of Common Stock (including 29,960
shares issued for option exercises, from October 1, 1996 to the date of this
Prospectus), of which the 400,000 shares to be resold in this offering 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, as amended, 1991 Non-Qualified Stock Option Plan,
as amended, 1993 Non-Employee Director Stock Option Plan and 1996 Stock Option
Plan. Of these shares, 1,988,020 shares
-12-
<PAGE>
are issuable upon the exercise of outstanding stock options granted by the
Company, of which options to purchase 768,236 shares are currently exercisable.
Registration Statements on Form S-8 have been filed with the Commission
registering all of the shares of Common Stock that may be issued under these
plans as well as the 390,000 shares of Common Stock subject to options granted
to Robert Dahut which were not granted under any stock option plan of the
Company of which options to purchase 30,000 shares are currently exercisable. 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.
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.
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.
-13-
<PAGE>
DESCRIPTION OF SECURITIES
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 January 21, 1997, the Company had
approximately 200 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
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<PAGE>
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.
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 shareholder owning more than 5% of the Company's voting
securities (a "Significant Shareholder") (other than those shareholders 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 Shareholders.
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.
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<PAGE>
SELLING SHAREHOLDERS
The following table sets forth information, as of January 23, 1997,
with respect to (i) each Selling Shareholder's beneficial ownership of the
Company's Common Stock prior to the offering of any shares of Common Stock
hereunder by such Selling Stockholders, (ii) the number of shares of Common
Stock which may be offered for sale hereunder and (iii) the number of shares of
Common Stock to be beneficially owned by each Selling Shareholders after the
offering (assuming the sale of all shares of Common Stock being offered
hereunder). The Company will not receive any of the proceeds from the sale of
such securities. There are no material relationships between any of such Selling
Shareholders and the Company or any of its predecessors, nor have any such
material relationships existed within the past three years.
<TABLE>
<CAPTION>
Shares of Shares of Shares of
Common Stock Common Common Stock
Name of Selling Beneficially Owned Stock to be Beneficially Owned
Stockholders Prior to Offering Offered Hereunder After Offering
<S> <C> <C> <C>
Harvey Sandler 982,616 120,000 862,616
Phyllis Sandler 122,000(1) 60,000 62,000
Fusion Partners, L.P. 65,000 65,000 0
Fusion Offshore Fund Ltd. 1,300 1,300 0
Ricky Sandler 3,700 3,700 0
Andrew Sandler 10,000 10,000 0
Martin Tash 120,000(2) 120,000 0(2)
Jeffrey M. Levine 20,700(3) 10,000 10,700
David Ross 11,200(4) 10,000 1,200(4)
</TABLE>
- ---------------------
(1) Includes 1,000 shares of Common Stock in an IRA Account,
(2) Additional shares of Common Stock in which Martin Tash may be deemed to
have an interest include (i) Martin and Arlene S. Tash, Joint Account -
90,500 shares; (ii) Arlene S. Tash - 6,622 shares; and (iii) Arlene S.
Tash, IRA - 10,778 shares. Arlene S. Tash is the wife of Martin Tash. (3)
Includes 5,156 shares of Common Stock in an IRA Account. (4) Includes
1,200 shares of Common Stock in an IRA Account. Does not include 18,002
shares of Common Stock held by Amy Ross (the wife of David Ross).
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<PAGE>
PLAN OF DISTRIBUTION
The shares of Common Stock may be offered for sale by the Selling
Shareholders from time to time in the over-the-counter market, in privately
negotiated transactions or otherwise at market prices prevailing at the time of
sale, at prices relating to such prevailing market prices or at negotiated
prices. The shares of Common Stock may be sold by one or more of the following
methods: (a) ordinary brokerage transactions and transactions in which the
broker solicits purchasers; (b) purchases by a broker or dealer as principal,
and the resale by such broker or dealer for its account pursuant to this
Prospectus, including resale to another broker or dealer; (c) a block trade in
which the broker or dealer so engaged will attempt to sell the shares of Common
Stock as agent but may position and resell a portion of the block as principal
in order to facilitate the transaction; or (d) negotiated transactions between
one or more Selling Shareholders and purchasers without a broker or dealer. In
connection with any sales, a Selling Shareholders and broker or dealer
participating in such sales may be deemed "underwriters" within the meaning of
the Securities Act.
Brokers or dealers selling under this Prospectus may receive
discounts, commissions or concessions from a Selling Shareholders and/or
purchasers of the Shares for whom such broker or dealers may act as agents, or
to whom they may sell as principal, or both (which compensation as to a
particular broker or dealer may be in excess of customary commissions). Any such
discounts, commissions and concessions and any profits realized on the sale of
Shares may be deemed to be underwriting compensation under the Securities Act.
Certain of the Selling Shareholders may, under certain circumstances, be
entitled to indemnification against liabilities under the Securities Act
pursuant to agreements between them and the Company.
At such time as Rule 144 becomes available for the sale of such
shares of Common Stock, such shares may be sold under Rule 144 instead of under
this Prospectus, subject to compliance with the volume limitations, as well as
the other requirements of Rule 144.
The Selling Shareholders have been advised by the Company that (i)
they are subject to the prospectus delivery requirements under the Securities
Act with respect to any sale of shares pursuant to this Prospectus; (ii) that,
to the extent deemed "distributing" Common Stock, neither they nor any brokers
or dealers acting for them nor any "affiliated purchasers" may bid for or
purchase any Common Stock of the Company or attempt to induce any person to
purchase any Common Stock in violation of Rule 10b-6 promulgated under the
Exchange Act or (iii) they may not engage in any stabilization activity in
connection with the Common Stock.
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.
EXPERTS
The financial statements of the Company appearing in the Company's
Annual Report (Form 10-K) for the year ended December 31, 1995, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon incorporated by reference therein and incorporated herein by reference.
Such financial statements are incorporated herein by reference in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
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<PAGE>
====================================== =======================================
No person has been authorized in
connection with the offering made
hereby to give any information or to
make any representation not contained
in this Prospectus or a supplement to
this Prospectus, and, if given or
made, such information or
representation must not be relied upon CELLULAR TECHNICAL
as having been authorized by the SERVICES COMPANY, INC.
Company, the Selling Shareholders or
any other person. Neither this
Prospectus nor any supplement to this
Prospectus constitutes an offer to
sell or a solicitation of an offer to 400,000 Shares of
buy, any securities other than the Common Stock
securities to which it relates or an
offer to sell or the solicitation of
an offer to buy such securities in any
jurisdiction where, or to any person
to whom it is unlawful to make such an
offer or solicitation. Neither the
delivery of this Prospectus nor any _________________________
supplement to this Prospectus nor any
sale made hereunder or thereunder PROSPECTUS
shall, under any circumstances, create _________________________
any implication that there has been no
change in the affairs of the Company
since the date hereof or thereof or
that the information contained herein
is correct as of any time subsequent
to the dates as of which such
information is furnished.
---------------------
TABLE OF CONTENTS
Page
Available Information............. 2
Information Incorporated by
Reference....................... 2
The Company....................... 3
Recent Developments............... 4
Special Note Regarding
Forward-Looking Statements....... 5
Risk Factors...................... 6
Description of Securities......... 14
Selling Shareholders.............. 16
Plan of Distribution.............. 17
Legal Matters..................... 17
Experts........................... 17
---------------------
, 1997
====================================== =======================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
All of the expenses listed below are estimated except for the SEC
registration fee. The itemized statement below includes all expenses in
connection with the distribution of the securities being registered, other than
underwriting discounts and commissions:
Securities and Exchange Commission registration fee................$ 2,068.18
Blue Sky fees and expenses 2,500.00
Printing and engraving expenses.................................... 2,500.00
Accounting fees and expenses....................................... 5,000.00
Legal fees and expenses............................................ 25,000.00
Miscellaneous expenses............................................. 931.82
-----------
TOTAL...................................................$ 38,000.00
===========
ITEM 15. 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.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
4.1 -- Specimen Certificate for Common Stock of Registrant(1)
4.2 -- Stock Purchase Agreement dated as of November 8, 1996,
among the Company and the investors specified therein (2)
5.1 -- Opinion of Parker Chapin Flattau & Klimpl, LLP(3)
23.1 -- Consent of Ernst & Young LLP(3)
23.2 -- Consent of Parker Chapin Flattau & Klimpl, LLP (included
in opinion filed as Exhibit 5.1)
- --------------------
(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 Quarterly Report on Form 10-Q filed on
November 14, 1996, for the quarter ended September 30, 1996 (File
No. O-19437).
(3) Filed herewith.
ITEM 17. UNDERTAKINGS.
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 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:
(1) To file, during any period in which offers of sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the Registration Statement; and
(iii) To include any material information with respect to
the plan of distribution previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
II-2
<PAGE>
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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; and
(3) to remove from the Registration Statement by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
The undersigned registrant hereby undertakes that for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and 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 27th day of
January 1997.
CELLULAR TECHNICAL SERVICES COMPANY, INC.
By: /s/ Stephen Katz
--------------------------------------
Stephen Katz, Chairman of the
Board of Directors and Chief Executive
Officer
The undersigned directors and officers of Cellular Technical Services
Company, Inc. hereby constitute and appoint Stephen Katz with full power of
substitution and resubstitution, our true and lawful attorney-in-fact with full
power to execute in our name and behalf in the capacities indicated below any
and all amendments (including post-effective amendments and amendments thereto)
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 and hereby ratify and confirm that such attorney-in-fact, or their
substitutes shall lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed by the following persons
in the capacities and on the 27th day of January 1997.
Signature Title Date
/s/ Stephen Katz Chairman of the Board of Directors January 27, 1997
- ------------------------ and Chief Executive Officer
Stephen Katz
/s/ Robert P. Dahut Director, President and Chief January 27, 1997
- ------------------------ Operating Officer
Robert P. Dahut
/s/ Michael E. McConnell Vice President and Chief Financial January 27, 1997
- ------------------------ Officer (Principal Financial and
Michael E. McConnell Accounting Officer)
/s/ Jay Goldberg Director January 27, 1997
- ------------------------
Jay Goldberg
/s/ Lawrence Schoenberg Director January 27, 1997
- ------------------------
Lawrence Schoenberg
II-4
<PAGE>
EXHIBIT INDEX
4.1 -- Specimen Certificate for Common Stock of Registrant(1)
4.2 -- Stock Purchase Agreement dated as of November 8, 1996,
among the Company and the investors specified therein (2)
5.1 -- Opinion of Parker Chapin Flattau & Klimpl, LLP(3)
23.1 -- Consent of Ernst & Young LLP(3)
23.2 -- Consent of Parker Chapin Flattau & Klimpl, LLP (included
in opinion filed as Exhibit 5.1)
- ----------------------
(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 Quarterly Report on Form 10-Q filed on
November 14, 1996, for the quarter ended September 30, 1996 (File
No. O-19437).
(3) Filed herewith.
[PARKER CHAPIN FLATTAU & KLIMPL, LLP]
Letterhead
January 27, 1997
Cellular Technical Services Company, Inc.
2401 Fourth Avenue
Seattle, Washington 98121
Re: Cellular Technical Services Company, Inc.
Gentlemen:
We have acted as counsel to Cellular Technical Services Company, Inc.
(the "Company") in connection with its filing of a registration statement on
Form S-3 (the "Registration Statement") covering 400,000 outstanding shares of
Common Stock (the "Shares"), as more particularly described in the Registration
Statement.
In our capacity as counsel to the Company, we have examined the
Registration Statement, the Company's Certificate of Incorporation and By-laws,
as amended to date, and the minutes and other corporate proceedings of the
Company.
With respect to factual matters, we have relied upon statements and
certificates of officers of the Company. We have also reviewed such other
matters of law and examined and relied upon such other documents, records and
certificates as we have deemed relevant hereto. In all such examinations we have
assumed conformity with the original documents of all documents submitted to us
as conformed or photostatic copies, the authenticity of all documents as
originals and the genuineness of all signatures on all documents submitted to
us.
On the basis of the foregoing, we are of the opinion that the Shares
have been validly authorized and legally issued and are fully paid and
non-assessable.
<PAGE>
Cellular Technical Services Company, Inc.
January 27, 1997
Page 2
We hereby consent to the use of our name under the caption "Legal
Opinions" in the prospectus constituting a part of the Registration Statement
and to the filing of a copy of this opinion as an Exhibit thereto.
Very truly yours,
/s/ PARKER CHAPIN FLATTAU & KLIMPL, LLP
PARKER CHAPIN FLATTAU & KLIMPL, LLP
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts"
in the Registration Statement (Form S-3) and related Prospectus of Cellular
Technical Services Company, Inc. for the registration of 400,000 shares of its
common stock and to the incorporation by reference therein of our report dated
March 1, 1996, with respect to the financial statements and schedules of
Cellular Technical Services Company, Inc. included in its Annual Report (Form
10-K) for the year ended December 31, 1995, filed with the Securities and
Exchange Commission.
/s/ ERNST & YOUNG LLP
Seattle, Washington
January 24, 1997
