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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-21409
------------------------
CELLNET FUNDING, LLC
(Exact name of registrant as specified in its charter)
DELAWARE 94-3298620
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
125 SHOREWAY ROAD
SAN CARLOS, CALIFORNIA 94070
(Address of principal executive offices, including zip code)
(650) 508-6000
(Registrant's Telephone Number, Including Area Code)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. Yes /X/ No / /
As of September 30, 1999, one share of Common Limited Liability Company
Securities was issued and outstanding, which is beneficially owned by CellNet
Data Systems, Inc., and 4,400,000 shares of 7% Exchangeable Limited Liability
Company Preferred Securities were issued and outstanding.
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TABLE OF CONTENTS
PAGE
--------
PART I. FINANCIAL INFORMATION.............................. 2
Item 1. CellNet Funding LLC Financial Statements
(Unaudited)............................................... 2
CellNet Funding LLC Condensed Balance Sheets as of
September 30, 1999 and December 31, 1998................ 2
CellNet Funding LLC Condensed Statement of Operations for
the Three and Nine Months Ended September 30, 1999 and
the Three Months and Period from April 21, 1998
(inception) to September 30, 1998....................... 3
CellNet Funding LLC Condensed Statement of Cash Flows for
the Nine Months Ended September 30, 1999 and the Period
from April 21, 1998 (inception) to September 30, 1998... 4
Notes to CellNet Funding LLC Condensed Financial
Statements.............................................. 5
CellNet Data Systems, Inc. Consolidated Financial
Statements (Unaudited)................................. 8
CellNet Data Systems, Inc. Condensed Consolidated
Balance Sheets as of September 30, 1999 and
December 31, 1998...................................... 8
CellNet Data Systems, Inc. Condensed Consolidated
Statements of Operations for the Three and Nine Months
Ended September 30, 1999 and 1998...................... 9
CellNet Data Systems, Inc. Condensed Consolidated
Statements of Cash Flow for the Three and Nine Months
Ended September 30, 1999 and 1998...................... 10
CellNet Data Systems, Inc. Notes to Consolidated
Financial Statements................................... 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 21
PART II. OTHER INFORMATION................................. 22
Item 1. Legal Proceedings.................................. 22
Item 2. Changes in Securities.............................. 22
Item 3. Defaults upon Senior Securities.................... 22
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 22
Item 5. Other Information.................................. 22
Item 6. Exhibits and Reports on Form 8-K................... 22
SIGNATURE................................................... 23
EXHIBIT INDEX............................................... 24
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
ASSETS
Noncurrent assets:
Dividends receivable from Parent.......................... $ 9,306 $ 4,106
Investment in CellNet Preferred Stock (Note 2)............ 93,500 93,500
Restricted cash (Note 2).................................. 12,830 17,984
-------- --------
Total assets............................................ $115,636 $115,590
======== ========
LIABILITIES AND MEMBER'S EQUITY
Current liability-accrued dividends payable to preferred
security holders.......................................... $ 641 $ 642
Payable to Parent........................................... 564 564
-------- --------
Total liabilities....................................... 1,205 1,206
Mandatorily redeemable preferred securities (Note 2)........ 106,438 106,191
Member's Equity:
Common limited liability security outstanding............. 10 10
Additional paid-in capital................................ 8,341 8,341
Accumulated deficit....................................... (358) (158)
-------- --------
Total member's equity................................... 7,993 8,193
-------- --------
Total liabilities and member's equity....................... $115,636 $115,590
======== ========
See accompanying notes to condensed financial statements.
2
CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM
THREE MONTHS ENDED NINE MONTHS APRIL 21, 1998
SEPTEMBER 30, ENDED (INCEPTION) TO
---------------------- SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------- -------- -------------- --------------
Interest Income.................................. $ 175 $ 291 $ 622 $ 427
Dividend income from CellNet Preferred Stock..... 1,782 2,457 5,199 2,457
------- ------- ------ ------
Income before dividends and accretion on
preferred securities......................... 1,957 2,748 5,821 2,884
Dividends and accretion on preferred securities
(Note 2)....................................... (2,007) (2,007) (6,021) (2,945)
------- ------- ------ ------
Net loss applicable to common member........... $ (50) $ (741) $ (200) $ (61)
======= ======= ====== ======
See accompanying notes to condensed financial statements.
3
CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS PERIOD FROM APRIL 21,
ENDED 1998 (INCEPTION) TO
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to common member.................... $ (200) $ (61)
Adjustments to reconcile net loss applicable to common
member to net cash used for operating activities:
Noncash interest income............................. (621) (398)
Accretion on preferred securities................... 247 122
Changes in:
Dividend receivable from Parent................... (5,200) (2,457)
Accrued dividends payable to preferred security
holders......................................... (1) 642
------- ---------
Net cash used for operating activities.......... (5,775) (2,152)
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of restricted cash........... 5,775 2,182
Purchase of CellNet Preferred Stock................. -- (93,500)
Increase in restricted cash......................... -- (21,433)
------- ---------
Net cash provided by (used for) investing
activities.................................... 5,775 (112,751)
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred securities, net
of issuance costs................................. -- 105,940
Proceeds from sale of common liability security..... -- 10
Additional paid-in capital contributed by Parent.... -- 8,341
Payable to Parent................................... -- 612
------- ---------
Net cash provided by financing activities....... -- 114,903
------- ---------
NET CHANGE IN CASH........................................ -- --
CASH, beginning of period................................. -- --
------- ---------
CASH, end of period....................................... $ -- $ --
======= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................. $ -- $ --
======= =========
Cash paid for income taxes.............................. $ -- $ --
======= =========
See accompanying notes to condensed financial statements.
4
CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND THE
PERIOD FROM APRIL 21, 1998 (INCEPTION) TO SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
CellNet Funding, LLC ("Funding") is a special purpose limited liability
company formed under the laws of the State of Delaware on April 21, 1998 as a
wholly-owned subsidiary of CellNet Data Systems, Inc. ("CellNet"). Funding
exists for the exclusive purpose of selling its preferred securities (see
Note 2) and investing the proceeds of the sale thereof in restricted cash and
CellNet's preferred stock. CellNet is the sole member of Funding that holds
common securities. The business and affairs of Funding are conducted by CellNet
and CellNet pays all of Funding's administrative expenses, which are not
significant. In the opinion of management, these unaudited condensed financial
statements include all adjustments, consisting of normal recurring adjustments
and accruals considered necessary for a fair presentation of Funding's financial
position as of September 30, 1999 and the results of operations and cash flows
for the three and nine months ended September 30, 1999, and the three months
ended September 30, 1998 and period from April 21, 1998 (inception) to
September 30, 1998. This unaudited interim information should be read in
conjunction with the audited financial statements of Funding for the period from
April 21, 1998 (inception) through December 31, 1998 and the notes thereto, and
the audited financial statements of CellNet for the year ended December 31, 1998
and the notes thereto.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Funding's ability to meet its
obligations, including payment of dividends and distributions on and redemption
of its 7% Exchangeable Preferred Securities Mandatorily Redeemable 2010 (the
"Preferred Securities"), is dependent on restricted cash of approximately
$12,830,000 and interest thereon designated for the payment of cash dividends on
the Preferred Securities through June 1, 2001, the receipt of dividends on its
CellNet Preferred Stock in the form of cash or shares of CellNet common stock,
the receipt of the mandatory redemption payment on its CellNet Preferred Stock
on June 1, 2010, the limited guarantee of the Preferred Securities provided by
CellNet and the payment by CellNet of Funding's administrative expenses (see
Note 2). Funding's ability to continue as a going concern is largely dependent
upon CellNet's ability to continue as a going concern. As shown in the financial
statements of CellNet, during the nine months ended September 30, 1999, CellNet
used cash in operating activities of $52,946,000; additionally, CellNet used
$72,332,000 of cash for the construction of networks for the nine months ended
September 30, 1999. As of September 30, 1999, CellNet had cash, cash equivalents
and short-term investments of $18,322,000 and its accumulated deficit was
$549,091,000. These factors among others may indicate that CellNet and Funding
will be unable to continue as going concerns for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should Funding be unable
to continue as a going concern. Management of CellNet is actively engaged in
several steps designed to enable CellNet to meet the capital requirements of its
business, which include continuing its efforts to obtain additional short- and
long-term financing, such as that described in Note 5 to CellNet's financial
statements, to fund growth and operations; restructuring CellNet's balance
sheet, which may adversely affect the equity stake of its common shares and the
Preferred Securities of Funding; streamlining costs by consolidating its former
Commercial Data Services group with its other operating units and redeploying
those personnel appropriately; removing certain assets, such as wide area
network
5
CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND THE
PERIOD FROM APRIL 21, 1998 (INCEPTION) TO SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION (CONTINUED)
components, of its California broad deployment network and redeploying such
assets where they can be better utilized in current operations; and implementing
efforts to reduce its corporate expenditures.
NET LOSS PER SHARE--Funding's one issued and outstanding common limited
liability company security is owned directly by CellNet. Accordingly, Funding
does not present net loss per share in its financial statements as such
disclosure is not considered to be meaningful.
COMPREHENSIVE LOSS--Comprehensive loss, the change in net assets during the
period from nonowner sources, and the reported net loss were the same for all
periods presented.
SEGMENT INFORMATION--Funding operates in one reportable segment; issuing its
preferred securities, investing the proceeds of the sale thereof in CellNet's
preferred stock and restricted cash.
RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS")
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which
defines derivatives, requires that all derivatives be carried at fair value, and
provides for hedge accounting when certain conditions are met. SFAS No. 133 is
effective for quarters of fiscal years beginning after June 15, 2000. Funding
has not fully assessed the implications of this new standard.
2. MANDATORILY REDEEMABLE PREFERRED SECURITIES
In May 1998, Funding completed the sale of 7% Exchangeable Preferred
Securities Mandatorily Redeemable 2010 (the "Preferred Securities") for gross
proceeds of $110,000,000. Net proceeds from the offering, after offering costs,
were approximately $105,989,000. The recorded amount of the Preferred Securities
will fully accrete to the face value of $110,000,000 on June 1, 2010. The
restricted cash at September 30, 1999 of approximately $12,830,000 includes the
proceeds of the offering which are designated for the payment of cash dividends
on the Preferred Securities through June 1, 2001. Funding invested the
restricted cash in U.S. Treasury strips (the "Treasury Strips") which were
placed in escrow upon the closing of the offering of the Preferred Securities.
The Treasury Strips have been pledged to The Bank of New York as escrow agent
(the "Escrow Agent") pursuant to an escrow agreement for the benefit of the
holders of the Preferred Securities. The Escrow Agent is required under the
Escrow Agreement to release from escrow amounts sufficient to pay quarterly
dividends on the Preferred Securities through June 1, 2001.
Dividend payments of $1,925,000 and $5,775,000 were made in the three and
nine months ended September 30, 1999, respectively, from the proceeds of the
Treasury Strips. Dividend payments of $2,182,000 were made in the three months
ended September 30, 1998 and for the period from April 21, 1998 (inception) to
September 30, 1998.
The Preferred Securities consist of 4,400,000 exchangeable preferred
securities of Funding that bear a cumulative dividend at the rate of 7% per
annum. The dividend is paid quarterly in arrears each March 1, June 1,
September 1 and December 1. The dividend is payable in cash through June 1, 2001
and thereafter, by cash or shares of CellNet common stock, at the option of
Funding. The Preferred Securities are exchangeable at any time prior to June 1,
2010, at the option of the holders, into CellNet common stock, at
6
CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND THE
PERIOD FROM APRIL 21, 1998 (INCEPTION) TO SEPTEMBER 30, 1998
2. MANDATORILY REDEEMABLE PREFERRED SECURITIES (CONTINUED)
a rate of 1.8328 shares of CellNet common stock per Preferred Security, or
$13.64 per share, subject to adjustment. On or prior to June 1, 2001, the
Preferred Securities must be automatically exchanged for CellNet common stock at
an exchange price of $13.64 per share in the event the Current Market Value
(which is a formula as defined in the Written Action of the Manager of Funding,
(the "Written Action")) of CellNet's common stock equals or exceeds the
following percentage of the exchange price, for at least 20 days of any 30-day
trading period during the 12 month period ending on June 1 of the indicated
year; 170% on and prior to June 1, 1999; 160% from June 2, 1999 through June 1,
2000; and 150% from June 2, 2000 through June 1, 2001. The Preferred Securities
are subjected to mandatory redemption on June 1, 2010 at a redemption price of
100% of the liquidation preference of the Preferred Securities, plus accrued and
unpaid dividends, if any. Funding may redeem, at its option, the Preferred
Securities, in whole or in part, at any time on or after June 1, 2001 at certain
redemption prices equal to a percentage of the liquidation preference (set forth
in the Written Action) which declines each year until maturity of the Preferred
Securities, together with accrued and unpaid dividends, if any.
Pursuant to and to the extent set forth in the guarantee of the Preferred
Securities (the "Guarantee") by CellNet for the benefit of the holders of
Preferred Securities, CellNet has agreed to pay in full to the holders of the
Preferred Securities (except to the extent paid by Funding), as and when due,
regardless of any defense, right of set off or counterclaim which Funding may
have or assert, the following payments (the "Guarantee Payments"), without
duplication: (i) any accrued and unpaid distributions that are required to be
paid on the Preferred Securities, to the extent Funding has sufficient funds
legally available therefor, (ii) the redemption price, with respect to any
Preferred Securities called for redemption by Funding, to the extent Funding has
sufficient funds legally available therefor, and (iii) upon a voluntary or
involuntary dissolution, winding-up or termination of Funding, the lesser of
(a) the aggregate of the liquidation preference and all accrued and unpaid
dividends on the Preferred Securities to the date of payment to the extent
Funding has sufficient funds legally available therefor, and (b) the amount of
assets of Funding remaining for distribution to holders of Preferred Securities
upon the liquidation of Funding. The Guarantee may also be subject to
contractual restrictions under agreements governing future indebtedness of
CellNet.
On May 19, 1998, after the investment in Treasury Strips, Funding applied
the remaining net proceeds from the offering of the Preferred Securities
together with other capital contributed by CellNet to purchase $93,500,000 of
CellNet's Preferred Stock (the "CellNet Preferred Stock") which pays dividends
each March 1, June 1, September 1, and December 1 in additional shares of
CellNet Preferred Stock through September 1, 2001. Subsequent to June 1, 2001,
dividends are payable in cash or shares of common stock, at the option of
CellNet. The CellNet Preferred Stock is exchangeable at the option of Funding,
at any time prior to June 1, 2010 into shares of CellNet's common stock at an
exchange rate based on the exchange rate of the Preferred Securities. The
CellNet Preferred Stock is subject to mandatory redemption on June 1, 2010.
During the three and nine months ended September 30, 1999, Funding earned
dividends on CellNet Preferred Stock of $1,782,000 and $5,199,000, respectively.
During both the three months ended September 30, 1998 and the period from
April 21, 1998 (inception) to September 30, 1998, Funding earned dividends on
CellNet Preferred Stock of $2,457,000, respectively.
7
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CELLNET DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 14,539 $ 35,505
Short-term investments.................................... 3,783 50,728
Accounts receivable--trade................................ 9,517 5,022
Accounts receivable--other................................ 4,130 2,442
Prepaid expenses and other................................ 2,747 1,358
--------- ---------
Total current assets...................................... 34,716 95,055
Networks--net............................................... 232,444 176,090
Network components and inventory............................ 26,093 32,616
Restricted cash............................................. 12,830 17,984
Property--net............................................... 13,079 16,499
Debt issuance costs and other--net.......................... 5,138 5,818
--------- ---------
Total assets.............................................. $ 324,300 $ 344,062
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 19,288 $ 11,703
Accrued compensation and related benefits................. 7,393 4,970
Accrued liabilities....................................... 7,305 4,168
Current portion of capital lease obligations.............. 473 691
--------- ---------
Total current liabilities............................... 34,459 21,532
Senior notes................................................ 358,292 316,709
Revolving credit agreements................................. 82,400 31,350
Deferred revenue............................................ 5,094 5,339
Capital lease obligations................................... 155 437
Commitments and contingencies (Note 4)...................... -- --
Mandatorily redeemable preferred securities of subsidiary
holding solely Company preferred stock.................... 106,438 106,191
Stockholders' deficit:
Preferred stock--$.001 par value; 15,000,000 shares
authorized; no shares outstanding....................... -- --
Common stock--$.001 par value; 300,000,000 shares
authorized; shares outstanding, 1999: 43,172,021; 1998:
42,494,406.............................................. 212,536 211,672
Notes receivable from sale of common stock.................. (528) (640)
Warrants.................................................... 74,545 74,545
Accumulated deficit......................................... (549,091) (423,085)
Net unrealized gain on short-term investments............... 0 12
--------- ---------
Total stockholders' deficit............................... 262,538 (137,496)
--------- ---------
Total liabilities and stockholders' deficit................. $ 324,300 $ 344,062
========= =========
See accompanying notes to condensed consolidated financial statements.
8
CELLNET DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1999 1998 1999 1998
-------- -------- --------- ---------
Revenues:
Network service revenues......................... $ 6,151 $ 2,896 $ 15,747 $ 7,346
Product revenues................................. 229 144 749 552
License fees and other revenues.................. 224 457 830 728
-------- -------- --------- ---------
Total revenues................................. 6,604 3,497 17,326 8,626
-------- -------- --------- ---------
Costs and expenses:
Cost of network operations....................... 11,137 8,729 26,373 20,165
Cost of product and other revenues............... 104 500 792 958
Research and development......................... 6,544 7,115 20,033 22,613
Marketing and sales.............................. 3,314 2,870 9,186 8,768
General and administrative....................... 5,203 3,752 14,681 11,890
Depreciation and amortization.................... 8,057 4,784 21,690 13,431
-------- -------- --------- ---------
Total costs and expenses....................... 34,359 27,750 92,755 77,825
-------- -------- --------- ---------
Loss from operations............................... (27,755) (24,253) (75,429) (69,199)
Equity in net loss of unconsolidated affiliate..... (1,555) (815) (3,689) (1,796)
Other income (expense):
Interest income.................................. 535 2,175 2,359 6,114
Interest expense, net of capitalized interest.... (15,511) (10,897) (43,097) (32,571)
Other--net....................................... (82) 17 (123) (159)
-------- -------- --------- ---------
Total other income (expense), net.............. (15,058) (8,705) (40,861) (26,616)
-------- -------- --------- ---------
Loss before provision for income taxes and
dividends and accretion on preferred
securities....................................... (44,368) (33,773) (119,979) (97,611)
Provision for income taxes......................... -- -- 6 --
-------- -------- --------- ---------
Loss before dividends and accretion on preferred
securities....................................... (44,368) (33,773) (119,985) (97,611)
Dividends and accretion on preferred securities of
subsidiary....................................... (2,007) (2,007) (6,021) (2,945)
-------- -------- --------- ---------
Net loss applicable to common stockholders......... $(46,375) $(35,780) $(126,006) $(100,556)
======== ======== ========= =========
Basic and diluted net loss per share............... $ (1.08) $ (0.86) $ (2.95) $ (2.43)
======== ======== ========= =========
Shares used in computing net loss per share........ 43,037 41,764 42,786 41,460
======== ======== ========= =========
See accompanying notes to condensed consolidated financial statements.
9
CELLNET DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to common stockholders................ $(126,006) $(100,556)
Adjustments to reconcile net loss applicable to common
stockholders to net cash used for operating activities:
Depreciation and amortization........................... 21,690 13,431
Accretion on senior notes, net of capitalized
interest............................................... 39,570 32,190
Accretion on preferred securities....................... 247 122
Amortization of debt issuance costs..................... 491 304
Equity in net loss of unconsolidated affiliate.......... 3,690 1,796
Other................................................... 2,044 (122)
Changes in:
Accounts receivable--trade............................ (4,495) (1,774)
Accounts receivable--other............................ (1,688) 1,855
Prepaid expenses and other............................ (1,389) 373
Accounts payable...................................... 7,585 5,410
Accrued compensation and related benefits............. 2,423 1,802
Accrued liabilities and deferred revenues............. 2,892 2,162
--------- ---------
Net cash used for operating activities.............. (52,946) (43,007)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Networks.................................................. (72,332) (66,714)
Network components and inventory.......................... 6,523 (9,163)
Purchase of property...................................... (2,904) (5,946)
Investment in unconsolidated affiliates................... (3,690) (3,327)
Purchase of short-term investments........................ (15,380) (95,400)
Proceeds from sales and maturities of short-term
investments............................................. 62,313 88,807
Increase in restricted cash............................... -- (21,433)
Proceeds from maturity of restricted cash................. 5,775 2,182
Other assets.............................................. 189 (307)
--------- ---------
Net cash used for investing activities.............. (19,506) (111,301)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit agreements................. 51,050 --
Proceeds from issuance of preferred securities............ -- 105,940
Repayment of capital lease obligations.................... (540) (521)
Proceeds from sale of common stock, net of repurchases.... 864 846
Collection of notes receivable from sale of common
stock................................................... 112 28
--------- ---------
Net cash provided by financing activities........... 51,486 106,293
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (20,966) (48,015)
--------- ---------
CASH AND CASH EQUIVALENTS, Beginning of period.............. 35,505 111,112
--------- ---------
CASH AND CASH EQUIVALENTS, End of period.................... $ 14,539 $ 63,097
========= =========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property under capital leases.............. $ 40 $ 834
Capitalization of interest into networks.................. $ 2,013 $ 3,086
Change in unrealized gain (loss) on short-term
investments............................................. $ (12) $ 38
Conversion of warrants into common stock.................. $ -- $ 1
Repurchase of unvested common stock and cancellation of
related notes receivable................................ $ -- $ 8
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 2,523 $ 78
Cash paid for income taxes................................ $ 6 $ --
See accompanying notes to condensed consolidated financial statements.
10
CELLNET DATA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
In the opinion of management, these unaudited condensed consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments and accruals the Company considers necessary for a fair
presentation of the Company's financial position as of September 30, 1999 and
the results of operations and cash flows for the three and nine months ended
September 30, 1999 and 1998. This unaudited interim information should be read
in conjunction with the audited consolidated financial statements of CellNet
Data Systems, Inc. and the notes thereto for the year ended December 31, 1998.
Operating results for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the nine months ended September 30, 1999, the Company used
cash in operating activities of $52,946,000; additionally, the Company used
$72,332,000 of cash for the construction of networks for the nine months ended
September 30, 1999. As of September 30, 1999, the Company had cash, cash
equivalents and short-term investments of $18,322,000 and its accumulated
deficit was $549,091,000. These factors among others may indicate that the
Company will be unable to continue as a going concern for a reasonable period of
time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to comply with the terms and covenants of its
financing agreements, to obtain additional financing or refinancing as may be
required, and ultimately to attain profitability. Management is actively engaged
in several steps designed to enable the Company to meet the capital requirements
of its business, which include: continuing the Company's efforts to obtain
additional short- and long-term financing, such as that described in Note 5 of
the condensed consolidated financial statements, to fund growth and operations;
restructuring of the Company's balance sheet, which may adversely affect the
equity stake of the Company's common shares and the 7% Exchangeable Preferred
Securities of CellNet Funding LLC; streamlining costs by consolidating its
former Commercial Data Services group with other operating units and redeploying
those personnel appropriately; removing certain assets, such as wide area
network components, of its California broad deployment network and redeploying
such assets where they can be better utilized in other current operations; and
implementing efforts to reduce corporate expenditures.
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME, which requires that an
enterprise report, by major components and as a single total, the change in net
assets during the period from nonowner sources. Adoption of SFAS No. 130 did not
impact the Company's consolidated financial position, results of operations or
cash flows. The comprehensive net loss was $46,374,000 and $35,748,000 for the
three months ended September 30, 1999 and 1998, respectively. The comprehensive
net loss was $126,018,000 and $100,518,000 for the nine months ended
September 30, 1999 and 1998, respectively. The comprehensive net loss differs
from the net loss applicable to common stockholders by the net unrealized gain
or loss on short-term investments.
In 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
The Company operates in one reportable segment: the design, development and
operation of its CellNet
11
CELLNET DATA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION (CONTINUED)
wireless data communication system to provide automated network meter reading
and other services to the utility industry. The Company operates exclusively in
the United States.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which defines
derivatives, requires that all derivatives be carried at fair value, and
provides for hedging accounting when certain conditions are met. SFAS 133 is
effective for quarters of fiscal years beginning after June 15, 2000. The
Company has not fully assessed the implications of this new standard.
2. NET LOSS PER SHARE
Basic EPS for the periods presented is computed by dividing net loss by the
weighted average of common shares outstanding (excluding shares subject to
repurchase). Diluted EPS for all periods presented was computed the same as
basic EPS since all other potential dilutive securities (common stock subject to
repurchase, common stock options and warrants and mandatorily redeemable
preferred securities) are excluded as they are antidilutive.
3. CUSTOMER LINE OF CREDIT
In September 1999, one of CellNet's wholly-owned subsidiaries amended its
$40,000,000 term loan agreement (the "Term Loan") with one of its customers, to
provide additional borrowings of up to $31,500,000, bringing the total borrowing
capacity of the Term Loan to $71,500,000. As in the original Term Loan,
borrowings bear interest at 6.5% per annum and are secured by the subsidiary's
assets, contracts and leases. The Term Loan provides for monthly drawdowns.
Interest on the drawdowns is payable quarterly. The drawdowns are payable on
June 30, 2004. At September 30, 1999, the wholly-owned subsidiary had
outstanding drawdowns of $25,800,000 which are included in revolving credit
agreements in the condensed consolidated balance sheet.
4. COMMITMENTS AND CONTINGENCIES
In October 1996, Itron, one of CellNet's competitors, filed a complaint
against CellNet in the Federal District Court in Minnesota, alleging that
CellNet infringed an Itron patent which was issued in September 1996. Itron
sought a judgement for damages, attorneys' fees and injunctive relief. On
January 28, 1999, the Court ruled in favor of CellNet that, as a matter of law,
CellNet's system did not infringe the Itron patent. The Court also ruled in
favor of Itron that the Itron patent was valid against certain prior art. Itron
is appealing the Court's ruling. Consequently, CellNet is cross appealing the
validity issue. CellNet believes that the ultimate outcome of the lawsuit is not
expected to have a material adverse effect on CellNet's operating results,
financial condition and cash flows.
In April 1997, CellNet filed a patent infringement suit against Itron in the
Federal District Court for the Northern District of California, claiming that
Itron's use of its electric meter reading Encoder Receiver Transmitter
(ERT-Registered Trademark-) device infringes CellNet's U.S. Patent
No. 4,783,623. CellNet sought an injunction, damages and other relief. On
November 2, 1998, the Court ruled that Itron's patent does not infringe upon
CellNet's Patent No. 4,783,623. CellNet filed an appeal of the Court's ruling.
12
CELLNET DATA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
5. SUBSEQUENT EVENT
On November 9, 1999 certain holders of the Company's 1997 Notes purchased
$10,000,000 of the Company's 15% Senior Secured Notes due November 30, 1999
("1999 Notes") in order to enable the Company to meet its short-term cash
requirements for the month of November. The 1999 Notes are secured by
substantially all of the assets of the Company, including the stock in
substantially all of its subsidiaries. All of the Company's subsidiaries other
than those holding the Company's interests in the existing projects for
AmerenUE, Kansas City Power & Light, and Puget Sound Energy, Inc. and those
holding the Company's interests in the international joint venture with Bechtel
Enterprises, Inc. have guaranteed the Company's obligations under the 1999
Notes. The purchasers of the 1999 Notes have no obligation to refinance the 1999
Notes when they become due. The purchasers of the 1999 Notes also have no
obligation to purchase additional notes or to otherwise loan or make funds
available to the Company in order to allow the Company to meet its cash
requirements for December 1999 and beyond (including the cash required to repay
principal and interest on the 1999 Notes). The purchasers of the 1999 Notes may
refinance the 1999 Notes, purchase additional notes or otherwise loan or make
available additional funds to the Company subject to mutual agreement between
the parties to do so, but no such agreement has yet been concluded or should be
assumed.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS SECTION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, INFORMATION WITH REGARD TO
FUNDING'S FINANCING ACTIVITIES AND THE PAYMENT OF DIVIDENDS ON ITS SECURITIES.
FUNDING'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS SET FORTH IN "RISK
FACTORS" AND ELSEWHERE IN THIS REPORT. AS A WHOLLY-OWNED SUBSIDIARY OF CELLNET
WITH NO INDEPENDENT OPERATIONS, FUNDING'S SUCCESS IS ENTIRELY DEPENDENT ON THE
SUCCESS OF ITS PARENT, AND ACCORDINGLY, REFERENCE MUST ALSO BE MADE TO THE RISK
FACTORS AND OTHER CAUTIONARY STATEMENTS SET FORTH IN CELLNET'S ANNUAL REPORT ON
FORM 10-K, QUARTERLY REPORTS ON FORM 10-Q AND OTHER FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION.
OVERVIEW
Funding is a special purpose limited liability company formed under the laws
of the State of Delaware on April 21, 1998 as a wholly-owned subsidiary of
CellNet. Funding has no independent operations and exists for the exclusive
purposes of selling the Redeemable Preferred Securities, investing the proceeds
of the sale thereof and engaging in other incidental activities. During
May 1998, Funding completed the sale of the Redeemable Preferred Securities for
gross proceeds of $110.0 million. Net proceeds from the offering, after offering
costs, were approximately $106.0 million.
The Redeemable Preferred Securities consist of 4,400,000 exchangeable
preferred securities of Funding that bear a cumulative dividend at the rate of
7% per annum. The dividend is paid quarterly in arrears each March 1, June 1,
September 1 and December 1, and commenced September 1, 1998. The dividend is
payable in cash through June 1, 2001 and thereafter, by cash or shares of
CellNet Common Stock, at the option of Funding. The Redeemable Preferred
Securities are exchangeable at any time prior to June 1, 2010, at the option of
the holders, into CellNet Common Stock, at a rate of 1.8328 shares of Common
Stock per Redeemable Preferred Security, or $13.64 per share, subject to
adjustment. On or prior to June 1, 2001, the Redeemable Preferred Securities
must be automatically exchanged for CellNet Common Stock at an exchange price of
$13.64 per share in the event the Current Market Value (which is a formula as
defined in the Written Action of the Manager of Funding, the "Written Action")
of the CellNet Common Stock equals or exceeds the following percentage of the
exchange price, for at least 20 days of any 30-day trading period during the
12 month period ending on June 1 of the indicated year: 170% on or prior to
June 1, 1999; 160% from June 2, 1999 through June 1, 2000; and 150% from
June 2, 2000 through June 1, 2001. The Redeemable Preferred Securities are
subject to mandatory redemption on June 1, 2010 at a redemption price of 100% of
the liquidation preference of the Redeemable Preferred Securities, plus accrued
and unpaid dividends, if any. Funding may redeem, at its option, the Redeemable
Preferred Securities, in whole or in part, at any time on or after June 1, 2001
at certain redemption prices equal to a percentage of the liquidation preference
(set forth in the Written Action) which declines each year until maturity of the
Redeemable Preferred Securities, together with accrued and unpaid dividends, if
any.
Pursuant to and to the extent set forth in the guarantee of the Redeemable
Preferred Securities (the "Guarantee") by CellNet for the benefit of the holders
of the Redeemable Preferred Securities, CellNet has agreed to pay in full to the
holders of the Redeemable Preferred Securities (except to the extent paid by
Funding), as and when due, regardless of any defense, right of set off or
counterclaim which Funding may have or assert, the following payments, without
duplication: (i) any accrued and unpaid distributions that are required to be
paid on the Redeemable Preferred Securities, to the extent Funding has
sufficient funds legally available therefor, (ii) the redemption price, with
respect to any Redeemable Preferred Securities called for redemption by Funding,
to the extent Funding has sufficient funds legally available therefor, and
(iii) upon a voluntary or involuntary dissolution, winding-up or termination of
Funding, the lesser of (a) the aggregate of the liquidation preference and all
accrued and unpaid dividends on the Redeemable Preferred Securities to the date
of payment to the extent Funding has sufficient funds legally available
therefor, and (b) the amount of assets of Funding remaining for distribution to
holders of the
14
Redeemable Preferred Securities upon the liquidation of Funding. The Guarantee
may also be subject to contractual restrictions under agreements governing
future indebtedness of CellNet.
RESULTS OF OPERATIONS
Funding is a wholly-owned subsidiary of CellNet, has no independent
operations and exists for the exclusive purposes of selling the Preferred
Securities, investing the proceeds from the sale thereof, and engaging in other
incidental activities. The restricted cash at September 30, 1999 of
$12.8 million includes a portion of the proceeds of the offering of the
Preferred Securities which are designated for the payment of cash dividends
through June 1, 2001. Funding invested the restricted cash in Treasury Strips
which were placed in escrow upon the closing of the offering of the Preferred
Securities. For the three months ended September 30, 1999 and 1998, Funding
earned interest on the amounts invested in Treasury Strips of $175,000 and
$291,000, respectively. For the nine months ended September 30, 1999 and the
period from April 21, 1998 (inception) through September 30, 1998, Funding
earned interest of $ 622,000 and $427,000, respectively, on the amount invested
in Treasury Strips. For the three months ended September 30, 1999 and 1998,
Funding accrued dividend income on CellNet Preferred Stock of $1.8 million and
$2.5 million, respectively, (which will be paid in additional shares of CellNet
Preferred Stock). For the nine months ended September 30, 1999 and the period
from April 21, 1998 (inception) through September 30, 1998, Funding accrued
dividend income on CellNet Preferred Stock of $5.2 million and $2.5 million,
respectively.
Funding incurred dividends and accretion on the Preferred Securities of
$2.0 million in both the three months ended September 30, 1999 and 1998, for an
aggregate net income (loss) applicable to CellNet of $(50,000) and $741,000,
respectively. For the nine months ended September 30, 1999 and the period from
April 21, 1998 (inception) through September 30, 1998, Funding incurred
dividends and accretion on Preferred Securities of $6.0 million and
$2.9 million, respectively, for an aggregate net loss applicable to CellNet of
$200,000 and $61,000, respectively.
Funding expects interest income to decrease each period through June 1, 2001
as restricted cash balances are used to pay cash dividends on the Preferred
Securities. Funding expects dividend income to be approximately $1.7 million per
quarter, absent the conversion or redemption of the CellNet Preferred Stock.
Funding expects dividend expense will be approximately $1.9 million per quarter,
absent the conversion or redemption of the Preferred Securities.
LIQUIDITY AND CAPITAL RESOURCES
During May 1998, Funding completed the sale of the Preferred Securities for
gross proceeds of $110.0 million. Net proceeds from the offering, after offering
costs, were approximately $106.0 million. The amount recorded as equity for the
Preferred Securities will fully accrete to the face value of $110.0 million on
June 1, 2010.
The restricted cash at September 30, 1999 of approximately $12.8 million
includes the proceeds of the offering which are designated for the payment of
cash dividends on the Preferred Securities through June 1, 2001. Funding
invested the restricted cash in Treasury Strips which were placed in escrow upon
the closing of the offering of the Preferred Securities. On May 19, 1998,
Funding purchased $93.5 million of CellNet Preferred Stock (85% of the gross
proceeds from the offering of the Preferred Securities) with the remaining
proceeds of the offering plus capital contributed by CellNet of $8.3 million.
The CellNet Preferred Stock pays dividends each March 1, June 1, September 1 and
December 1 in additional shares of CellNet Preferred Stock through June 1, 2001.
Subsequent to June 1, 2001, dividends are payable in cash or shares of CellNet
Common Stock, at the option of CellNet. The CellNet Preferred Stock is
exchangeable, at the option of Funding, at any time prior to June 1, 2010 into
shares of CellNet Common Stock at an exchange rate based on the exchange rate of
the Preferred Securities. The CellNet Preferred Stock is subject to mandatory
redemption on June 1, 2010.
15
The Preferred Securities bear a cumulative dividend at the rate of 7% per
annum which must be paid quarterly in arrears each March 1, June 1 September 1
and December 1, which commenced September 1, 1998. The dividend is payable in
cash through June 1, 2001 and thereafter, by cash or shares of CellNet Common
Stock, at the option of Funding. The Treasury Strips have been pledged to The
Bank of New York as escrow agent (the "Escrow Agent") pursuant to an escrow
agreement for the benefit of the holders of the Preferred Securities. The Escrow
Agent is required under the Escrow Agreement to release from escrow amounts
sufficient to pay quarterly dividends on the Preferred Securities through
June 1, 2001. Funding paid dividends of approximately $1.9 million and
$5.8 million during the three and nine months ended September 30, 1999.
Cash used for operating activities was approximately $5.8 million for the
nine months ended September 30, 1999 and consists primarily of dividends paid on
the Preferred Securities offset by interest income receivable on Treasury
Strips.
Cash provided by investing activities was approximately $5.8 million for the
nine months ended September 30, 1999 and consists of proceeds received on the
maturity of three Treasury Strips. The restricted cash balance will decrease in
future periods as preferred dividends are paid.
There were no financing activities in the nine months ended September 30,
1999. Funding expects cash provided from financing activities will not be
significant, as future periods are not anticipated to include proceeds from
securities offerings.
CASH COMMITMENTS
The Preferred Securities require payments of dividends to be made in cash
through June 1, 2001. Funding has cash dividend obligations on the Preferred
Securities of approximately $7.7 million in each of 1999 and 2000, and
$3.9 million in 2001.
YEAR 2000 COMPLIANCE
As a wholly-owned subsidiary of CellNet, Funding's Year 2000 compliance plan
is dependent on CellNet's Year 2000 compliance plans for its consolidated
operations. Because Funding has no independent operations, Funding has not
addressed the state of the Year 2000 readiness, compliance costs, risks or
contingency plans of Funding.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
FUNDING IS A WHOLLY-OWNED FINANCE SUBSIDIARY OF CELLNET, HAS NO INDEPENDENT
OPERATIONS AND EXISTS FOR THE PURPOSES OF ISSUING PREFERRED SECURITIES AND
INVESTING THE PROCEEDS FROM THE SALE THEREOF AND ENGAGING IN OTHER ACTIVITIES
NECESSARY OR INCIDENTAL THERETO. THE SUCCESS OF FUNDING IS COMPLETELY DEPENDENT
UPON THE SUCCESS OF CELLNET, AND ACCORDINGLY, REFERENCE MUST BE MADE TO THE RISK
FACTORS AND OTHER CAUTIONARY STATEMENTS SET FORTH IN CELLNET'S ANNUAL REPORT ON
FORM 10-K, QUARTERLY REPORTS ON FORM 10-Q AND OTHER FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION.
NO OPERATIONS OF FUNDING
Funding, the issuer of the Preferred Securities, is a special purpose
subsidiary of CellNet which is a Delaware limited liability company with no
operations or assets other than the CellNet Preferred Stock and Treasury Strips
which were purchased with the proceeds of the offering of the Preferred
Securities. Funding will have no other funds to pay cash dividends. In order to
pay subsequent dividends, Funding will be dependent on CellNet (i) to distribute
cash dividends in respect of the CellNet Preferred Stock (which distribution is
restricted by the terms of the indenture governing the 1997 Notes (the
"Indenture")), (ii) provide to Funding funds or (iii) issue to Funding common
stock (which is required by the terms of the
16
CellNet Preferred Stock). Funding's assets will consist almost entirely of its
interest in the CellNet Preferred Stock and the Treasury Strips.
BECAUSE WE ARE DEPENDENT ON CELLNET'S SUCCESS, ANY FINANCIAL DIFFICULTIES
EXPERIENCED BY CELLNET COULD MATERIALLY ADVERSELY EFFECT THE PREFERRED
SECURITIES
Because our success is completely dependent on the success of CellNet, any
financial difficulties experienced by CellNet will adversely affect the value of
the Preferred Securities. In CellNet's quarterly report on Form 10-Q for the
quarter ended September 30, 1999, CellNet reported that it had been unsuccessful
in securing additional capital necessary to fund the continued operation and
growth of its business. CellNet also reported that it requires substantial
additional funds to maintain current operations, to develop, commercially,
deploy and expand its network, and to fund operating losses. CellNet reported
that if it is not able to raise sufficient funds, its business will suffer and
could fail. In the event that financial difficulties at CellNet continue or
worsen, the value of the Preferred Securities could decline.
NO PRACTICAL BENEFIT TO HOLDERS FROM THE GUARANTEE
CellNet will guarantee the payment in full to the holders of the Preferred
Securities of (i) accrued and unpaid dividends on the Preferred Securities, if
and only to the extent Funding has funds sufficient and legally available
therefor to make such payment, (ii) the redemption price with respect to the
Preferred Securities redeemed, if and only to the extent Funding has funds
sufficient and legally available therefor to make such payment and (iii) upon a
voluntary termination or involuntary dissolution, winding-up or termination of
Funding (other than in connection with a redemption of all of the Preferred
Securities), the lesser of (a) the aggregate of the liquidation preference and
all accrued and unpaid dividends on the Preferred Securities to the date of
payment, to the extent Funding has funds sufficient and legally available
therefor to make such payment, and (b) the amount of assets of Funding remaining
available for distribution to holders of the Preferred Securities upon
liquidation of Funding. The Guarantee may also be subject to contractual
restrictions under agreements governing future indebtedness of CellNet.
Because the obligations supported by the Guarantee are limited by the amount
of the funds in Funding, if CellNet were to default on its obligation to pay
amounts payable on the CellNet Preferred Stock, Funding would lack available
funds for the payment of dividends or amounts payable on redemption of the
Preferred Securities or otherwise, and, in such event, holders of the Preferred
Securities would not be able to rely upon the Guarantee for payment of such
amounts. In addition, upon the initiation of any proceedings by or against
Funding under bankruptcy, insolvency or similar laws, or upon the occurrence of
certain other events, funds held by Funding may not be legally available for
distribution to the holders of the Preferred Securities and the holders would
then not be able to rely on the Guarantee for payment of such amounts.
Because the obligations supported by the Guarantee are limited to the amount
of the funds held by Funding that are legally available to make the payments
described above and because the Guarantee is subordinated to CellNet's existing
and future obligations not expressly subordinated to the Guarantee, the
Guarantee is of no practical benefit to holders of the Preferred Securities.
RANKING OF CELLNET PREFERRED STOCK; PRIOR PAYMENT OBLIGATIONS OF CELLNET;
UNCERTAINTY OF REDEMPTION
The CellNet Preferred Stock will be subordinated to all existing and future
indebtedness and other liabilities of CellNet, and will, with respect to
dividend distributions and distributions upon the liquidation, winding-up or
dissolution of CellNet, rank senior to all common stock and senior to or PARI
PASSU with all other capital stock of CellNet. There are no terms in the CellNet
Preferred Stock, the Preferred Securities or the Guarantee that limit CellNet's
ability to incur additional indebtedness or issue PARI PASSU preferred stock. As
of September 30, 1999, CellNet had approximately $441.3 million of indebtedness
outstanding and no preferred stock outstanding other than the CellNet Preferred
Stock issued to Funding. CellNet has
17
authorized the issuance of up to 15 million shares of preferred stock. The
Indenture permits CellNet to incur substantial additional indebtedness and issue
additional preferred stock. Any new indebtedness incurred by CellNet, any
securities issued to refinance existing indebtedness and any future issuances of
new series of CellNet preferred stock may prohibit or restrict the redemption of
the CellNet Preferred Stock for cash, thus effectively prohibiting or
restricting Funding's ability to redeem the Preferred Securities for cash.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
PARTNERSHIP STATUS
Funding's ability to pay dividends on Preferred Securities depends, in part,
on the classification and treatment of Funding as a partnership for federal
income tax purposes. No ruling from the Internal Revenue Service (the "IRS") as
to such classification or treatment has been or is expected to be requested.
Assuming Funding is classified as a partnership for federal income tax purposes,
Funding intends to issue each holder of Preferred Securities an IRS Form K-1 on
or about June 30 of each relevant year and will not issue a Form 1099.
If Funding were classified or treated as an association taxable as a
corporation for federal income tax purposes, Funding would pay tax on its income
at corporate rates (currently a maximum 35% federal rate), distributions would
generally be taxed again to the holders of Preferred Securities as corporate
distributions, and no income, gains, losses or deductions would flow through to
the holders of Preferred Securities. Because a tax would be imposed upon Funding
as an entity, the cash available for distribution to the holders of Preferred
Securities would be substantially reduced. Classification or treatment of
Funding as an association taxable as a corporation or otherwise as a taxable
entity would result in a material reduction in the anticipated cash flow and
after-tax return of the holders of Preferred Securities and thus would likely
result in a substantial reduction in the value of Preferred Securities.
All holders of Preferred Securities are advised to consult their own legal,
tax and investment advisors as to all legal, tax and investment matters,
including without limitation, federal, state, local and foreign tax consequences
of the purchase, ownership, exchange, redemption and disposition of the
Preferred Securities and the reporting of income or loss with respect to the
Preferred Securities.
FUNDING ALLOCATIONS
It is possible that a holder of Preferred Securities may receive allocations
of taxable income without matching cash distributions. Furthermore, a holder who
disposes of Preferred Securities between record dates for dividends may be
required pursuant to Funding's method of allocation to include its pro rata
share of Funding's income (and deductions) through the end of the applicable
fiscal period in which such disposition occurs in the holder's calculation of
taxable income (and to add such amount to (or subtract such amount from) the
adjusted tax basis in the holder's Preferred Securities) without receiving the
dividend for the quarter in which such disposition occurs. Furthermore, certain
allocation methods used by Funding may be challenged by the IRS, which may
result in greater tax liability to holders of Preferred Securities during their
period of ownership or upon disposition.
DISPOSITION OF PREFERRED SECURITIES
A holder that sells Preferred Securities will recognize gain or loss equal
to the difference between the amount realized and its adjusted tax basis in such
Preferred Securities. Thus, prior Funding distributions in excess of cumulative
net taxable income in respect of Preferred Securities which decreased a holder's
tax basis in such Preferred Securities will, in effect, become taxable income or
gain if the Preferred Securities are sold at a price greater than the holder's
tax basis in such Preferred Securities, even if the price is less than such
holder's original cost. To the extent the selling price is less than the
holder's adjusted tax basis, a
18
holder will recognize a capital loss. Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes.
LIMITED VOTING RIGHTS
Generally, holders of the Preferred Securities do not have any voting
rights. However, the vote of a majority of the Preferred Securities is required
to approve any amendment to the Operating Agreement governing Funding or any
proposed action by Funding that would (i) have a material adverse effect on the
powers, preferences or special rights of the holders of the Preferred Securities
or (ii) cause the dissolution, winding-up or termination of Funding. The
approval of the holders of a majority of the CellNet Preferred Stock is required
to approve any change to CellNet's charter or any proposed action by CellNet
that would (i) have a material adverse effect on the powers, preferences or
special rights of the holder of the CellNet Preferred Stock or (ii) cause the
dissolution, winding-up or termination of Funding. Funding is expected to be the
sole holder of the CellNet Preferred Stock. Funding has agreed not to grant such
approval without the consent of the holders of a majority of the Preferred
Securities then outstanding.
ANTI-TAKEOVER PROVISIONS
On November 24, 1998 (the "Rights Dividend Declaration Date"), the Board of
Directors of CellNet adopted a Stockholder Rights Plan (the "Rights Plan") and
declared a dividend of one Preferred Share Purchase Right (a "Right") for each
outstanding share of common stock. The dividend was paid to stockholders of
record on December 21, 1998 (the "Record Date"). In addition, one Right will be
issued with each share of common stock that becomes outstanding between the
Record Date and the earlier to occur of the Distribution Date (as defined below)
and the Expiration Date (as defined below). This includes common stock that is
issued upon conversion of securities convertible into common stock such as stock
options, warrants, and the Preferred Securities.
The Distribution Date will occur, if at all, on the earlier of (a) the close
of business on the tenth (10th) day after a person or group acquires beneficial
ownership of fifteen percent (15%) or more of CellNet's common stock (including
common stock issuable upon conversion or exchange of any convertible
securities), and (b) the close of business on the tenth (10th) business day
after a person or group announces a tender or exchange offer, the consummation
of which would result in ownership by a person or group of fifteen percent (15%)
or more of CellNet's common stock (including common stock issuable upon
conversion or exchange of any convertible securities).
The Rights may not be exercised prior to the Distribution Date. Following
the Distribution Date, each Right will entitle the holder to purchase for $50.00
(the "Exercise Price") one one-thousandth (1/1000) of a share of CellNet's
Series A Participating Preferred Stock, $0.001 par value per share subject to
certain adjustments in both price and number of shares.
If a person or group acquires beneficial ownership of fifteen percent (15%)
or more of CellNet's common stock (including common stock issuable upon
conversion or exchange of any convertible securities) (an "Acquiring Person"),
then each Right (other than Rights owned by an Acquiring Person or its
affiliates) will entitle the holder thereof to purchase, for the Exercise Price,
a number of shares of CellNet's common stock having a then current market value
of twice the Exercise Price.
If, after an Acquiring Person acquires beneficial ownership of fifteen
percent (15%) or more of CellNet's common stock (including common stock issuable
upon conversion or exchange of any convertible securities), (a) CellNet merges
into another entity, (b) an acquiring entity merges into CellNet, or
(c) CellNet sells more than fifty percent (50%) of its assets or earning power,
then each Right (other than Rights owned by an Acquiring Person or its
affiliates) will entitle the holder thereof to purchase, for the Exercise Price,
a number of shares of the common stock of the person or entity engaging in the
transaction having a then current market value of twice the Exercise Price.
19
At any time after an Acquiring Person acquires beneficial ownership of
fifteen percent (15%) or more of CellNet's common stock (including common stock
issuable upon conversion or exchange of any convertible securities) and prior to
the acquisition by the Acquiring Person of fifty percent (50%) of CellNet's
common stock (including common stock issuable upon conversion or exchange of any
convertible securities), the Board of Directors may exchange the Rights (other
than Rights owned by the Acquiring Person or its affiliates), in whole or in
part, for shares of CellNet's common stock at an exchange ratio of one
(1) share of common stock per Right (subject to certain adjustments).
The Rights are redeemable at CellNet's option (with the approval of the
Board of Directors) at any time prior to the close of business on the day (prior
to the Expiration Date) of a public announcement that an Acquiring Person has
acquired beneficial ownership of fifteen percent (15%) or more of CellNet's
common stock (including common stock issuable upon conversion or exchange of any
convertible securities). Upon exercise of CellNet's option to redeem the Rights,
holders will be entitled to receive a redemption payment of $0.001 per Right
(subject to certain adjustments) payable in cash or in shares of CellNet's
common stock.
The Rights expire (the "Expiration Date") on the earliest of
(a) November 24, 2008, (b) the consummation of any of the following
transactions: (i) CellNet merges into another entity, (ii) an acquiring entity
merges into CellNet, or (iii) CellNet sells more than fifty percent (50%) of its
assets or earning power, (c) the effective date of a redemption of the Rights
determined by the Board of Directors, and (d) the time at which the Board of
Directors orders an exchange of the Rights.
Under certain circumstances, Rights beneficially owned by an Acquiring
Person or an affiliate or associate of an Acquiring Person and any subsequent
holder of such Rights may become null and void. The Rights have no voting
rights. The Rights have the benefits of certain customary anti-dilution
provisions.
The foregoing is a summary of certain principal terms of the Rights Plan and
is qualified in its entirety by reference to the terms of the Rights Agreement
pursuant to which the Rights have been issued. A copy has been filed with the
Securities and Exchange Commission on Form 8-A dated December 9, 1998.
The Rights Plan was adopted to provide protection to CellNet's stockholders
in the event of an unsolicited attempt to acquire CellNet on terms that are not
in the stockholders' best interests. The Rights Plan does not prevent an
acquisition of CellNet, impact CellNet's ability to negotiate a transaction on
mutually agreeable terms, or limit CellNet's flexibility in responding to
offers. The Rights Plan is designed to prevent the use of coercive and/or
abusive takeover techniques and to encourage any potential acquiror to negotiate
directly with the Board of Directors for the benefit of all stockholders. The
Rights Plan is also designed to afford the Board of Directors adequate time
within which to consider any takeover proposal and, if appropriate, to explore
alternatives. In addition, the Rights Plan is intended to provide increased
assurance that a potential acquiror would pay an appropriate control premium in
connection with any acquisition of CellNet. Nevertheless, the Rights Plan could
be utilized, under certain circumstances, as a method of discouraging, delaying
or preventing a change of control of CellNet.
CellNet is authorized to issue additional shares of undesignated preferred
stock. The Board of Directors has the authority, without further action by the
stockholders, to issue such stock in one or more series, to fix the rights,
preferences, privileges and restrictions thereof. The issuance of such stock may
also have the effect of delaying, deferring or preventing a change in control of
CellNet, may discourage bids for CellNet's common stock at a premium over its
market price and may materially and adversely affect the market price of and the
voting and other rights of the holders of common stock. In addition, CellNet is,
and will continue to be, subject to the anti-takeover provisions of the Delaware
General Corporation Law, which could have the effect of delaying or preventing a
change of control of CellNet. Furthermore, upon a change of control, the holders
of CellNet's outstanding 1997 Notes are entitled, at their option, to be repaid
in cash. Such provisions may have the effect of delaying or preventing changes
in control or management of CellNet. All of these factors could materially and
adversely affect the price of the Preferred Securities.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Funding's restricted cash balances are invested in fixed income Treasury
Strips having staggered maturities matching dividend payment dates of the
Preferred Securities. Accordingly, changes in market interest rates have no
effect on Funding's operating results, financial condition and cash flows.
At September 30, 1999, Funding had $93.5 million of CellNet Preferred Stock,
which is exchangeable into shares of CellNet Common Stock, at an exchange rate
based on the exchange rate of the Preferred Securities. There exists no
established public trading market for CellNet Preferred Stock. The risk of
changes in fair market value of the underlying CellNet Common Stock, which is
listed and trades on the Nasdaq National Market, is eliminated by the adjustable
rate of exchange of shares of CellNet Preferred Stock. The CellNet Preferred
Stock pays dividends in cash or additional shares of CellNet Preferred Stock
sufficient to meet the dividend requirements on the Preferred Securities.
Although changes in the fair market value of CellNet Common Stock have no effect
on Funding's financial condition or results of operations, such changes may
influence Funding's decision to redeem the Preferred Securities or a Preferred
Security holder's decision to exchange those securities for CellNet Common
Stock.
The information below summarizes Funding's financial instruments exposed to
market risks associated with fluctuations in interest rates as of September 30,
1999. The table presents principal cash flows and related interest rates by year
of maturity for Funding's restricted cash and mandatorily Preferred Securities
in effect at September 30, 1999 (in thousands). This information excludes the
potential exercise of the relevant redemption features.
YEAR OF MATURITY TOTAL DUE
---------------------------------------------------- AT
1999 2000 2001 2002 2003 THEREAFTER MATURITY FAIR VALUE
-------- -------- -------- -------- -------- ---------- --------- ----------
Restricted Cash-
Fixed Rate............... $1,937 $7,700 $3,850 -- -- -- $ 13,487 $12,866
Average Rate............. 5.60% 5.60% 5.60% -- -- --
Mandatorily Redeemable
Preferred Securities-
Fixed Rate............... -- -- -- -- -- $110,000 $110,000 $42,350
Interest Rate............ -- -- -- -- -- 7.0%
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO. EXHIBIT TITLE
- ----------- -------------
27.1 Financial Data Schedule
99.1 Management's Discussion and Analysis of Financial Condition
and Results of Operations of CellNet Data Systems, Inc.
(b) REPORTS OF FORM 8-K
REPORT DATE EVENT REPORTED
- ----------- --------------
10/27/99 CellNet Data Systems Reports on Efforts to Raise Additional
Capital
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELLNET FUNDING, L.L.C.
BY: CELLNET DATA SYSTEMS, INC.
AS MANAGER
Date: November 15, 1999 By: /s/ DAVID L. PERRY
-----------------------------------------------
David L. Perry
VICE PRESIDENT AND CHIEF ADMINISTRATIVE OFFICER AND
ACTING CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER)
23
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT TITLE
- ----------- -------------
27.1 Financial Data Schedule
99.1 Management's Discussion and Analysis of Financial Condition
and Results of Operations of CellNet Data Systems, Inc.
24